Our take on termination rates

O2’s Head of Regulatory Affairs, Nick Blades, discusses Ofcom’s proposals to cut mobile termination rates.

Last week Ofcom set out proposals to cut mobile termination rates, the costs we charge other telecoms companies for carrying their traffic over our network. Ofcom argue that this will lead to cheaper calls for consumers and much of the press coverage has suggested that operators have been overcharging thanks to these costs.

Firstly, it’s worth pointing out that Ofcom sets these charges, not the operators. What we are seeing is a calculation made by Ofcom in 2007 being updated with a new calculation it’s made in 2010 – based on updated information. We do not agree with the basis of this new calculation.

The UK is the most competitive mobile market in Europe with margins well below all other EU countries. There is no evidence of excessive profit taking or overcharging by any operator based here. So what is all the fuss about?

Well, quite bizarrely, after nearly a decade of regulating these charges and allowing us to recover a small percentage of the money we invest in our network, Ofcom has decided to remove this network cost allocation from its calculation. Yet clearly we’re still incurring the costs of investing in our network. So the real question is, if we’re not making excessive profits, where do we claw these costs back from?

To say that Ofcom’s proposal will lead to cheaper calls for UK consumers is both simplistic and misleading. We are a business and, as our European CEO Matthew Key commented in The Times yesterday, ‘if our business model changes we have to do something to compensate’. We have spent over £10 billion on our mobile network to date. And with surging demand for data and the requirements of next generation networks, we have earmarked hundreds of millions of pounds more to invest.

If we cannot recoup some of this investment through mobile termination rates, we have two choices. Either we raise prices in other areas, such as Pay & Go or data, and cut handset subsidies, or we cut back on our investment, risking the rollout of next generation networks or preventing new services from being rolled out in rural areas.

None of these options is attractive to us but they point to how consumers may ultimately suffer through Ofcom’s proposals. We will be contributing fully to Ofcom’s consultation process to get our points across. And, come what may, we will remain 100 per cent committed to ensuring that we maintain the quality of service our customers expect.