Ofcom delivers double whammy to major UK operators

UK regulator Ofcom has called for mobile operators to make steep cuts to mobile termination rates, and has also issued fresh proposals ahead of the 4G spectrum auction scheduled for next year.

Ofcom’s move to cut the amount mobile operators can charge to connect mobile and landline phone calls to their networks comes under a broader European Commission (EC) initiative aimed at reducing wholesale prices.

It is likely to have a sharp impact on the three major UK operators – O2, Vodafone and Everything Everywhere, which are expected to have to reduce wholesales charges by 84% over the next four years. With such fees representing approximately 10% of a mobile operator’s revenue, the move will come as a blow to UK operators but is expected to cheapen calls for consumers.

“We expect greater flexibility in prices, with innovative packages to emerge [in the short to medium future]. However, we believe that the trend of mobile operators offering bundles with higher fixed fees and lower call charges will be likely to accelerate,” said an Ofcom spokesperson. “Without any changes in retail, if mobile termination rates remained at today’s levels mobile operators would increase profitability as their costs declined.”

The three major UK operators are also unlikely to be enthused by Ofcom’s latest consultation regarding the allocation of 800MHz and 2.6GHz bandwidths. The proposed rules for the auction, which is expected to take place by June 2012, suggest selling the spectrum in a series of combinations that impose limits on the minimum and maximum amount of spectrum a bidder can win.

The UK regulator has imposed such a cap with the view of levelling the playing field for all four mobile companies operating in the UK.

“We believe that competition at the national wholesale level is essential to future competition. In addition, there would be a significant risk to national wholesale competition if there were fewer than four national wholesale competitors with credible spectrum portfolios for providing higher quality data services,” said an Ofcom spokesperson.

The move is a boost for the UK’s smallest mobile network operator, 3, which had previously voiced concern over its chances of buying spectrum next year. Matthew Howett, senior analyst at Ovum, believes the cap was imposed very much with the operator in mind. “The fact that Ofcom has said it wants a minimum of four operators to emerge from the auction is a clear reflection that it does value a fourth operator’s presence such as 3 in the market,” said Howett.

On the reduction of mobile termination rates, Howett believes this move could possibly lead to alternative charging mechanisms appearing in the UK market in the future. “The majority of the traffic on networks could move from minutes to data, which means possibly charging based on capacity instead of minutes. This would have to come as an agreement from within the industry as opposed to being implemented by the regulator,” said Howett. “The problem is nobody will move to that charging principle whilst there is still the existing calling party paid regime with high termination rates – there is too much money involved. By setting a glide path down to that low number, Ofcom has set the ball in motion and it will be up to the operators at the end of this next period of charge control if they want to abandon that system.”

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