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How will phone companies recoup lost revenues?

Robert Peston | 09:29 UK time, Thursday, 1 April 2010

Those busy busy Ofcom people are at it again. And this morning they are proposing quite a shakeup of the mobile phone industry.

Woman using mobileOn this occasion they can be seen as interpreting the will of the European Commission that the termination rate for a call - that's what your mobile phone provider pays the mobile service you ring when you telephone another mobile phone - should not be greater than the direct cost of "terminating" the call.

Ofcom is proposing a very steep fall in that termination charge, by almost 88% or 4p a minute in phases from 2011 to 2015.

So for example if you are calling O2, Vodafone or the merged Orange/T-Mobile, the termination charge paid by your mobile phone provider will drop from 4.3p a minute to 0.5p a minute over those four years (and from 4.6p to 0.5p if you are calling 3).

So does that mean that that you'll be better off to the tune of almost 4p per minute of calls for every call you place to one of the big mobile phone services?

Well there should be a big benefit if are ringing a mobile from a landline. The provider of your fixed line should pass the saving on to you, given that there's pretty intense competition in that market.

So that slight trepidation that some of us still have when calling a mobile from the home phone should be ameliorated a bit.

But what about the big mobile phone companies? How will they react?

Some 16% of their UK revenue comes from these charges. That's quite a lot of revenue to be at risk.

So they'll try and recoup it - perhaps by putting up the cost of so-called data traffic, or what they receive when you send texts or access the internet on your mobile, or possibly by reducing the subsidy they pay on handsets.

The important point about the proposed change is that it penalises the incumbents and levels the playing field to the benefit of younger mobile phone companies.

The logic works like this: the market leaders, Orange/T-Mobile and O2, are currently in effect guaranteed a big chunk of income, because they have the most mobile customers in the UK and know that they'll receive substantial termination charges when those customers receive calls; those guaranteed revenues are now set to shrink fast; which means that they will have less of an endowment of protected revenues that they can channel into initiatives aimed at crushing new entrants.

So perhaps the biggest benefit to consumers will be that we'll see more competition from nimbler, younger mobile phone providers. Which should deliver some combination of lower prices and better services - although right now it is impossible quantify the monetary gain for consumers with any precision.

By the way, I should point out that this is not Ofcom's final ruling. There's still a bit of consultation to come before the new termination charges are set in stone - and even at that stage, the mobile phone companies could appeal to the Competition Commission.

That said, a more competitive landscape for mobile looks a pretty certain prospect.

Comments

  • Comment number 1.

    The point of promoting competition is to take away from market participants the ability to earn revenues due to excessive market power. Hence, the assumption that phone companies will simply recoup lost revenues elsewhere is the same as assuming that the policy fails. If the policy works, the revenue is lost - not recouped. That is the whole point.

  • Comment number 2.

    I'm all in favour of better competition because we've been fleeced for a long time now, and it's high time mobile phone costs were much cheaper.

    We are still caned on international rates though. My other half travels abroad a lot and his data and call costs are still astronomical and that's with a special international bolt on for his tariff. Hopefully this will be reduced more than the token gesture last year.

    (Great to see some non-banking stories, Robert, although the latest round of charges from the FSA would warrant some interest - I'd like to know which 2 investment banks are involved this time...)

  • Comment number 3.

    I bought a transportable mobile phone in 1988, if memory serves it was around the £750.00 mark, and I can’t remember what the tariff charges were.

    This week I bought a Samsung C3050 phone for £34.95.

    I bought it, not for the phone specifically, because I already have one, I bought it for the charger, so I’ve got a charger at home and one at work.

    I’m on Orange, and the service has been faultless for as long as I can remember.

    Out of all the things I tend to use and consume, it is probably the only thing that has actually got cheaper and better over the years.

    Pity the mobile phone operators aren’t standing in the next general election.

  • Comment number 4.

