Mobile 'bully boys' forced to cut termination fees

Ofcom has ruled that mobile operators must slash their termination charges. But will consumers appreciate it in the long-term?

by Emma Haslett
Last Updated: 06 Jul 2011
Plenty of grumbles from mobile phone operators this morning, after communications watchdog Ofcom ruled that they must lower the cost of their termination rates, the amount they charge rivals to connect calls to their network. At the moment, the charges are about 4.18p a minute, but Ofcom has decided they should drop to 2.66p by the end of this year, and to 0.69p by 2015. Unsurprisingly, the operators are pretty unhappy about this big hit to their revenues. And while consumer groups are hailing it as a triumph over the industry’s ‘bully boys’, it won't be great news in the longer term if it just pushes up costs elsewhere...

Ofcom argues that the ruling will increase competitiveness among operators. At the very least, it should give the industry’s smallest players, like 3, a leg-up: the company has been arguing in favour of the changes for some time, on the basis that with just 6.2m customers, it’s actually paying out more in charges to rivals than it does for receiving calls on its own network.

This isn’t the first time Ofcom has clamped down on termination fees (in 2007, it ruled that operators must drop their charges each year, a decision which it says has cut costs by 35% in real terms). But you can’t blame the operators for being upset. At the moment, the charges account for between 10% and 15% of their revenues – which means cutting them will have a substantial impact on their bottom lines.

So while the likes of say it’s ‘a clear victory... for anyone that dials up a mobile number’, it might actually be more complicated than that. When Ofcom first proposed the idea in April last year, Orange called it a ‘backward step for Britain’, pointing out that that termination rates offset the cost of investing in infrastructure. And what’s worse (particularly for those who can’t function without their £500 smartphones), the operator warned that it might have to stop handing out free handsets to customers, because it couldn’t absorb the cost any longer. So although calls might be cheaper, you might have to pay more for your phone, or end up with an inferior service. Doh.

What’s more, all this fuss about termination charges could end up being largely irrelevant before long. Ofcom points out that the majority of growth in the mobile market is expected to be driven by demand for data services, not phonecalls. Apparently, revenues from data increased by 90% between 2007 and 2009 – and that’s expected to grow even further over the next few years. 3 already offers calls over VOIP services like Skype – so it may only be a matter of time before phonecalls become a sideline for Orange et al anyway.

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