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SPEECH/09/218












Neelie Kroes

European Commissioner for Competition Policy




Cutting the price of phone calls – new termination rules

























Opening remarks at press conference
Brussels, 7th May 2009

Introduction

Today's Recommendation on termination rates is about customer welfare – it will benefit both business and household phone users by requiring termination rates to be based on costs.

The ability to communicate via mobile and fixed phones is at the heart of how we do business and live our lives throughout Europe.

In fact, there are more mobile phones than people in Europe today and most households have also a fixed connection.

So it is obvious that fair prices for fixed and mobile phone calls are a basic economic need for all Europeans, and a more competitive market is needed to deliver them.

As such it should come as no surprise that the Commission wishes to ensure that the sector operates efficiently.

In this way, businesses, families and individuals avoid unfair costs from using their telephones.

At a time when many face financial difficulties, it is especially important to end bad practices and rectify market failures.

The obvious problem is mobile termination rates, which are in most Member States 4 to 5 times above the cost of providing the service.

As today's Recommendation shows, we think this is best done with regulation based on sound competition principles.

We need regulation and competition law to work together to tackle this problem – and today's Recommendation is a milestone for that joint approach.

Need for action

Why did the Commission act? How do mobile termination rate problems affect competition?

Firstly, each mobile and fixed network operator has a monopoly for the provision of termination services on their own network and like all monopolists they have no incentive to reduce these rates.

On the contrary, they want to not only maximise their own profits but also make it as difficult as possible for rival fixed and mobile operators to compete.

This means that dozens of companies across Europe are passing on needless costs to hundreds of millions of customers.

Unlike roaming rates, this rip-off is not obvious to consumers because it built into charges that operators offer to consumers.

But the problem is even more significant because it affects calls from fixed as well as mobile phones and domestic as well as cross-border calls.

We are fortunate that all national telecoms regulators have recognised the need for price regulation, and this Recommendation encourages them to implement rates based on the costs of an efficient operator, that will apply to all operators at the same level.

The evidence

The evidence that change is needed is crystal clear.

Despite five years of regulatory efforts to bring prices down, mobile termination rates remain out of all proportion to both operator costs and charges for comparable services.

Mobile termination rates are still ten times higher than fixed line termination rates, and four to five times above the cost of providing the connection.

Any justification for this, for example in terms of mobile operators having higher costs because of the need to set up the networks, is long gone.

As already said, the situation in the fixed sector is less dramatic where the termination rates are 'only' twice the cost of providing call termination.

This is classic monopoly behaviour and the solution requires action from the Commission.

The Recommendation encourages all regulators to continue with their work to bring down termination rates with rigour and in a consistent way in all Member States.

Without such guidance, high termination rates would persist for many years. That would be a crazy situation, and we have to act to stop it.

Instead, by forcing prices down, we are levelling the playing field in particular for small mobile operators, but also between fixed and mobile operators, and ensuring that more competition is possible.

We estimate that eliminating price distortions between phone operators across the EU will lower consumer prices for voice calls within and between Member States, saving business and household customers at least 2 billion euros in 2009-2012.

And this is just in the short term. In the mid-to-long-term, the overall gain to society as a whole resulting from increased competition will be much greater. And this is just in the short term. In the mid-to-long-term, the overall gain to society as a whole resulting from increased competition will be much greater.

Distortions of competition

The competition distortions are very real in the current situation.

Smaller operators are at particular risk of being unfairly squeezed out of the market.

Why? Because small mobile operators, who terminate many of their customers' calls on the network of their incumbent rivals, have to pay large sums for this service.

If termination rates were lower, they could use these funds to finance investment in new infrastructure and could also make more aggressive retail offers to attract more customers.

Instead, they face undue hardship because of the unfair termination rate costs.

Fixed operators of all sizes are in a similar situation.

They pay large sums to mobile operators in what is a hidden cross-subsidy to the mobile operators.

The smaller fixed operators also cross-subsidise the operations of their incumbent rivals, the former state monopolists, by paying excessively high termination rates.

The incumbents are, in plain English, using the termination market as a "cash cow."

With lower termination rates these games will end and customers will get a better deal.

Of course, large, incumbent mobile operators are hostile to this change – after all, which monopolist is ever happy to give up their privileged position.

But the Commission has to take account of the interests of all phone operators, not just the former incumbents, and of the overall interests of Europe's businesses and citizens.

In terms of how operators will adjust to the new competitive environment, we believe the transition period is generous and that those who offer efficient and innovative services will be fine.

The Recommendation clarifies that phone companies are not entitled to rip-off phone users.

We would not allow such excessive and divergent charging or such distortions of competition in markets for other basic items - so there is no reason to allow it to continue in telecoms.

I am confident that regulation is needed, and I am confident that the new, lower regulated rates foreseen in today's Recommendation is the right form of regulation.

It will lead to more competition and innovation in the sector, and improved customer welfare.


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