    The mobile phone tariffs in this country are obfuscated by the phone companies' tactic of offering 'free' handsets and handset upgrades.

    The price of calls is unnecessarily high because of the amount of money the phone companies spend on these largely unnecessary frequent 'upgrades'.

    If people were to be made responsible for their own handsets they could choose how often they wanted to upgrade and what level of features they required and everyone could have cheaper calls.

  • Comment number 5.

    #3. Dempster wrote:

    "Out of all the things I tend to use and consume, it is probably the only thing that has actually got cheaper and better over the years."

    Apart from TVs, computers, radios, cars, washing machines...

  • Comment number 6.

    > So they'll try and recoup it - perhaps by putting up the cost of
    > so-called data traffic, or what they receive when you send texts or
    > access the internet on your mobile, or possibly by reducing the subsidy
    > they pay on handsets.

    If these measures worked, they'd already be trying them to make more money on top. But they aren't, so they don't.

    Look, stuff doesn't stay hi-tech for long, today. Those guys had their chance to make some money, and now we must commoditise their services. If that means that they have a hard time, who cares? It's just business, and they'd gouge us if they could. So now it's our turn to gouge them.

  • Comment number 7.

    Robert

    1) the phone companies will still make excessive profits from SMS (consider the low bandwidth and equipment required v. talk or data).

    as data capable phones grow - will data based services like twitter cannabilise the SMS market?

    2) how do the phone company profits compare with the 3G fees paid? It seems to me that allowing them latitude to recover those costs (and make some profit) would only be reasonable - but bidding war looked more like a bubble than a competition!

    3) what was the business case for the orange - T-mobile merger -if they are now the biggest then the mutually lost charges must also have been significant

  • Comment number 8.

    Are they the same quango that force the Royal Mail to deliver other peoples sorted mail at a 2-3p loss per letter.

    UK Mail and other providers are allowed to under cut the royal mail for bulk deliveries then deliver the mail to your local sorting office where its sorted and delivered the last mile.

    The only problem is that the price for this "sorting and last mile delivery" is fixed by PostCom or OfCom or what ever quango it is, at such a price that royal mail make a 2-3p loss per letter.

  • Comment number 9.

    The Evil EU Empire Strikes again.

    Oh wait, actually no, again the EU has shown leadership and common sense where our own toothless regulators have got fat dinning with the very people they are meant to be regulating.

    Hopefully when the next lot get in we will end up with some EU style regulation.

    I freely except that today a mobile phone costs a fraction of the price in 1988, but an hour with Ashes to Ashes will also remind you that e-mail, the Internet, and pocket computers didn't exist either.

    I'm with O2 and some of their tactics are horrific such as charging to use the free features that came with your phone such as Wi-Fi!!
    And until recently data rates were astronomical until the arrival of the iPhone and I guess the realisation that without data it was never going to sell.

    Next step regulate the ultimate fat cat SKY. Please please EU lets see their prices regulated.

  • Comment number 10.

    The mobile phone services already make a whopping profit from monthly 'inclusive' charges on contracts that customers are locked into for excessive periods of time.

    And don't get me started on data roaming charges while abroad, which are the closest thing to extortion you can imagine. Now that's something Ofcom really should clamp down on.

  • Comment number 11.

    What would be of great interest, is the relative numbers of calls made from landline to mobile, from mobile to landline, and from mobile to mobile. My kids lives are dependent on their mobiles - whilst they MIGHT walk as far as the kitchen unaccompanied by their mobile, they would not dream of walking into the garden for instance without having their mobile in their pocket (or their hand!). They use their mobile in preference to the landline to make calls. I only use my mobile if I have no other choice.
    The reason for knowing these numbers is that if Orange have to pay Vodaphone X million for terminating charges, they are most likely to receive a similar amount back.
    The real winners in this instance are people like myself who use landlines to call (on occasion) mobiles. But the numbers of potential winners is constantly reducing, with some households not bothering with a landline at all. And then there are the links between landline companies and their mobile divisions...
    I don't think that this will cripple any mobile companies.

