Mobile Termination Rates

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Many are getting outraged at New Zealand’s high mobile termination rates – the cost of terminating a call on another network. Many of the comparisons made to other countries – in particular those made by Drop the Rate Mate campaign – are false.

New Zealand operates a calling party pays (CPP) regime – the party that makes the call pays for the cost of the call. The examples of countries which have no termination rates (the United States, Singapore, Hong Kong, etc.) operate receiving party pays (RPP) regimes. If you think about it, it becomes very clear why CPP rates are higher than RPP rates.

When I buy a phone, I care about the cost to me of terminating on other networks. But I cannot control that price, because it is charged by other networks. Equally, I care little about the cost of terminating a call on my cellphone – because I don’t pay that – the people that call me pay that. In technical language, under CPP the terminating network has the incentive to exploit subscribers from originating networks due to its monopolistic market power.

RPP has one draw back – sometimes people refuse to answer the phone if they think the conversation will not be worth the price. Equally however, in CPP regimes, some people do not make calls that are worth it from the point of view of the receiving party. Some phone calls which would have net utility are not made under either regime. It is my understanding that regulation required mobile companies to operate CPP regimes. Now we are considering regulation to bring MTRs down (or the threat of regulation, which is forcing the mobile companies to lower rates). The whole regulatory issue of MTRs has arisen by virtue of prior intervention!

This article has a lot more on the interface between calling regimes and regulation.

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3 Responses to “Mobile Termination Rates”

  1. Joe Says:

    Stephen – congratulations on this blog.

    You say “It is my understanding that regulation required mobile companies to operate CPP regimes.” I don’t believe that is the case, but I’d be very interested if you can point me to a source.

    CPP is the world standard – only a few countries use RPP – the US and India are the main ones. RPP tends to drive different customer and operator behaviour so culturally it’s difficult to change – a bit like changing from left to right side of the road (which can have real advantages, but everyone hates).

    There’s certainly a snow ball effect – once one carrier starts using CPP others will follow. I’m not aware of any jurisdiction where you find a mix. Ordinarily you might think such uniformity implies regulation, but in network industries it can also just indicate the nature and development of the carriers in a given jurisdiction.

  2. stephenwhittington Says:

    CPP and RPP regimes was the subject of an international mooting competition I was involved in. Our research revealed that mobile companies were in favour of CPP, aspparently because it seemed to increase pentratino rates in the beginning, presumably because that general model aligned with landline payment structures. The ITU pushed hard for CPP regimes, and most of the countries we examined opted for CPP because of that pressure.

    I haven’t researched the NZ case extensively, so cannot say with certainty.

    I broadly agree with the point about network effects, although it surprises me if that was the reason, given the level of evidence now out there that RPP is cheaper.

  3. Joe Says:

    Interestingly the high termination rates in New Zealand have also significantly influenced the relative predominance of SMS use in New Zealand. Carries don’t charge termination rates on SMS because they figure it all comes out in the wash. Text based conversations rely on a message from network A to B being responded to by B to A. Doesn’t work that way for calling. There’s follow on effects on terms of what phones are successfully retailed here etc. etc.

    Anyway, termination rates are an interesting issue. Make a submission… http://www.med.govt.nz/templates/ContentTopicSummary____10696.aspx

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