Ofcom to Slash Mobile Termination Rates

By Gary Kim, Contributing Editor

In a move that should lessen the perceived value of VoIP calling from fixed or mobilephones, Ofcom, the U.K. communications regulator, has ordered a cut in off-network mobile termination fees, from 6.54 cents to half a cent by 2015, starting with a first cut in 2011.

The changes will reduce dominant carrier revenue, and help smaller mobile providers, in the U.K. market. The changes do not directly affect international calling rates, which arguably are a bigger problem, but which also have been addressed by European Union regulators.

Some estimate that mobile terminationcharges represent about 15 percent of total mobile operator revenue.

Vodafone (News - Alert), for example, says it earns 11 percent of its European revenue from mobile termination charges, while paying 10 percent of its revenue to other carriers who terminate its traffic.

U.S. mobile providers operate under a different framework. In Europe, only the calling party pays for a voice session, while in the United States, both caller and called party are charged for airtime. That difference means the cost of mobile termination is almost 'a wash,' and has enabled national calling at very-low prices, as the additional cost of terminationis quite low, and shared.

Britain’s mobile operators collected £750 million or $1.1 billion in 2009 in mobile termination rate revenue, so that is the potential area of impact: a reduction of most of that revenue by 2015.

Oddly enough, the move is beneficial to end users, but also means the cost of regular mobile calls is much cheaper, lessening the perceived value of VoIP over mobile services, at least for domestic calls.

The move shows how fluid the market environment can be for any application or service that competes largely on the basis of price arbitrage. History suggests that price arbitrage can drive an application's success for quite some time, thus powering business models for attacking companies in a market. But when incumbents are able, or in this case forced, to lower their prices in ways that eliminate the arbitrage, the arbitrage business model also is damaged or erased.

VoIP services still are most attractive for international calls, which are not affected by the Ofcom rule change, though.

(source: http://mobile-voip.tmcnet.com/topics/mobile-voip/articles/80646-ofcom-slash-mobile-termination-rates.htm)