  • Comment number 12.

    5. rbs_temp wrote:
    #3. Dempster wrote:

    ""Out of all the things I tend to use and consume, it is probably the only thing that has actually got cheaper and better over the years."

    Apart from TVs, computers, radios, cars, washing machines..."


    Yup - all the things the government use to measure 'inflation'.....

  • Comment number 13.

    5. At 10:38am on 01 Apr 2010, rbs_temp wrote:
    #3. Dempster wrote:
    "Out of all the things I tend to use and consume, it is probably the only thing that has actually got cheaper and better over the years."
    Apart from TVs, computers, radios, cars, washing machines...

    I knew someone would pick me up on that.





  • Comment number 14.

    "Slight trepidation when calling a mobile from the home phone"?! Only slight?

    It costs me 1p/minute on my landline to phone my father's mobile in America, but 15p/minute to phone my wife when she walks round to her mum's. It's not rocket science to work out that someone's profiteering here.

    I never had any interest in having a mobile, but was forced to do so by sky-high phone bills that were purely down to calling mobiles. I got an inclusive smartphone and more inclusive minutes than I could use and still made a monthly saving on bills. Yes, that's right, I had to get a contract with the very people who were ripping me off in order to get any saving.

    This is a completely insane situation that has to end. If phone companies can't be trusted to come up with a fair pricing system, it's quite right for the regulator to come along and crack a few proverbial heads together.

  • Comment number 15.

    Good article in parts but a few things worth mentioning here, the mobile industry is saturated and the only race now is for the 4G market, over 80% of the UK now have a mobile phone so the boom years whereby thousands were joining the big 4 every week no longer exists. The majority of movement is due to voluntary churn, whereby a customer wants to leave a particular network to join another for whatever reason, so you will find that the market leaders will conentrate far more on customer service because ultimately that will be the USP they will use when they expand into other areas. Don't forget that these companies are communications companies, don't be fooled into thinking it is only mobile phones, expect to see many different products over the next 10 years as disclosed at the Mobile World Congress 2010, things like NFC (Near field chips) are already been tested with banking institutions by Orange/O2/Voda and that is likely to be just the beggining.

    Secondly, when you say "benefit of younger mobile phone companies", what companies are you talking about exactly?, it is game over for the UK in terms of entering the market, and what we do have left over are companies that use the big 4's cell cites, for example, Tesco Mobile, use O2's network, Libra mobile, use Vodafone's network, Lycmobile, use O2's network, 3 are pretty much been propped up by Orange/T-mob, there are more but again, they all purchase airtime from the bigger firms.

    Finally, in response to some comments that were left, the reason why people get stuck into contracts and cannot leave is because they decide to opt and choose a phone that is obviously out of their reach, it is a personal choice, I have a rolling monthly sim only contract as I went out and bought the phone that I wanted therfore I can change networks whenever I feel like it. If Mr Joe Bloggs wants the new super duper all purpose smart phone for free then expect to be tied down for a while, it's not rocket science, we as consumers can sometimes be blinkard as there are many options out there we just have an unnatural thirst for products that we cannot afford, hence the recession.

  • Comment number 16.

    This shake-up is very welcome from my point of view (before anyone asks, I have worked at varying levels, including senior, in this industry for the last 15 years).

    The mobile phone industry is at the penultimate stage of its profitability curve. The EC is merely highlighting this - which is something all operators are (at least privately) all too aware of. Growth in mobile operations will decline in the not too distant future should present conditions remain.

    Persuading the market to develop new revenue streams - as well as more efficient footprints - is from my point of view very positive, and necessary.

    Otherwise, quite frankly, we will end up with another BA, Rover, etc...

    PS #3 Dempster: Alas, careful what you ask for!

  • Comment number 17.

