Everything Everywhere has said that changes to Mobile Termination Rates, as mandated by UK regulator Ofcom, may make many of its pre-paid customers unprofitable. It is considering an appeal against Ofcom’s decision.

Ofcom announced that from 1 April, it will place a cap on the rates, known as MTRs, that 3UK, O2, Everything Everywhere and Vodafone charge each other and other carriers for terminating a call on their network. Ofcom said that this would lead to around an 80% reduction in termination rates over the next four years.

Ofcom said that reducing the rates would give operators the chance to be more flexible, encouraging competition and aiding customers. It also said that with data rising as a % of revenues, MTRs would be increasingly of less overall value to operators.

What’s the problem with the rate cuts?

But EverythingEverywhere, the holding company for Orange and T-Mobile in the UK, said that the ruling could in fact damage a certain segment of its customer base.
A statement from the company said, “Our concerns focus on the impact of the decision to our vulnerable pay-as-you-go customers. By applying pure LRIC methodology in setting call termination rates going forward, Ofcom has suggested we recover a larger share of our costs from retail charges. This may force us to change the pay-as-you-go model as we know it as a large number of these customers will now become uneconomical – making the way our consumers currently buy, use and enjoy their mobiles radically different going forward.”  

LRIC stands for Long Run Incremental Cost – a bottom-up cost model that calculates the generic operator costs with and without voice termination traffic, and divides the difference by that traffic volume to provide the incremental cost of voice termination per minute. Pure LRIC is a change from a previous model called the long-run average incremental unit cost plus a potential mark-up (LRAIC or LRAIC+).

You can see a fuller examination of the impact of LRIC models here, from Analysys Mason. In essence, Analysys Mason’s analysts note that although the LRIC model leads to lower costs initially, rates may increase with volume. At very high volume levels the pure LRIC may move towards the LRAIC/LRAIC+ level (the previous method of determining termination rates).

Ovum analyst Matthew Howett said, “The regime after 2015 has yet to be determined, but having the cost of terminating a call in the mobile network at a level similar to in the fixed network will enable operators to choose from a range of alternative charging mechanisms – such as bill and keep, where call termination is priced at zero. Capacity-based interconnect could be another option, which becomes a lot more relevant in a world where data is king and the minute is no longer a relevant cost driver.”

BT meanwhile welcomed the cuts, saying that although Ofcom had set rates at a level somewhat higher than those in its recommendation last April and the reduction “glide path” was more gradual than it had hoped for, BT intends to pass on the new rate to customers as soon as possible.

“We are also looking to introduce an all-inclusive package that will include calls from landlines to mobiles and we will make a further announcement on this in due course,” a statement from BT said.