ARCEP, the French telecoms regulator, has decided to regulate the price that operators charge one another for call terminations. The move will eventually result in lower prices for end users. Other telecom regulators in Europe have lowered these rates or about to make similar moves.
Setting up a model to evaluate cost of mobile networks
In 2006, ARCEP adopted a new model to understand better the cost structure of mobile phone operators. Many elements of the ARCEP model come from Ofcom, the UK regulator, but adapted to the French market. The model has undergone numerous changes until it was finalized in October 2008. Bouygues Telecom, a French operator, says the model is reliable enough to provide an estimate of the costs of running a cellular network, but SFR and Orange disagree on certain parameters. ARCEP asserts the gap between Orange’s own estimates and its model is less than 2% on annual costs. ARCEP will continue to refine the model in coordination with the operators.
Complex tariffs and convergence distort the market
In France and in Europe, cell phone billing is based on the “calling party pays” principle. This means someone who receives a call does not have to pay for it. Until January 2005, mobile operators were using a “Bill and Keep” system were the mobile operator agrees not to bill the other for call terminations. This situation was replaced by a system of call termination billing were the calling operator pays a call termination fee (based on a wholesale price) to the called operator.
At that time, traffic from fixed to mobile networks was low and there was no competition between fixed and mobile operators. A fairly high call termination price, much higher than its cost, allowed mobile operators to get financing from the operators of fixed networks to continue to build their networks.
As the market evolved, new mobile offerings appeared which used flat fee rates such as unlimited calls to fixed numbers, free calls to numbers using the same operator, fixed-mobile offerings like “Unik” from Orange or “Happy Zone” from SFR, specific tariffs at night, calls to specific numbers, etc. all of which multiplied combinations and bundling opportunities.
Today 30% of fixed voice calls are made in France through high speed Internet (DSL, cable, fiber) networks. Fixed mobile convergence has started to emerge and the mobile market is now reaching a plateau. All these possibilities have disrupted competition in the market, resulting in higher tariffs in some instances, or a dominant position of some operators in specific segments of the market.
Sophisticated regulation but limited transparency
ARCEP’s analysis revealed that the gap between the cost of the operating a cellular network and the price of the call terminations created imbalances in the market, especially for smaller operators, resulting in a “club effect” and “walled gardens” related to technology. ARCEP also highlighted in its analysis that the price of call termination for fixed networks is around 1 eurocent and for mobile networks, 7 eurocents. This discrepancy made fixed to fixed calling more popular than fixed to mobile. At the end of its lengthy and detailed analysis (which also refers to the work done by the European Regulator Group), ARCEP explains the new regulation whose ultimate goal is to put mobile and fixed call terminations at the same level.
(1) The first phase begins on 1 July 2009 ends in June 2010: the maximum price of a mobile voice call termination will be 4.5 euro cents for SFR and Orange. The maximum mobile voice call termination for Bouygues Telecom is set at 6 eurocents because of different cost structure. This measure represents a relative drop of 30.8% for Orange and SFR and a drop of 29.4% for Bouygues Telecom.
(2) The second phase begins 1 July 2010 and terminates on 31 December 2010. The maximum price for SFR and Orange will be 3 eurocents which is a relative drop of 33.3% from the previous price; for Bouygues Telecom, this will be 4 eurocents (also a drop of 33.3%). ARCEP believes that the price gap between SFR-Orange and Bouygues Telecom will probably not continue.
ARCEP does not predict what will be the effect of these price reductions on users of mobile phones in France. Unfortunately, the documents containing the cost analysis of each operator is covered by trade secret regulations. This is unfortunate. We need more transparency to create more competition in the market for cellular services.
No comments yet.