    This is a welcome move, but I'm sure it's true that we'll just end up paying for it elsewhere.

    And what's more, we probably won't understand where we end up paying for it, because mobile phone charging structures are so complicated. I don't understand how mobile phone charging works, and I'm a professional statistician and I've got a PhD.

    One of the most useful things the regulators could do would be to force all phone companies to set their charges in the same way so that the consumer could compare charges between different providers. That would undoubtedly bring prices down.

  • Comment number 18.

    "So perhaps the biggest benefit to consumers will be that we'll see more competition from nimbler, younger mobile phone providers."

    Sorry Robert but this won't happen. The cost of building a physical mobile phone infrastructure means any new players will need to be virtual operators paying to use one of the big three's networks.

  • Comment number 19.

    Mobile phone companies will not be able to recoup lost revenues. They will find that a phone is a phone and not a universal cash extraction device.

    People will not buy the added features that they hope to use to swindle cash out of customers - and even if the customers do use the features the networks (even G3 and possibly G4) cannot cope with the data demand to provide the services.

    Mobile phone companies are a put option (when, if I knew that I could make millions or billions!)

  • Comment number 20.

    Robert you have missed the point. Yes these companies will lose revenue but they will also have cheaper costs as termination rates come down. The companies that will benefit the most, and can then maybe pass the savings on, are those that have a high percentage of 'off-network' calls. i.e. calls from their customers to other mobile networks. Companies with more market share stand to lose out more.

  • Comment number 21.

    Overseas charges are something that need looking at next. My father in Canada phones me all the time, because he can talk to me for an hour for the same price it would cost me to phone him for 5 minutes.

  • Comment number 22.

    The trouble is that ever since Mrs Thatcher the British definition of "privatisation" and the "free market" has tended to be the replacement of publicly-owned monopolies and/or cartels with privately owned monopolies and/or cartels. Unless and until we get REAL competition instead of these cosy rip-offs we'll be no further forward. Caledonian Comment

  • Comment number 23.

    Is this really the good thing it's made out to be? Sounds like it ought to be really good for mobile users but it could play out in a whole different way.

    The key thing here is it affects the price you pay to call a mobile. Note OFCOM don't compel BT to pass on the saving to fixed line users calling mobile - so BT can take a higher profit and mobile users will be paying for it. Would be nice if there was some joined up thinking at OFCOM.

    3 customers will probably be the only section of the mobile user base to see a benefit from this move (as it has a smaller customer base than the other operators). I'll continue to use my mobile to call mobile users as there are plenty of bundled minutes available at "no extra cost" and I would much rather not give any more money to BT.

    Let's see OFCOM force the fixed operators to pass on the whole saving - or is this another handout to BT?

  • Comment number 24.

    "So that slight trepidation that some of us still have when calling a mobile from the home phone should be ameliorated a bit."

    Slight trepidation??? I only call mobiles on a "needs must" basis from landline or mobile. I only use a mobile to make calls on the same basis.

    I have one of the old tariffs that is like PAYGO but sends a monthly bill that can be £0.00 if I don't use it. These tariffs disappeared after the silly bidding for G3 licences government sell-off since hat was supposed to be a tax on mobile operators became a tax on mobile users when the normal monthly contract went from £10 to £30, passing this "tax" on to the customer.

    I am all for Ofcom preventing these people from what is effectively protecting their interests as a cartel, but it seems wrong that the "termination" fees are allowed to be on a pence-per-minute basis if they are supposed to reflect the cost of making the connection - isn't that a fixed amount irrespective of the duration of the call?

    We now see the newer landline operators offering UK calls that cost 0p per minute to UK landlines and a 1p connection fee (some chage up to 5p).
    In this day and age that's sensible - it is only the rapacious greed of corporations that keeps charges as high as they are. That coupled with politicians inaction over the issues - perhaps they have been "lobbied" - but at least by creating an independent watchdog there is some hope for the man in the street.

