Snow job on termination rates
There's a new stoush over termination rates brewing, this time cooked up by a rather peculiar alliance: Econet's successor NZ Communications/2 Degrees, Matthew Hooton's PR company Exceltium, Consumer NZ and The Telecommunications Users Association of NZ (TUANZ). These are joined by the Federation of Maori Authorities (FOMA), Airnet, New Zealand Union of Student Associations (NZUSA), Federated Farmers and Unite the labour union.This motley crew is campaigning for mobile termination rates (MTRs) to be dropped, forcibly by the government through the regulator, the Commerce Commission. Unfortunately however, the group has resorted to using rather faulty arguments, as Steve Biddle points out on his blog.
The Commerce Commission has banned media from revealing the details about 2 Degrees' sweetheart deal on MTRs with Vodafone, but you should know that what's on the Drop The Rate, Mate site doesn't reflect reality.
Since Vodafone bills MTRs on a per-second basis, a twenty-second call would not attract a termination rate of 15c. If you want to know exactly how much 2 Degrees pays, head over to Wikileaks and do some simple calculations.
You should also be aware that 2 Degrees bills its customers on a per-minute basis, and not per-second. Work out for yourself the margin difference between the MTR 2 Degrees pays for a 20-second call and compare that to the retail rate of 44c/min you would pay.
Given that 2 Degrees was very vocal in the regulatory process about per-second billing, I think the company has some explaining to do why they launched with per-minute instead.
Would dropping MTRs result in lower retail rates then? That's not at all certain, because this is TelcoLand where reality is altered and confusion reigns.
MTRs do influence retail rates, but it can be in both directions as telcos use them to subsidise other parts of their business. Some countries, like the US and Singapore, have billing systems where people pay to receive calls as well as to make them. In those countries, there are no MTRs unlike in places like New Zealand and most European countries, that use the Calling Party Pays (CPP) principle.
I'd love it if MTRs were simple wholesale rates meaning if they're slashed, retail rates go down too. That, unfortunately, isn't quite how it works and it makes the argument about pass-through a red herring. How much difference do you think 5.5c/minute would make to your phone bill? That's what a 75 per cent pass through of MTR reductions would achieve for customers.
Droptheratemate PR spinner Matthew Hooton reckons that we're overcharged to the tune of 15c/minute which happens to be the standard MTR today, and more than what 2 Degrees pays. Except he won't tell you that. Hooton also won't tell you that the Commission isn't proposing the total removal of MTRs and that it is not in favour of 2 Degrees' Bill and Keep regime.
Depending on how a telco's pricing structure is set up, you can actually pay less in retail rates than the prevailing MTRs are.
How badly ripped off are we these days then? I'm not saying that mobile communications are cheap, but the OECD issued a set of figures for August 2008, showing how much people pay for a medium-use "basket" of telco services, comprising 780 voice calls, 600 texts and eight PXTs a month year.
Netherlands and the Nordic countries were the cheapest, followed by Austria, Luxembourg and New Zealand. Interestingly enough, MTRs in Netherlands are 19c, same in Denmark, and 11c in Finland. Sweden is the lowest with 8c/minute (NZ$, non-PPP adjusted).
Have a look at the MTR-less United States though. You'd think it'd be the cheapest with zero MTRs...
It seems that regulating MTRs is done for a less direct purpose than to lower retail rates, namely to reduce the market power of large telcos. Imagine a normal month, with millions of minutes flying around on the mobile networks, and you'll see we're talking about some pretty large sums even with low termination rates. Text messages also attract termination rates between 3.5c and 9.5c and with something like 700 million messages zooming around on each of the two big telco networks, that's big money.
Obviously, calls between say two Telecom customers don't attract termination rates. This and the big dollars that flow between the networks make it difficult for a new entrant to get a foothold in the market but again, things are not so clear-cut.
The United States is campaigning for third-world countries to cut MTRs because... the United States is a next exporter of calls. Ergo, said third-world countries make money out of US telcos. If a new entrant can attract calls from larger networks to its own, and manages to strike an asymmetric deal on MTRs, it'll make good money. It's all a question of call flows between networks, and these are difficult to assess as telcos move away from circuit-switched to packet-switched call routing.
What we're looking at here is a commercial marketing ploy by 2 Degrees, masterfully leveraging its position as a third entrant encouraged by the government - the taxpayer has sunk some $10 million into the business already, through 2 Degrees predecessor Econet and NZ Communications.
