Vodafone - attack in EC reforms

Reding reforms under attack

Vodafone has vented its anger at Viviane Reding by making the extraordinary claim that 40m Europeans could be forced to ditch their mobile phones because of the European Union telecoms commissioner's controversial plan for telecoms reform.

Ms Reding is provoking a bitter fight with leading mobile operators over her ambition for deep cuts in the charges that they impose on each other, together with fixed-line phone companies, for connecting calls to their wireless networks.

These wholesale charges, called mobile termination rates, represent between 15 per cent and 20 per cent of operators' revenues and have been an important means of recovering costs.

Ms Reding is by no means the first regulator to express concern that the charges are too high. But, in a typical flourish, she has used strong language in making her case for reform.

In an interview with the Financial Times in June, Ms Reding described termination rates as "guaranteed money" for the operators that created "real distortion of competition".

Now Vodafone has matched her rhetoric. In a submission to Ms Reding about her plan, Vodafone is warning that operators will have to raise retail charges for customers to compensate for the cuts in termination rates.

"Failure to recover costs risks bankruptcy," says Vodafone in its submission, seen by the Financial Times.

Vodafone uses its submission to argue against the adoption of a US-style system whereby mobile users pay to receive calls as well as making them.

Ms Reding is interested in the US model because mobile users there pay lower call charges and make greater use of their mobiles.

Some academics also argue in favour of the US system, where termination rates are set at near zero. Professor Stephen Littlechild, the former UK energy regulator, said in a 2006 research paper that British telecoms regulators moved in the late 1990s to impose price caps on operators' termination rates because the charges amounted to a "bottleneck monopoly".

He said an operator had previously been able to "name its own price" when deciding the charges for connecting calls to its network.

Mr Littlechild supported the introduction of a US-style "bill and keep" system, under which an operator bills its own customers and keeps the revenues to cover the costs of connecting calls to its network.

The system means that customers usually pay to receive calls although it is not compulsory.

In its submission to Ms Reding, Vodafone accepts the case for cuts in termination rates. However, the company rejects Ms Reding's call for deep cuts. Across the European Union, termination rates are on average set at eight cents a minute, and Ms Reding would like to see them drop to between one and two cents a minute by 2012. Vodafone would prefer between five and six cents a minute by 2012.

Nick Delfas, analyst at Morgan Stanley, estimated in March that Vodafone would see its earnings before interest, tax, depreciation and amortisation reduced by £900m by 2012 if termination rates were reduced to 2.5 cents per minute.

Vodafone says that operators will have no option but to raise their retail charges for European customers if Ms Reding's plan is implemented by national telecoms regulators across the EU.

Moreover, Vodafone warns that the impact of increased charges would be felt by less well-off customers who have cheap pay-as-you-go deals with operators rather than the more expensive monthly contracts.

This is because Vodafone says most of its revenue from pay-as-you-go customers is derived from their receiving incoming calls, which attract termination rates. These customers make relatively few outgoing calls.

TNS, a market research firm, was hired by Vodafone to find out what 9,000 mobile users thought about the prospect of higher retail charges, including the idea of minimum monthly payments. TNS also sought views on the possibility of paying to receive calls.

Perhaps unsurprisingly, TNS found significant hostility to higher retail charges, and Vodafone is claiming that 10 per cent of Europe's mobile users would decide they either did not want their phones any more or could not afford to keep them. "Reducing mobile ownership in Europe by around 40m users should cause the Commission to reconsider its proposals," says Vodafone.