OFCOM has today announced a new consultation on voice markets. In most respects this follows the model OFCOM has used in the past. But in one aspect, which comes as a surprise (at least to me) it makes a change that will be potentially significant for telecoms operators outside the EEA (and, depending on the outcome of Brexit talks, inside the EEA but outside the UK too).

These consultations relate (as relevant here) to the market for terminating voice calls on fixed or mobile networks. When a customer of one network (the originating network) makes a voice call, whether to a landline or mobile, to a customer of another network (the terminating network), the originating network must buy a voice termination service from the terminating network.

In past market reviews, OFCOM has decided that each UK network operator as Significant Market Power (SMP) in respect of the market for terminating calls to their own network – because the originating operator has no choice but to buy termination from that operator. The remedies imposed have included a wholesale price control. Today’s consultation retains this model, though changes the price control levels in some cases.

The proposal, though, is to make a change to this so that, for the first time, the price controls would not apply to calls originating outside the EEA (or, depending on the outcome of the Brexit talks, originating in any country outside the UK). Instead, calls originating internationally would be subject to a different charge. Their charge in these cases would be the higher of (i) the charge that the originating operator itself would charge for calls originating in the UK, or (ii) the UK-regulated termination rate.

The aim of this change appears to be to create pressure on operators in other countries to reduce their domestic termination rates. In other words, OFCOM is making trade policy! They justify this on the basis of the benefits that would accrue to UK consumers if international ones reduce their termination rates (most notably in the form of cheaper international calls from the UK, but also because it might make it easier for UK operators to maintain “roam like at home” retail offers after Brexit).

This is a model that a number of other EU countries use, including France, Germany and Ireland, but it is not one the UK has previously adopted. I think (and this is my personal view) that it is problematic for several reasons:

  • OFCOM is effectively making trade policy. It is proposing a rule that is consciously designed to put pressure on other countries to change their rules. This should really be a job for the elected UK government, not the telecoms regulator.
  • It means UK operators will be permitted to charge differing prices to different customers for an absolutely identical service. A UK operator could end up charging the regulated price (around 0.4ppm for mobile termination) to a UK originating operator, but much more – this could easily be 3ppm (or even more) in the case of some countries (typically, but not always, in emerging markets). This seems at odds with OFCOM’s normal principles of regulation; far from enforcing non-discrimination, this is actively encouraging it.
  • This price difference of a factor of six or more for the same service will create strong incentives for various kinds of distortions, or even for fraudulent behavior. I thought the days of such dodges as “one way bypass” (where a monopoly provider from a less-regulated country sets up a UK subsidiary to receive, and re-present as local, calls that were in fact internationally originated) were long-gone, but they now seem likely to return.
  • OFCOM itself acknowledges a risk that the fact that it will be more expensive, perhaps much more expensive, to call the UK from overseas will operate to reduce international business and trade and make it harder for UK businesses to trade overseas – because it will be harder for international customers to call them. The actual impact of this will depend on how easy it will be to switch to OTT alternatives (like WhatsApp), but in at least some significantly affected countries (for example, those with minimal use of smartphones) this will not be easy.
  • The policy seems to assume the actual costs of termination in the UK will be similar to the costs elsewhere. This is incorrect: countries have different geographies, populations, taxes and cultures, and all these things affect the actual cost of building and maintaining telecoms networks. Moreover, in any countries with a best-practice regulatory system, we can expect the local regulator to have set local termination rates in a manner that reflects local costs. These costs differences may represent at least part (perhaps a significant part) of the reason terminating costs in some overseas markets are higher, and it may not be realistic in such countries to second-guess the local regulator and to expect local termination rates to fall materially.
  • In some cases, the overseas originating operator will not, in fact, offer a termination service, so it will not be possible to determine the “charge that it would make  for calls originating in the UK,” and thus the price! International calling card companies, for example, offer international termination, but not originating. It is unclear how their prices will be determined.

The biggest impact here will likely be felt in emerging markets, where local termination rates are often higher – though other countries with high termination rates (like Switzerland) could also be impacted.

The consultation ends on October 8, 2020.