    Good on Ofcom. Go the final ste and enforce fixed termination fees and remove the need for PAC codes completely as in other countries.

    NB We need to do the same with switching energy and water suppliers.

  • Comment number 25.

    The mobile phone companies were fools in the first place to pay soo much cash for the 3G licences in the first place and now being "robbed" because they charge too much?
    Sorry, but not impressed.
    It does reek a bit of the Sky story a bit, moaning because they charge too much, but would prefer a monopoly to charge what they (inset any company here) like.
    And then moan that..... sorry off on one here as a division to make my point......
    When BT was privatised so many companies moaned because it was and still is market leader. And now those same companies moan that it abuses it lead by wanting to compete fairly in the same market.

    My point is if these firms have public double standards, then at least be open with them..
    And no mention of the election.....dammmm

  • Comment number 26.

    Agree with #1 Chris B.

    However, as we have seen with the governemnt licence sell-off they will try to pass the costs on to the customer. Businesses currently think they have a God-given right to set a level of profit that will be acceptable to their shareholders and the customer is supposed to suffer it.

    We need to prevent that, probably by a watchdog actiing as Ofcom have done in the Sky issue, to prevent overpricing. It has to be possible for corporations to fail or we will end up supporting the insupportable and see an ever-increasing cost of living.

    I believe that we are already beyond the point where the cost of living is acceptable in this country. It has to stop. Having people who are basically stewards of existing companies shovelling money into their own coffers and seeing their only responsibility as maximising shareholder returns is the root cause of this evil. We need to redesign corporate structures and responsibilities - and also what can and cannot be done by those running a company that they did not create, producing products that they did not onvent.

    To be clear, I differentiate between an inventor such as, say, Dyson, who invents a cleaner and sets up a company to market the product, and a board of directors of a bank who take over stewardship of an existing corporation and as such are mere custodians of an existing enterprise, particularly one with a long-term role to play in the infrastructure of society.

  • Comment number 27.

    It is BT (landline) in the country that has been campaigning for this. Currently they charge 7p a minute for calls to mobiles if you register and or if you are on anytime If this comes to pass then presumably those on 'anytime' will pay nothing when calling a mobile.

    Incidentally the charge for receiving calls calls on mobiles used to have to be paid by the actual recipient (that is shown on the bill) but that was all ended long ago by it being paid up front by the sender.

    Is there actually any real competition in the mobile market? I suspect in reality it is all smoke and mirrors.

  • Comment number 28.

    Its simple if you don`t like the charges get rid of the phone.
    Not that easy they stitch you up in contracts, just read the contracts they mostly have a clause which states they can change the charge at any time! I had a smart phone on a 3yr term, lost my job so I rang the company asked them to remove all the thrills and trim it to the bare bones.
    I switched the phone off and put it in my drawer, luxury right unemployed now! Then I get the next bill and they have introduced a flat monthly fee of $100.I rang them no end of times saying I had not agreed to this you have changed the terms of the contract! Actually an UnFair Contract Term put in the agreement,I put all of this in writing in Dec 2009 not paid the bill not going to.They keep chasing me but its not right! So the phone is not being used, they lost revenue on the telephone calls so they slapped a monthly charge on it!
    Thats mobile phone companies for you crooks!

  • Comment number 29.

    Use skpe or Yahoo Messenger or Google Chrome, forget having a land line contract just pay for the internet service. Forget mobile phones they are a con, your average guy really can do without them, its business people that need them.
    The average person is cross subsidizing the business uesr plus they can monitor your movements with a cell phone. Everybody seems to forget that bit, a cell phone is a big brother device particulary with gps navigation feature.
    Truth is the average person can do without them.

  • Comment number 30.

