Fate of new telco hinges on mobile rates

Soon-to-launch mobile phone company 2degrees will struggle to make money unless the call fees charged by its competitors are forced down by the Government, the Commerce Commission says.

The newcomer's ability to compete in the $2 billion mobile phone market hinges on a proposal to slash the cross-network fees it will pay rivals Telecom and Vodafone, according to the commission.

The commercial watchdog flexed its regulatory muscle this week, releasing a report which recommends the Government enforce large reductions in mobile termination rates. MTRs are the fees network operators charge each other for handling a call that originates from a rival's network.

The commission has recommended MTRs be halved from their current level of 15c per minute to 7.2c by the end of this year, and trimmed further, to 3.8c per minute, by 2015. It also wants the rate for text messages slashed from current levels of up to 9.5c down to 0.5c by 2015.

In its 240-page report the commission estimates the net saving to consumers if MTRs are cut will be at the higher end of a range of between $92.8 million and $275.7 million over five years.

It slams Telecom and Vodafone, saying while several barriers to entry into the mobile market have been reduced, their pricing practices "are of concern". In particular the prevalence of "closed network pricing" - special deals which discourage subscribers from calling phones on rival networks - will make it difficult for new entrants like 2degrees to attract customers, the commission says.

The arrival of a third mobile network operator has long been seen by industry observers as the key to cutting mobile call costs because it will encourage competition in a market where Telecom and Vodafone each have approximately a half-share of subscribers.

High MTRs are not a significant commercial factor for the two incumbent players because the amount they pay out for terminating calls on the other's network is roughly cancelled out by the amount they receive. Although Vodafone is believed to make about $30 million a year under the arrangement due to its slightly higher market share, which means it terminates more calls than Telecom.

But for 2degrees - which will be forced to start out in business with a small subscriber base of callers who will predominantly be placing calls to the other networks - its MTR bill from Telecom and Vodafone will be substantial.

The company's chief executive, Mike Reynolds, acknowledged last week that MTR pricing was the greatest competitive challenge faced by 2degrees as it prepares for a launch planned for August.

The company says it has spent more than $250 million building its mobile network. But the commission's recommendation is not likely to lead to a quick reduction in cellphone bills for consumers, or a quick fix for 2degree's business plan.

The recommendation is now open to industry submissions and is planned to go to Communications and IT Minister Steven Joyce for consideration in mid-December.

At that point Joyce may accept the recommendations but could also open up negotiations on a compromise regime with the telcos which could see the process further delayed.

2degrees had been pushing the commission to recommend an even more radical "bill and keep" inter-network pricing regime which would mean operators did not charge back the cost of terminating calls received from other networks.

But in its report this week the commission rejected that proposal, reiterating a view it has expressed previously that the "cost-based pricing" proposal it has put forward in the form of greatly reduced MTRs "is likely to best promote competition and be consistent with economic efficiency".

It did, however, leave the door open to an eventual move to bill-and-keep, saying it remained "open-minded to the possibility that, in the long term, it may become appropriate to consider the adoption of BAK in New Zealand, depending on market conditions in New Zealand and overseas developments".

The commission said it did not expect the recent arrival in the local market of several "mobile virtual network operators" - companies selling rebranded mobile phone services using Vodafone and Telecom's networks - were unlikely to increase competition to the same extent as a network-owning new entrant like 2degrees.

That was because MVNOs were taking a long time to launch services after signing agreements with Telecom and Vodafone, and given the nature of their contracts with the incumbents, had limited ability to "engage in independent, rivalrous behaviour".

Meanwhile 2degrees' business case may have been boosted this week by a related announcement from the commission. It said it would investigate pricing for national mobile roaming services.

Because 2degrees has not built a network of cell sites covering the entire country it has an agreement with Vodafone that 2degrees customers can "roam" on Vodafone's network when outside its coverage area.

The commission said it was concerned "prices contained in current commercial roaming agreements may be significantly above cost" so would investigate whether it considered charges under such agreement should be reduced through regulation.

MOBILE MANOEUVRES

VODAFONE

Had an estimated 52.6 per cent market share of subscribers as of last September, but revenue share is higher because of its higher-spending customer base.

TELECOM

Hoping the launch of its new 3G XT network will help it regain the market lead from its long-time rival.

2DEGREES

Has spent $250 million building a new network it hopes to launch next month.

TELSTRACLEAR, DIGITAL ISLAND

Sell mobile services using Telecom's older, slower CDMA network and have been denied access to the new XT Network for at least 18 months.

BLACK+WHITE

Sells mobile services using Vodafone's network.

ORCON, CALLPLUS

Expected to begin selling mobile services using Vodafone's network next month.