UPDATE: EU Calls For 70% Cut in Mobile Call Handling Fees

BRUSSELS -(Dow Jones)- European mobile operators face a 70% cut in the fees they charge each other for passing on calls from competing networks under draft guidelines published by the European Commission Thursday that led to sharp criticism from the industry.

European Union telecoms commissioner Viviane Reding argues that so-called termination fees, which account for around 20% of operators' revenue, don't reflect the cost of providing the service and are nine times higher than equivalent fixed-line charges.

"Call termination markets in the E.U. need a regulatory plumber. Over the next 3 years, I expect greater consistency and coordination to bring the costs for mobile phone calls down by around 70% from the current level," Reding said.

Mobile call termination rates are currently around EUR0.08 to EUR0.09 a minute.

But the commission's latest proposals faced strong opposition from the industry and some national telecommunications regulators, who may seek to block it.

The commission's plans are "too drastic," said Hamid Akhavan, chief executive officer of Deutsche Telekom's T-Mobile wireless unit. "That is a level that is significantly below what we expected," he said.

Richard Feasey, director of public policy at Vodafone Group, said the commission's proposal fundamentally changes whe way mobile operators cover the cost of operating a network in Europe.

Operators' revenue is already under pressure from previous cuts to roaming call prices and increased competition, just as they face possible further regulation on text and data charges.

Industry body GSM Association, joining the chorus of criticism, said there's little need to regulate an industry in which prices are already falling year on year.

Still, the commission believes that bringing down call termination fees will spur competition and make it easier for new entrants who will pass on less of their revenue in charges to the incumbents with wider networks.

Stakeholders now have two months to consult on the draft proposal. The commission is expected to formally adopt the guidelines in October, after which national regulators can decide whether to implement them, or explain to the commission why they won't do so.

Many industry experts believe that key to success will be for the commission to win over the European Regulators Group - an umbrella organization that represents all the national regulators.

It has previously said that termination fees should be cut by about 40% over the next three years, to around EUR0.055 a minute.

Commission officials remain confident that the industry can recoup the lost revenue through growth in call traffic. But Vodafone's Feasey said that the estimated EUR10 billion to EUR15 billion hit to industry revenue wouldn't be recovered that easily and could mean consumers pay more.

He said Europe would end up with a pricing model similar to the U.S., with low volume users such as those on prepay cards seeing the cost of owning a cellphone rise.

That industry view contrasts with E.U. Competition Commissioner Neelie Kroes, who said cost-oriented termination rates "will increase competition to the benefit of consumers. Consumers should expect to pay lower retail prices as a result."

The proposals would hurt the largest European operators such as Vodafone most, said JP Morgan analyst Andrew Webb. Operators who also own a fixed line service are largely hedged because they would pay less for transferring calls from fixed to mobile, he said, but Vodafone doesn't have its own fixed line operation, Webb said.

Smaller operators, however, stand to benefit. The proposals "remove the distortions of competition" created by the current fees, said Kevin Russell, Chief Executive at 3 UK, a subsidiary of Hutchison Whampoa.

These tariffs are currently determined by national telecoms regulators, and vary across the European Union. In Cyprus a mobile operator can only charge EUR0.02 a minute for handling a call from a rival network, while Bulgarian companies get up to EUR0.18 a minute. The commission's recommendation will also eliminate distortions of competition between fixed and mobile operators, Kroes said.

Fixed-line operators and their customers are indirectly subsidizing mobile operators by paying higher termination rates for calls made from fixed lines to mobiles, the commission said. The proposals offer a new methodology for how national regulators should calculate the rates, not a price cap, commission officials said.

-By Peppi Kiviniemi, Dow Jones Newswires; +32 2 7411483; peppi.kiviniemi@dowjones.com

(Archibald Preuschat in Frankfurt contributed to this story)

(END) Dow Jones Newswires

Posted to the site on 26th June 2008