Cutting Room: MTR cuts only a step in evolution of market

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Ofcom’s proposal to slash mobile termination rates (MTRs) is hard for the big four network operators to bear, given they find themselves under intense margin pressure already. But, in the broader scheme, their talk of it suffocating market innovation and killing consumer choice is over-egged.

The proposed rate cut is enormous, from 4.4p to 0.5p by 2015 with staggered reductions in the intervening period. Orange was most outspoken in its objections to the proposal, and will be hammered worst now its joint venture with T-Mobile in the UK is confirmed. But its points about such legislation enforcing change to the present industry model are shared by Vodafone and O2 also.

It suggests, with some reason, considerable consumer value will be wiped from the prepay model, that handset subsidies will be slashed, that nefarious new calling models could be introduced to cover the shortfall, that 4G rollout will be hampered and Digital Britain will be undermined, and that technological pyrotechnics will be forcibly stubbed out by pauper operators.

Sounds scary, but its response is of course intended to hit Ofcom where it feels it most – as veiled threats to consumer wellbeing.

In fact, most of the above trends are already underway. The prepay market is declining, particularly as handset subsidies have been eliminated from SIM-only deals to enable a migration of the consumer market to contract.

Networks have been keen to explore some kind of break-up of the UK subsidy model for years, and have attempted to flex their muscle on the subject with most vendor brands. Of course, Apple put paid to that network/manufacturer power match – and even if it is a special case, Google has helped the struggle of weaker incumbent manufacturer brands with its Android platform.

Yes, there are huge cultural barriers to overcome if the subsidy model is to be altered significantly. But SIM-only demonstrates the kind of innovation achievable with tariffs and sales models. Revenue share also.
The consumer has got it good, and will have it better. Competition is the UK market is so intense that it would be a brave, and probably stupid, operator to hike prices across the board to make up for the loss of revenue from termination rates.

Full article in Mobile News issue 461 (April 12, 2010).

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