6.4 Interconnection

The interconnection issues associated with mobiles depend on which of two charging regimes apply. Most countries use Calling Party Network Pays (CPNP) but a few countries (e.g USA and Canada) apply Receiving Party Network Pays (RPNP) which allows for bill and keep (BAK) payment systems where there are no inter-operator payments (end users at each of the call may pay a fee to their respective operators) [1].

IP interconnection will eventually replace switched interconnection as new mobile technologies are data-centric and data traffic is becoming more significant than voice traffic. The transition will be harder for operators in CPNP countries if voice interconnection rates are high because IP interconnection is very cheap.

There is no access pricing issue with RPNP because there are no wholesale termination charges. The end-user placing the call pays the operator providing the mobile phone without the operator completing the call receiving any payments (BAK).

BAK is now finding favour as a possible wholesale charging arrangement in both fixed and mobile next generation networks for IP interconnection (see sections 3.1.2 and 4.3) because it is similar to ‘peering’ on the internet. This regime also reduces the amount of interconnection issues that a regulator has to deal with.

The Australian regulator asked the industry if would consider moving to BAK [2]. But the majority of stakeholders preferred a uniform approach to regulating MTM and FTM termination. One concern was the risk of arbitrage which arises if traffic originating on a fixed network is presented by an access seeker as mobile-originated traffic. Such traffic would be terminated at zero price under a BAK system while fixed-originated traffic would normally be charged at the FTM termination rate. There are potentially significant costs associated with monitoring arbitrage activities and rectifying their consequences.

For CPNP countries the cost of terminating traffic on mobile networks continues to be a key regulatory issue. Both main forms of mobile termination under CPNP may be regulated:

· Fixed to Mobile call termination (F2M)

· Mobile to Mobile network call termination (M2M)

Calls to the fixed network (M2F) are usually terminated at the same rates as fixed (F2F) calls.

A special case of M2M is machine-to-machine communication [3] which is rated more cheaply than person-to-person M2M calling and is not currently regulated; perhaps because machine-to-machine communications tend to be on-net services offered by an individual operator to an individual business.

The wholesale termination rate is usually the same for both F2M and M2M; which also has to deal with text messages (SMS, short message service) and MMS (picture and video transfer).

CPNP is generally believed to cause a market failure problem requiring regulation of mobile call interconnection. With CPNP, charges are ultimately borne by the customers of the originating operator and there is no competitive pressure on the terminating operator to constrain its wholesale charges [4]. Price controls imposed on wholesale mobile termination have been justified on the basis that a high mobile termination rate:

is due to each mobile network operator having monopoly power over the termination of calls on its network
leads to high retail prices, as the termination fee generally sets a floor on the retail price which discourage calling ;
makes it harder for a much smaller mobile competitor to expand because of the additional cost that is linked to off-net calls;
makes it harder for smaller mobile competitors to grow because larger networks have more extensive off-net calling opportunities to offer customers.

Where there is a large fixed network, mobile operators have used high F2M termination rates to promote mobile adoption through cheap SIM cards and handset subsidies. However, in many developing countries the fixed network is often not large so the fixed network cannot provide cross subsidies to mobile users (and is not recommended anyway).

In the Mobile to Mobile (M2M) context, mobile networks typically price on-net calls lower than (off-net) calls to other networks. If M2M termination rates are high, larger mobile networks are more likely to attract customers in a sort of ‘club effect’: to get cheaper calls, customers select the mobile operator that the people they call most also use. Without regulation, an operator could increase its termination rate to generate more revenue without affecting its own customers. The new revenue could be used to offer deeper on-net discounts to attract more customers which then generate more incoming calls and more revenue for bigger on-net discounts and so on.

Box 6.5: Namibia M2M disputes

MTC is the largest of the three mobile operators with about 85 per cent of the mobile market. It has tried to use its dominance to maintain its position it two ways; which have both been remedied by regulatory intervention.

MTC used high M2M termination charges to offer low on-net call charges to its customers. In 2008, the M2M rate was N$1.06 and MTC charged its customers N$2.5 for off-net calls compared with N$1.79 charged by its nearest rival (CellOne, rebranded later as Leo). Since most customers were already on MTC, this created a ‘club effect’. Keeping its retail prices high caused traffic imbalances with the other network operators (both fixed and mobile) making net interconnection payments to MTC.

Following complaints and a benchmarking exercise, in July 2009 the regulator forced the M2M rate down to N$0.60 immediately (equal to the fixed termination rate) and required it to fall to N$0.30 (about 4 US cents) by the beginning of 2011. This removed the justification for the different retail prices between on-net and off-net calls.

But MTC did not pass through falls in M2M wholesale charges to the retail prices its customers paid to call off-net customers. Unless customers can move easily to other mobile networks, the ‘club effect’ continues because the difference in on-net and off-net retail charges is maintained. So in February 2011 the regulator prohibited different retail prices for these two types of calls.

Despite dire warnings from MTC about the impact of these changes on its profitability and ability to invest, MTC has continued to prosper.

Sources: Namibian Telecommunication Sector Performance Review, 2010

There is little cost justification for high mobile termination rates. Reducing mobile termination rates to cost leads to more traffic between networks increasing consumer welfare.

Box 6.6: Kenyan M2M rate cut

In Kenya, the regulator reduced the mobile termination rate from KES 4.42 per minute to KES 2.21 in August 2010 and this combined with increased mobile competition led to 70 per cent increase in calls to other mobile networks over 3 months compared with a 3 per cent increase in on-net call traffic.

Source: Sector Statistics Report, 2nd Quarter 2010/2011 www.cck.go.ke

Kenya does not have a large fixed network; and what it has is losing customers. At December 2010, there were just under 0.4 million fixed lines (of which, over half were fixed wireless) and 25 million mobile subscribers.

In 2008 mobile termination rates in Europe ranged from 2 eurocents per minute in Cyprus to 8 eurocents in Germany, over 10 eurocents per minute in Greece and almost 16 eurocents in Bulgaria. This fragmented price regulation was seen as a serious risk to creating a single borderless market for telecoms services in Europe and a real threat to Europe's competitiveness. As a result of an agreement in May 2009 on regulatory treatment of termination rates, they are required to fall to ‘pure’ [5] LRIC. This is expected to result in rates between 1.5 and 3 eurocents by the end of 2012 [6].

END NOTES

[1] CPNP has been associated with rapid adoption rates as high mobile wholesale rates have been used to cross-subsidise access (handset prices and fixed charges) while RPNP has seen higher calling volumes per customer than CPNP regimes.

[2] ACCC Inquiry to make a final access determination for the Domestic Mobile Terminating Access Service (MTAS) - Access Determination Explanatory Statement, 7 December 2011

[3] Machine to machine communications essentially offers low-cost remote connectivity that is well suited to meters, monitoring instruments, retail inventory tracking, etc. In February 2011, Ericsson predicted that 50 billion devices would be connected in 2020. http://www.ericsson.com/news/1488399

[4] Mobile operators in the UK argued that competition does prevail but Ofcom rejected their two major arguments. First, even if mobile communications constituted a two-sided market, where both called and calling customers were retail customers, it did not believe that this consideration rose to the level of implying that mobile call termination was not a separate market for purposes of pricing. Second, Ofcom also rejected the cluster market argument that mobile providers competed for a customer’s entire business, including calls that terminated to that customer so that any excess profits from mobile call termination are competed away as operators attempt to gain the customer’s entire business. See the Mobile Call Termination Statement published by Ofcom in March 2007.