Telecom braces for $30m earnings hit

Reversing its original (split) decision of February 22, the Commerce Commission has today issued a preliminary recommendation that Communications Minister Steven Joyce reject voluntary rate cut offers from Telecom and Vodafone, and instead regulate mobile termination rates - which user advocate Tuanz says add $300 a year to the average customer's mobile phone bill.

Reversing its original (split) decision of February 22, the Commerce Commission has today issued a preliminary recommendation that Communications Minister Steven Joyce reject voluntary rate cut offers from Telecom and Vodafone, and instead regulate mobile termination rates - which user advocate Tuanz says add $300 a year to the average customer's mobile phone bill.

Vodafone $12 plan provokes minister
The move had been widely anticipated after Mr Joyce asked the watch-dog to take a second look at its decision on April 27, seemingly provoked by Vodafone’s aggressive new $12 calling plan, which has an on-net element (that is, discounts or no charges for making calls to users on the same network. Mobile termination rates, or MTR, are the fees phone companies charge when a call or txt from a customer on a rival network is received by a customer on their network. 2degrees has alleged Telecom and Vodafone use on-net loyalty deals in combination with high MTR to block its growth.)

Today, the commission said  in light of the new [Vodafone $12] Talk Add-on plan, the mobile termination rates contained in the final undertakings offered by Vodafone and Telecom will not address the competition concerns identified by the commission during its mobile termination access services investigation."

“While lower retail prices are generally good for consumers, the competition concern which arises in relation to the [$12 Vodafone] Talk Add-on plan is the combination of low on-net retail prices and above-cost wholesale mobile termination rates which creates a barrier to efficient expansion by a new entrant,” Telecommunications commissioner Ross Patterson said in a statement.

“In light of such developments, the commission’s preliminary view is that if cost-based mobile termination rates were put in place, then all mobile operators would be able to vigorously compete in the retail market and provide consumers with competitive and innovative calling products,” Dr Patterson said.

The Telecom earnings hit
Based on draft figures, and assuming that 50% to 80% of the MTR reduction is passed through, for both mobile-to-mobile and fixed line-to-mobile calls, and price elasticity of 25% to 50%, Forsyth Barr analyst Guy Hallwright estimates the impact on Telecom’s 2012 ebitda will be between $10 million and $50 million, with a central point of -$30 million.

The remaining unknowns: how much of the MTR saving will be passed on to customers (the Commerce Commission can only regulate pricing at the wholesale level) and market elasticity - or how much calling volumes increase as prices lower.

Mr Hallwright expects minimal impact on Telecom's 2011 financial year (beginning July 1) earnings.

Or ... it could have not impact - but goad the commsion
A key point: in the last round of MTR cuts in Australia the pass-through into fixed-to-mobile pricing was quite low, in the 30% range, Mr Hallwright said today.

A similar pass-on rate here would have a neutral effect on Telecom earnings, said the analyst (however, that would also be problematic, as the Commerce Commission's working assumption is that at least 80% of savings will flow through).

In other countries, where MTR cuts kicked in during the mid-2000s, pass-through rates were around the 70% to 80% mark.

Any impact on Telecom's earnings will come on top of a tumble of other bad news recently, including a $10 million-a-quarter hit from the recession, the estimated $56 million a year that will be wiped off ebitda by changes to the TSO, and slower than expected mobile uptake.

Regulated MTR is expected to lower Vodafone revenue by about $8 million a month. The New Zealand subsidiary of the UK company does not reveal local figures.

The wholesale price cuts
The commission originally asked for the immediate halving of MTR on voice calls from above 15 cents today to 7.5 cents with a glide path to 3.8 cents by 2015 - faster and steeper cuts than Telecom and Vodafone offered in their undertakings for voluntary cuts.

For txt, it called for a immediate cut from 10 cents to 3.8 cents. Further cuts would take that down to 0.5 cents by 2015.

However, Mr Hallwright notes that these proposed benchmark rates are several months old now. "With rates continuing to fall globally, an updated benchmarked rate would be likely to be lower," said the Forsyth Barr analyst.

Estimated savings
The commission said that the cuts would save customers a cumulative $46 million to $63 million over the period, with around $200 million in savings on fixed-to-mobile calls partially offset by an anticipated rise in base costs for monthly mobile plans.

The Telecommunications Users Association of NZ (Tuanz), which called for mobile termination rates to be scrapped altogether, said MTR adds $300 a year to every New Zealanders’ mobile phone bil.

Chief executive Ernie Newman has also said MTR delivers Vodafone a “slush fund” of $73 million a year in net MTR payments from Telecom.

The timeline from here
A very tight timetable - by the standards of the multi-year MTR imbroglio - means Telecom, Vodafone, 2degrees and other parties now have until May 19 to make submissions on the commission's preliminary recommendation.

There will then by cross-submissions, due by May 26, then a final recommendation to the minister "early June".

Telecom shares (NZX: TEL) closed yesterday at $2.10, close to their 52-week low.

6 comments
Login in or Register to view & post comments