    From mortgages, credit card agreements, to mobile phone contracts all have terms that a heavily in favour of the supplier. The consumer has very little rights in all of this and some of the terms and conditions go against the UnFair Contract Terms Act.
    The consumer has very little protection, just sit down and read the contract and see what powers they have. Once you read it you will be shocked!
    They can very the prices, they can vary the term of the agreement, they can introduce new fees or charges etc.My advice to anybody is do not touch any of these products with a barge pole they are a license to print money.And you will be stitched up big time on all of these!
    Consumers have no rights the suppliers providing the product have tons of remedies including taking you to court!

  • Comment number 31.

    I guess now we know why they have been so keen to sell smart phones!
    If price controls apply to voice calls I bet your bottom dollar the cost of data transfer, texting, e mail access will rocket!
    You legislate to bring costs down in one area and they apply it to another area, its a game were the consumer is always playing follow my leader.
    Simple solution dont have a mobile phone, they are not that essential.
    We all know smart phone technology and data roaming is a license to print money period.If you ever go abroad with your phone switch data roaming off!, otherwise you will be in for a shock when the next bill arrives!

  • Comment number 32.

    Orange refused to cancel my contract and continued charging monthly charges when they had cut off service and claimed it was their legal right.
    I complained to OFCOM and Orange backed down quick fast.
    (rip offs)

  • Comment number 33.

    Reduced charges to come into effect by 2015? Why so long? This is a simple act, easy as flipping a switch, and I see no good reason for the delay, apart, that is, from being a period for the phone companies to fill their coffers with our money. OFCOM should have made these cuts compulsory, with immediate effect.

  • Comment number 34.

    Switch to pay as you go its a lot less hassle, then when you want to get rid you have no contract to get out of.Or better still dont have one !
    What would they do if people did that squeel like hell and watch them reduce prices in double quick time!

  • Comment number 35.

    The results of this change will be very revealing of the amount of real competition in the mobile market. The immediate loss of revenue will be mostly cancelled out by a reduction in costs (because who is it that mostly pays termination fees to mobile companies? Other mobile companies...)

    The real question will be, will competition then drive prices down or not? In a competitive market it would - but there's quite some evidence that the mobile market might not be very competitive after all...

    http://www.knowingandmaking.com/2010/04/making-up-cost.html

  • Comment number 36.

    They will increase their charges, Im getting rid of my phone as I am refusing to pay gordon browns tax on it

  • Comment number 37.

    The cost for out of bundle usage is quite high - 35p per minute to a different network and 20p per minute to the same network on some contacts - does OFCOM not need to look at that charge?

  • Comment number 38.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 39.

    You have to say one thing about Offcom, at lease they are showing their teeth in support of the general consumer unlike Offgem who are weak need toothless fairies who allow the energy companies to tread all over their customers and charge what ever they like.

  • Comment number 40.

    #9 Totally agree Kev - the substantial UKIP wing of Tory party is obsessed with trashing the EU for it's 'interference' - well, I applaud anything the EU can do to counter the influence of the powerful business lobbies in defence of consumers.

    Perhaps we should look more often to Europe instead of slavishly following
    our US cousins and buying into their me myself I culture (or their toxic investment "opportunities" for that matter).

  • Comment number 41.

    I expect pricing to continue to fall until we pay almost nothing for calls and landline rental. Call rates have already dropped significantly over the last 5 years due to increased availability of cheap bandwidth which facilitates VoIP. The increasing competition is lowering prices for consumers. This has already happened on international calls to most parts of the world. The main area that the large telcos still take profit from is termination charges from fixed lines to the mobile network because VoIP providers cannot route these calls over the internet. Home users are switching in droves to VoIP and almost all phone systems these days are VoIP capable. Telcos are no doubt scared of the emerging technology and lowering prices to avoid losing business.
    Open source projects such as the Asterisk PBX platform are a sign of the times and do believe that over the next 10 years almost all telephone services in developed countries will be VoIP based.
    The wikipedia page on VoIP is a great read for more information

 

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