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Latin America was considered one of the most flexible regions in terms of mobile termination rate regulation since mobile services were launched in the region back in the 1980s. According to the ITU Survey on Tariff Policies 2009, which was cited in the agency’s discussion paper: “Mobile termination rates—should they be regulated?” by Dr. Vaiva Lazauskaite, in over half the countries in Latin America, mobile termination rates (MTRs) were determined through negotiation between operators, with regulatory intervention solely in the event of a dispute. This was the case, for instance, in Brazil and Mexico, the two largest mobile markets in Latin America.
However, recent regulatory actions have moved away from this model.
In Brazil, although regulator Anatel does not fix MTRs, which are freely negotiated among operators, it incentivized the reduction of MTRs in 2010 by cutting fixed-to-mobile tariffs in conjunction with annual readjustments of 2011, 2012 and 2013. This means that if companies don’t reach an agreement on MTR values, which are a direct cost of the fixed-to-mobile tariffs, the proposed MTR cut is 27% for the 2011-2013 period. In addition, by 2014, it is expected that Anatel will define a reference level for the MTR in case of disputes among operators in the negotiation process with a cost-oriented approach, using a Fully Allocated Costs model¹.
In Mexico, regulator COFETEL also allowed free negotiation of MTRs until 2005, but in 2006, it resolved a dispute and defined an annual gradual reduction of MTRs from 2006 to 2010 for Telcel and its competitors, according to the article “La externalidad de red en el mercado móvil en México” by Lester García Olvera. After this period, COFETEL imposed an additional MTR cut of 59% in 2010 and a charging mechanism by the second, instead of by the minute, which impacted even more mobile operators’ revenues.
Benchmarking of MTRs with European and Asian countries shows that MTR levels in Latin America are still higher than average, especially in Brazil. However, this is a direct result of the assumption by European countries and others that each mobile operator has a natural monopoly for terminating calls, and thus they have regulated prices to be aligned with efficient costs, and establishing glide paths² for reduction, so operators have time to recompose the MTR revenue with service revenues.
Chile and Colombia are the countries most aligned with this international practice, and both apply models to determine MTRs directly oriented by costs. In Chile, regulator Subtel imposed a reduction of 44.6% on the MTR for the period 2009-2014, and in Colombia, Conatel imposed an MTR cut of 57.1% for the period of 2011-2015.
These reductions highlight the preoccupation of regulators with competition, as the MTR level can affect the market in four main ways:
- High MTRs result in high tariffs for the end user, reducing usage (MOU) and well-being.
- High MTRs result in incentives for unlimited on-net plans, and dominant competitors benefit from that.
- New-entrant operators are impacted due to higher traffic volume originated by dominant mobile operators than incoming traffic, resulting in a net loss.
- Where there are higher-than-efficient costs, the MTR level gives rise to transfers between fixed and mobile markets and fixed and mobile consumers.
Analysis of Latin American mobile market dynamics after MTR cuts shows that mobile operators had an incentive to stimulate prepaid users to generate revenue from services (to avoid revenue loss due to the impact of expected MTR cuts), launching different pricing schemes, such as daily and weekly usage, and low prices to increase minutes of use (MOU), as well as SMS and data traffic.
However, most of this growth continued to be derived from on-net traffic, meaning that interconnection remained an issue. People often use mobile VoIP, social networks and instant messaging services to avoid the high prices of calling other mobile networks.
In addition, with two exceptions in Chile and Colombia, VTR and UNE, new competitors did not enter the market aside from mobile virtual network operators (MVNOs). This may be a sign that the MTR reduction should have been done before the market had matured. Or that there should be higher MTR levels allowed for new entrants.
The competitors’ market dominance, which is a concern especially in Colombia and Mexico, did not change. On the contrary, although the dominant operator in Mexico had been losing market share from 2006 to 2010, it still had 70.2% of the total subscribers in 2010 and increased that to 70.3% in 1H2011, according to Frost & Sullivan analyses. In Colombia, the dominant competitor also increased its market share from 2010 to 1H2011, from 66.8% to 67.3% in terms of subscribers.
Considering all these factors, it is possible to observe that MTR reductions alone did not contribute to the change in market dynamics.
Possible reasons are that other factors contributed to operators’ dominance, such as distribution channels for prepaid services and the absence of mobile number portability in certain markets for several years, but specific regulatory issues concerning interconnection also contributed to operators’ dominance, such as the fact that interconnection regimes do not incentivize traffic between networks and that regulators do not track retail off-net tariffs.
The concern around MTR levels will likely to continue to be reflected in the regulators’ agendas in the region; regulators will need to balance their decisions so as to limit the affect on mobile operators while looking out for users’ welfare. Regulators need to establish gradual changes, sometimes broader than only cutting MTRs, to reach the desired competition/welfare levels.
However, eventual changes need to be widely discussed with mobile operators and within society at large to keep a stable and predictable regulatory framework, in order to attract continued investment from mobile operators and guarantee them a fair return on that investment.
1) An accounting method to distribute all costs among a firm’s various products and services; hence, the FAC may include costs not directly associated with a particular product or service. Source: PPIAF, PURC, The World Bank—Body of Knowledge on Infrastructure Regulation Glossary.
2) In the case of price cap regulation, the regulatory authority can establish the price trajectory. Instead of a one-off price adjustment (a large discrete price change), the regulator could establish a prescribed price path over time, so companies are given proper signals for future cost containment and investments.
Renato Pasquini is team leader for Latin America region at Frost & Sullivan