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Mobile Termination Rates & Why They Matter

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Yesterday something very important happened that will affect your mobile phone bill for years to come: the little guy won. The problem is it raises a larger question: is this actually a good thing?

So What Happened?

For those who haven't been following the media blitzkrieg of the past 24 hours Ofcom has decided to dramatically reduce mobile termination rates. Currently they stand at just over 4p per minute and come April they will be reduced to 2.66p, dropping further in 2012, 2013 and 2014 to 1.7p, 1.08p and 0.69p respectively.

The decision marks a successful conclusion to the Terminate the Rate campaign principally led by Three, BT, MoneySupermarket.com, the Federation of Small Business (FSB), The Post Office and Unite. The campaign has waged for nearly two years.
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Why should I care?

To answer that question you have to first take a look at the role of mobile termination rates. More commonly known as 'MTRs' they are the charges carriers levy one another for every minute they access their network. So every time a Vodafone customer calls a T-Mobile customer Vodafone charges T-Mobile 4p per minute and vice versa. To be precise O2, Vodafone and Everything Everywhere (T-Mobile and Orange) charge 4.18p per minute while Three charges 4.48p

You'd think this would just add up to a lot of money endlessly being passed back and forth and that it would all even itself out. It doesn't. The problem is the bigger networks by definition receive more calls than the smaller networks so they make more money from MTRs. This is why Three, being the smallest UK network, has to charge a higher rate to avoid falling into enormous debt. So big companies like MTRs, little ones don't. It's anticompetitive.

Fair play aside the knock on effect for the consumer is massive. Ever wondered why you can get unlimited calls on the same network (say O2 to O2 or Three to Three) for very little additional cost? That's because calls on the same network have no MTRs. Ever wondered why calls from mobile to landlines are so cheap and calls from landlines to mobiles are so expensive? That's because landline MTRs are cheap, mobile MTRs are expensive. The vast majority of your phone bill is decided by MTRs.
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So my phone bill is going to get really cheap, right?

If you read most media coverage that would certainly be the impression you'd get. As a thrilled Terminate the Rate spokesperson said:

"Ofcom has acknowledged that lower mobile termination rates are better for consumers and committed to reducing them to less than a penny, which raises the question: why can't those benefits be realised sooner? In the long term, this is a win for consumers: cutting mobile termination rates supports competition and better deals for all that call mobiles."

The thing is the picture isn't so clear cut. By contrast here is the response from Everything Everywhere:

"We are disappointed with Ofcom's decision and are currently reviewing the detail and our position as to whether we will appeal. 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."

Likewise Vodafone said: "We are really disappointed that Ofcom has ignored the evidence that termination rate cuts will mean higher costs for pre-pay customers especially at a time when money is tight for many families. We are studying Ofcom's decision and considering all of our options."

So who is right? To an extent everyone is.

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