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Ofcom confirms continued cellco dominance

But operators still face significant challenges

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An interesting press release was issued today by UK regulatory body Ofcom in relation to mobile call termination charges.

For those unfamiliar with this area, the practice being referred to is mobile operators cross charging other networks for the privilege of routing calls to their subscribers. These charges are in turn passed on to the person originating the connection, the upshot being that it costs all of us more to call someone on a mobile phone than it does to call a person on the end of a fixed line.

To put this into perspective, Ofcom says: “These mobile call termination charges generate more than £2bn per year for operators and account for about half the price of a typical call from a BT fixed-line phone to a mobile”. So, it’s big business.

Some would argue that this mechanism is a rip off – don’t operators already make enough from outgoing call charges? How can they justify charging in the other direction too?

From the operators' perspective, they counter-argue that incoming calls to their subscribers still travel over their cellular network, and these are not cheap to licence, build and operate. It’s therefore only fair for them to charge for the routing and carrying service they provide, regardless of the direction.

The reason Ofcom is involved is to make sure operators don’t crank up termination charges to unreasonable rates, as the caller does not have any choice but to pay them if they want to reach a particular mobile phone user. Unlike outgoing mobile phone tariffs, you cannot switch to another supplier if you don’t like the charges; there is effectively no competitive pressure to keep the players “honest”, so regulation is required to protect the customer.

The purpose of Ofcom’s latest announcement is to make us aware of its intention to extend regulation in this area both in terms of time and scope, with the latter being broadened to include 3G as well as 2G networks now that a lot of voice traffic is switching over.

But hold on a minute – is all this additional regulation really necessary when we are hearing so much about Wireless VoIP being set to destroy the cellular market? After all, we have Nokia and other handset manufacturers building Wi-Fi into phones now, so surely that will create the kind of competition needed to keep everything balanced. In fact, far from worrying about mobile operators abusing their position, shouldn’t we be feeling sorry for them?

It’s an interesting theory that we hear over and over again in the press and from various groups with vested interests in promoting Wi-Fi and WiMax type technologies. But come on guys, cellular networks have close to complete population coverage in most developed countries in Europe and they are reliable, easy to use and getting cheaper to access on an almost continuous basis. Sure, we will see some people sitting in hotspots using their Wi-Fi handset, but being realistic, it will be a long time before people have the confidence to give up their cellular service.

Ofcom has obviously done its homework and concluded the same thing when it says in its release that “structural or technical change in the market - that might create competition and remove the need for regulation - is currently neither practicable nor feasible”.

To put it another way, the assumption is that cellular operators are going to maintain their dominant position in the mobile telephony market for some time to come. We agree. The mass market may well move predominantly to Wireless VoIP at some stage, but our bet is that the underlying bearer will still be cellular for the “out and about” style usage, as this is inherently the most appropriate infrastructure – and it’s already in place.

Having said this, the emergence of Wi-Fi enabled handsets and converged communication technologies from the likes of Cisco and Avaya means some pretty big chunks of cellular operator revenues are definitely under threat. Business users are notorious for gravitating towards the cellular phone as their default device, leading to lots of calls to and from mobiles in the office environment, even when the user is sitting at their desk next to a perfectly good landline. By integrating mobile handsets with the company PBX over Wi-Fi, a lot of this traffic can be diverted from cellular to internal networks or the fixed PSTN. Initiatives such as BT Fusion attempt to achieve a similar result for consumers in the home amd smaller businesses.

While these technologies and approaches may take a while to have their effect, however, we could well see a much quicker impact on operator revenues in another areas. The EU has been on the warpath lately about international roaming charges, with one of the key figures, commissioner Viviane Reding, moving on from asking awkward questions to issuing some pretty clear warnings to the operator community to clean up its act on what she, and many of the rest of us, consider to be unjustifiable rates.

So, the world is definitely changing, and players like Vodafone are clearly facing some serious challenges. But let’s not write off the operators too quickly. We are all dependent on cellular telephony at the moment for both personal and business use and this level of incumbency will take a lot of shifting. Just as in the mobile data space, it’s all about how well the operators are able to exploit their position and assets to move into new areas and businesses models as the traditional ones are squeezed tighter.

Dale Vile is research eirector at independent analyst firm Freeform Dynamics.

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