Why mobile operators keep their Ofcom legal work in-house.
A fortnight ago telecoms watchdog Ofcom published its long-awaited decision on mobile termination rates – the fees mobile operators charge to connect calls from rival networks and landlines – and it spelt miserable news for the UK’s big three operators.
On 15 March Ofcom announced that it would slash termination rates by 80 per cent over the next four years, a move that will hit O2, Everything Everywhere (which operates the T-Mobile and Orange brands) and Vodafone where it hurts most – their profits.
It is little surprise that most market commentators are firmly of the opinion that an appeal to the Competition Appeal Tribunal (CAT) is only a matter of time. You would think that the prospect of a drawn-out appeals process, potentially followed by further litigation, would have private practice lawyers wetting their lips. The truth is, though, that they will play hardly any role at all.
“One development that happened a few years ago, when the good times were still rolling, was that in-house capabilities at mobile operators increased significantly,” says Simmons & Simmons TMT partner Tom Wheadon. “A lot of work was taken in house.”
Wheadon believes it is now increasingly rare for major mobile operators to use high-end specialist lawyers, the kind of expensive “brain surgeons” companies used to instruct regularly.
“It costs a lot of money for a company to ask questions of a brain surgeon,” he says. “They’d deliver great stuff, but it was difficult to show how they add value – not in the same way you can with a lawyer working on a transaction.
“It started to be seen as an unnecessary expense and there was a big transfer of work in-house. This was coupled with a loosening of regulation by Ofcom.”
Olswang telecoms head Rob Bratby agrees. “It’s certainly a trend that mobile operators will deal with a lot of work in-house, particularly when it comes to dealing with the regulators,” he says.
It means that, as Ofcom has started to tighten up its regulation of mobile operators, the workload for in-house teams has mounted.
At the forefront of the battle to slash the termination rates, for example, was 3. It was the only mobile operator to take that stance and has spent years lobbying Ofcom and the UK Government.
The lobbying efforts were led by 3 general counsel and director of legal affairs Stephen Lerner. The mobile operator teamed up with BT and organisations such as the Federation of Small Businesses and the National Union of Students to set up the Terminate the Rate campaign, which Lerner believes was active in swaying the telecoms watchdog. The lobbying was also hugely time-consuming.
“I’ve probably spent around 50 per cent of my time over the past few years dealing with [termination rates],” he says. “We’ve had three lawyers and three economists working on it full time.”
Unlike O2, Everything Everywhere and Vodafone, 3 did instruct outside counsel, turning to a team led by Baker & McKenzie partner Tom Cassels.
“Bakers is one of our of most trusted external advisers and we value their opinion,” Lerner says. “They’ve been involved for many years and will continue to be.”
The level of resources involved in the termination rates saga is understandable given how high the stakes are. The big three were charging 4.18p per minute to connect calls from other phone companies, but this figure will fall to 2.66p next month and just 0.69p by 2014.
The Ofcom decision should be good news for consumers, as the regulator expects savings to be passed on to customers. It is even better news for 3, as termination rates were one of the biggest obstacles to its growth in the UK.
“This is a really good decision from Ofcom,” continues Lerner. “Termination rates were a huge barrier to new entrants to the market and to our future growth. The reality is that this was only benefiting the big three players. This decision levels the playing field.”
While none of the big three operators have lodged an appeal, Lerner believes it is only a matter of time.
“My expectation is that all three of the big operators will challenge this opinion,” says Lerner. “They’ll throw endless resources at trying to overturn this decision because of the impact on profits.”
Olswang’s Bratby agrees. ”History suggests that an appeal’s likely. Mobile termination rates are an issue whenever there’s a decision because it costs mobile operators a lot of money, so it’s in their interests to challenge.”
Everything Everywhere has already expressed its disappointment with the decision, pointing out that it may not necessarily benefit consumers because it could make the pay-as-you-go model uneconomical.
Everything Everywhere regulatory chief Robyn Durie, who featured in The Lawyer Hot 100 2011, admits that “[Ofcom’s ruling] didn’t come as a huge surprise. We’re now actively considering our options.”