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Ofcom's termination cap will hurt profits, 3 UK says

Everyone else is bigger than us

3 UK has lodged a complaint with the Competition Appeal Tribunal against Ofcom's capping of termination rates, claiming it will restrict its ability to turn a profit.

The termination rate is the amount paid to the receiving operator when a call is made into their network - so when a T-Mobile customer calls a 3 customer, T-Mobile pays 3 for handling the call.

The problem is that 3 customers don't have enough mates on other networks calling them, so while the other four networks find their termination rate payments being roughly equal, 3 finds itself paying out - to the tune of £50m in 2006, according to 3 UK chief executive Kevin Russell.

Last time Ofcom examined the termination rates, in 2004, 3 was excluded from capping as it wasn't considered to have SMP (Significant Market Power) - other operators has caps imposed. 3 was later deemed to have SMP over calls coming into its own network.

But the caps are now expiring, so Ofcom wants to force the other operators to cut their termination rates to 5.1 pence per minute by April 2010. It plans to do so in four equal steps over the next four years, and wants 3 UK to cut its rate to 5.9 pence per minute over the same period.

But Kevin Russell (in a FT interview) said the cap will jeopardise 3's drive to profitability, which is already running six months late.

The answer, of course, is to get more people to call into the 3 network, or reduce the number of calls made out of it. But that would mean increasing prices, a move 3 can't afford to take.

It almost seems that this attack on Ofcom is an attempt to shift blame when 3 fails to announce profitability again this year. ®

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