What's happening now is a heady mix of 2 Degrees exploiting its position and going down the populist route with mainly Vodafone in its sights. Thanks to the lack of transparency in an overly complex regulatory process that few understand, 2 Degrees gets away with it. The chickens are coming home to roost for Vodafone and Telecom too, after years of simmering customer dissatisfaction with high retail rates; in terms of timing, 2 Degrees' campaign is spot on.
I'm guessing 2 Degrees' business plan is to keep up the populist pressure as in the past, and pick up enough customers to appeal to Optus or TelstraClear for a quick sale over the next two years or so.
Instead of lending their support and voices to a commercial campaign by 2 Degrees with some rather dubious claims, shouldn't TUANZ and Unite think about for instance Telecom landlines, which are regulated and which will never go down in price? Telecom put up the landline cost with $3 a month recently, because it is allowed to by law. I don't need a voice landline, but have to have one for broadband.
How about making some noise around that?
Update OECD Low User basket, with NZ taking the 10th spot:
OECD High User basket, with NZ at 14th place:
Tag(s):
oecd
2 degrees
telecom nz
vodafone
telecommunications
regulation
commerce commission
new zealand
mobile termination rates
mtrs
ec
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Comment by hamo, on 12-Aug-2009 15:47
780 voice calls is medium use? How many NZ mobile customers (non-business) would make that many calls as opposed to texts?
Comment by ockel, on 12-Aug-2009 16:22
The number of calls in the OECD basket has fallen in the 2006 definition to 780 (from 900) PER ANNUM with SMS increasing.
The average call length assumed is 1.75 minutes (ie 1 minute 45 seconds) but the basket is made of calls to local, national, on-net and off-net mobiles. Similarly text messages are split on net/off net.
This suggests that the medium basket is 1365 minutes per annum. This compares to ComCom's report that suggested that NZ's made approx 890 minutes of mobile calls per annum in 2007/08 (16 billion total minutes across 4.5 million connections).
In 2006 or 2005 the MED made adjustments to NZ calling baskets given NZ was only one of three free-local calling countries and our calling patterns were distinctly different to all but those three countries. Sadly it dropped that adjustment as it didnt appear to support its view.
Comment by ockel, on 12-Aug-2009 16:23
Typo - NZ 16 billion minutes of which mobile were 25% - across 4.5 million customers.
Comment by ockel, on 12-Aug-2009 17:21
Juha: In theory, yes. That is mobile to mobile calls. It is suggested that 80% of calls are on-net so off-net volumes would be 800million minutes or $120m. Likely $60m from VOD to TEL and $60m vice versa.
Fixed to mobile were an additional 960m minutes. IF TEL accounts for 75% of total domestic market then 360m minutes terminated on their mobile network and 360m minutes terminated on VOD's network (VOD receives $54m from TEL). Rest of market terminates 120m minutes on TEL (TEL receives $15m) and 120m minutes on VOD (VOD receives $15m).
I've used 50/50 market share for simplicity although revenue market share is different to this in reality.
I think I've got the logic right (and hopefully the maths). Happy to be corrected.
Comment by sbiddle, on 12-Aug-2009 17:44
I've love to see some open transparency.
Both Vodafone and Telecom show us
* The number of calls that terminate on their mobile networks
* The revenue this generates
* The origin of this inbound traffic (Telecom, TCL, WxC etc)
From this we can conclude how much of a cash cow inbound MTR's are and also establish exactly how much Telecom are making with their high (assuming you have no plan) PSTN to mobile calls.
Comment by ockel, on 13-Aug-2009 10:48
All of the data regarding call volumes and origins is restricted information c/- the transparent Commerce Commission.
Cant tell you or we'd have to sue you.
Comment by nzgeek, on 19-Aug-2009 12:44
The real killer for consumers is the high retail margin that's being made per call. Assuming that a call costs $0.89 a minute (e.g. on Vodafone and XT prepay plans), a minimum of $0.74 of that is gross retail profit. Some of this will disappear due to operating costs and overheads, but I would say that the majority is pure profit.
Regarding termination rates, one thing that may benefit consumers is to ensure that the rates are calculated per second rather than per minute, at least for calls within NZ. This would remove any excuse for telcos to do per minute billing for national calls. This benefits those who pay for each call and also allows customers with call plans to make more effective use of their included minutes.
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Comment by Nigel, on 12-Aug-2009 15:27
Tough to know how that table came to be given in the USA Verizon have unlimited calling & txt for $139 ( the top of the table ).
Nigel