Accc No Threat To Cheap Mobiles
Sydney Morning Herald
Monday December 18, 2000
A long-delayed decision on phone pricing could end cross-subsidies for mobile calls.
It is two years since AAPT asked the Australian Competition and Consumer Commission to determine how much the big mobile telephone companies should be able to charge for connection to their networks. The ACCC is finally about to decide the matter.
Its statement of principles for determining mobile network termination prices will be an arcane document with serious implications for the companies involved, and for their investors.
The area the competition watchdog is examining is one of the major sources of mobile revenue and the decision, expected before Christmas, will create a template that will in time apply to all the companies that own and operate networks in Australia: Telstra, Optus, Vodafone, Hutchison and One.Tel.
What is at issue is the price those companies charge when a mobile or fixed handset call terminates on their mobile network. Resellers, including AAPT and Primus, are urging steep cuts, and calls from fixed lines to mobile handsets are the focus of the investigation.
The networks charge on average about 28c a minute for those terminating calls to generate income which accounts for between 20 per cent and 40 per cent of total revenue. Their dependency on the charges is highest when their networks are new, with relatively few subscribers.
Any reduction in the mobile termination charges will therefore affect their profits and their overall market value, with the youngest networks most exposed. One piece of broker analysis circulating in the industry estimates that a 20 per cent cut in mobile termination rates (that is, a cut of between 5c and 6c a minute) will knock mobile company share prices down by over 10 per cent.
The decision is particularly important for Optus, which is fielding offers for its businesses. The document Optus has circulated to potential bidders for the mobile assets notes that the ACCC decision is imminent. Vodafone, which is yet to float its Australian interests, is also watching closely.
The nightmare scenario for the network owners was set out in a discussion paper written for the ACCC in late 1999 by two Melbourne University academics, Joshua S. Gans and Stephen King.
Gans and King concluded that mobile termination charges were largely immune to competition because the callers, who only indirectly pay the charge, really have no idea what network they are connecting to or what price they are paying when they do so.
In that environment, a carrier which reduces its termination charge is not rewarded because the price signal it sends is not received in the market. Gans and King argued that, for the same reason, a carrier could also increase termination charges with impunity.
The Melbourne University duo recommend that charges be based on how much it costs the networks to accept an additional connection. AAPT wants Optus, Telstra and Vodafone to more than halve their connection charges, to nearer 12c a minute. But the Gans-King formula would produce an even bigger cut in prices, with potentially profound implications. That is because the termination fees underwrite or, more correctly, cross-subsidise other prices in the mobile telephony retail market, including the zero connection charge that is now the industry standard and the peppercorn prices that users pay for mobile handsets.
Optus has argued most strongly with the commission that if the termination charges were slashed, the era of free or low-cost mobile phones would be be over. It also believes that mobile call charges would rise as mobile network operators clawed back lost revenue.
The ACCC chairman, Professor Allan Fels, and his colleagues are sceptical about the warnings that other prices will rise if mobile termination charges are cut. They believe that competition for customers at the retail level is too intense for that to occur.
Luckily for Optus and the other mobile network operators, however, they are in any event disinclined to accept a draconian cost-based pricing system. But the industry's suggestion that prices be left to market forces is also unlikely to be adopted and the ACCC will probably strike a middle course with a regime that reduces access prices by a set percentage every year.
The velocity of the decline will be decided inside the ACCC on Wednesday and announced shortly thereafter.
The odds are rising that the battle for Australian Football League rights between the incumbent, Kerry Stokes' Seven Network, and the consortium of News, Nine, Foxtel and Telstra, will become a gravy train for lawyers.
In 1997 Seven paid $20 million for ``first and last rights" to bid for the AFL rights from 2002 onwards. That means it can make the final offer, but Seven believes that an indicative offer the league put to it under this agreement is defective, partly because it only covers network television rights.
Meanwhile, the MCG trust has been making noises about preventing any deal while the MCG and the AFL are at loggerheads over who controls media access to the ground.
© 2000 Sydney Morning Herald
