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Regulation of Mobile Termination

Dr Rob Albon Senior Economic Adviser(Regulatory Development)Australian Competition and Consumer Commission

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Mobile Termination – Why is it Declared?

Mobile termination is a declared service because the ACCC considers that individual carriers have ‘bottleneck’ market power in terminating calls on their networks.

Effectively, carriers control the gateway to subscribers on their networks.

The market power stemming from this control is not lessened by the addition of new carriers and is independent of the size of the carrier concerned.

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Evidence from Unregulated Period Unregulated termination charges prior to 2001

were around 30 cents per minute and 35 cpm in the late 1990s.

The ACCC estimates that this is far in excess of the TSLRIC+ cost of these calls (maybe around 8 cpm?).

For comparison, termination charges for PSTN are currently only a little over 1 cpm.

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Mobile Termination – Previous Approaches The ACCC took a laissez-faire approach to mobile

termination until 2001. While it was a declared service, it was regarded as

too immature for an interventionist approach to be taken.

In 2001 the ACCC moved to influence termination price, adopting a ‘light-handed’ regulatory approach of benchmarking termination prices against retail price movements.

This was used from 2001 to 2004, but the results were ‘disappointing’.

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Mobile Termination – 2004 Decision Following a major review, the Commission

decided in June 2004 to move towards TSLRIC+ pricing for mobile termination.

Its initial adjustment path was based on moving from rates of around 22 cpm in 2004 to a ‘conservative’ international cost benchmark of 12 cpm in mid-2007.

An adjustment path based on decrements of 3 cpm per year was set out.

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Lower Mobile Termination Charges – What the Parties Think The 2004 approach received mixed reactions. Of the mobile carriers it is being resisted by Optus

and Vodafone; tacitly supported by Telstra and (for MTM) encouraged by Hutchison.

The different positions of the carriers reflect their different business characteristics.

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Supporters of Lower Mobile Termination Charges – Users To the extent they have a ‘voice’, consumers also

tend to support the Commission’s approach. The ACCC’s approach was supported by both the

Australian Consumers Association and the Australian Telecommunications Users Group (ATUG).

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Supporters of Lower Mobile Termination Charges – Fixed-line Carriers The fixed-line only carriers (AAPT, Primus,

Macquarie Telecom, etc.) have interests are clear, and all support the Commission’s decision.

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Supporters of Lower Mobile Termination Charges – Telstra (1) Because Telstra is an integrated carrier that is

relatively large in fixed (about 65% market share) compared to mobile (45%), it has more minutes (approx 1 billion) terminated for it by other carriers than it terminates of theirs.

Therefore the first round impact on Telstra of a decrease in termination charges is positive.

However, it may have to pass-through some of these savings in lower retail prices.

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Supporters of Lower Mobile Termination Charges – Telstra (2) Telstra has supported the ACCC’s decision by

forcing other mobile carriers into arbitrations. It has also intervened strongly against both

Optus’s and Vodafone’s appeals (see below) in the ACT

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Opponents of Lower Termination Charges – Optus Optus is also integrated, but is relatively small

in fixed (around 20%) compared to mobile (34%) and it therefore terminates more minutes than it has terminated.

The first-round impact of a reduction in termination price is therefore negative.

Optus is using legal avenues to resist and delay the reduction in prices, including lodging an undertaking (rejected early 2006) and appealing its rejection.

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Opponents of Lower Termination Charges – Vodafone Vodafone is mobile-only and, because of incoming

FTM calls, it terminates far more minutes than it has terminated.

It is a strong opponent of lower termination prices and is using all possible legal avenues to resist and delay the reduction in price.

Part of its strategy was to force a ‘judicial review’ of the Commission’s pricing decision in 2004.

This appeal was unsuccessful.

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Hutchison – An Intermediate Approach Hutchison has taken an interesting approach of

trying to push down MTM termination prices, but not those from fixed services.

If anything, FTM termination prices would go up. Essentially Hutchison wants to grow its mobile

business while maintaining profits from FTM calls to its network.

A complicated undertaking to this effect was recently rejected by the ACCC.

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Next Steps (1)

The rejection of Optus’s and Vodafone’s undertakings in early 2006 led to both carriers appealing the rejection in the ACT.

Both these cases will be heard in late August, and decided before the end of the year.

These appeals are chewing up enormous of resources of the appealing carriers, intervening carriers, the ACCC and the Tribunal itself.

At this stage Telstra is strongly opposing the appeals.

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Next Steps (2)

The ACCC’s position has always been that it needs to model termination costs in a formal bottom-up cost model before it can reduce the termination price further down.

To that end, WIK Consult is currently constructing a bottom-up cost model for the ACCC.

It will report at the end of the year.