18 March 2011 | By Abigail Townsend
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For Stephen Lerner, general counsel and director of regulatory affairs at mobile phone operator 3, the past 12 months have been extraordinarily busy. Landing on his desk have been T-Mobile’s merger with Orange (3 has a network-sharing agreement with T-Mobile), spectrum auctions, and refarming and roaming - all alongside a raft of commercial decisions.
Few issues have taken up as much time as mobile termination rates. These are the fees operators charge each other for terminating calls on their networks. So if an O2 customer calls a Vodafone customer, the caller pays O2, but Vodafone gets no money from the call. It therefore charges O2 a regulated fee to complete the call on its network. 3 wants to see the cost of these rates slashed, a stance it is alone in adopting among its peers.
“It’s in the interests of the big incumbents to keep termination rates high - it’s the little guys or new entrants like us that want to bring them down,” Lerner argues. “If you have a smaller customer base more of your customers’ calls will end with someone who’s not on your network and will therefore incur termination rates.
“The cost Vodafone would incur is minuscule, something like 0.2p per minute. But the regulated rate is a multiple of that, at around 4p to 5p per minute. It means that you can’t reduce your prices because you’re always subject to this fee.”
As yet, 3 does not have the same brand strength as more established players, so it attracts customers largely through price. Lerner concedes that termination rates have come down “considerably” over the years, but believes they are still far too high.
The rates are calculated on the LRIC+ system. Under this, the regulator takes both incremental and frontline costs - everything from head office overheads to the cost of buying spectrum - into account when setting the fee.
Both the EU and Ofcom have indicated that they would prefer to use LRIC methodology, which takes only incremental costs into account, and 3 also favours this.
“We’re strongly in support of what the EU is doing and were heavily involved with the drafting of the recommendation, as all the operators were,” says Lerner. “We lobbied hard for them to move in the direction they were predisposed to move in; having a mobile operator on board was great for them. We argued that this was a competition issue.”
It is Ofcom that sets UK mobile termination rates. It does this in four-year blocks and the current period expires on 31 March this year. Ofcom launched a consultation in spring 2010, when it announced plans to cut rates from around 4.3p per minute to 0.5p per minute by 2015. Its final decision was expected in
mid-March, just before this publication went to press.
Lerner has spent much time drumming up support, despite the strain on his relatively small department. In 2009, 3 delivered a 140,000-strong petition to Ofcom and got 262 MPs to sign an early day motion.
“My team is made up of just 15 lawyers and three economists,” he says. “I go to Brussels, Ofcom and various government departments on a regular basis - it’s important to maintain positive relationships.”
The company has also been seeking support from consumers. Teaming up with BT and various other interested parties such as the Federation of Small Businesses and the National Union of Students, it launched a campaign and website called Terminate the Rate.
“We had to take this two-pronged approach [of lobbying and raising public awareness],” explains Lerner. “As the smallest, our voice is easily ignored. We had to find allies to bring these issues to light. It’s complex so we needed to bring it to life through a media campaign.”
Lerner has worked closely on rates with colleagues, especially those in the marketing and press departments, and he is not expecting the pace to slacken in 2011.
“If Ofcom maintains its approach, the big operators will spare no expense in litigating the decision,” he says. “If Ofcom is swayed to change its decision, we will challenge it. So one way or another, the decision will be litigated and I’ll be spending a lot of time on this.”
The Government is proposing narrowing the criteria for appealing Ofcom decisions under the Communications Act 2003 to “an enhanced view of judicial review (duly taking account of the merits)”, with appeals “determining whether Ofcom has made a material error” only. It believes these changes are required if the Competition Appeal Tribunal is to cope with EU requirements for more frequent market reviews and rights of appeal.
The proposal, says Lerner, was a “pleasant shock”.
“Our rivals seem to litigate every Ofcom decision,” he adds. “We have a regulatory regime that allows anyone to challenge [any aspect of Ofcom’s] decisions. In most European countries the ability to challenge a regulator is limited to a form of judicial review.”
But the amendment will not come into effect until well after Ofcom has made its decision. Despite the tough year ahead, Lerner is adamant 3 must prevail.
The company is owned by Hong Kong’s Hutchison Whampoa, one of the world’s biggest conglomerates. But Lerner insists that 3’s survival is still at stake.
“We’re owned by a big company, but like any business we’re expected to operate profitably and within our means. It’s nice to have a strong shareholder, but we don’t have the budgets or resources of some of our rivals,” he says. “The UK is one of the first major European countries to make a decision [on rates] and the operators think that if the UK goes down this route it will encourage other member states to do so. That’s why there’s such interest: this is the biggest threat to profitability and the biggest issue facing the telecoms industry today.”