April 23, 2010 4:38pm by David Farrar

Vodafone responds

Vodafone have sent a response to my recent post on their pricing change:

Got a prepay mobile with Vodafone? Give up your landline

Last week we released a new add-on called Talk that lets Vodafone Prepay customers talk for up to 200 minutes a month to landlines or to Vodafone mobiles for $12. We want to encourage our mobile customers to use their voices rather than their fingers, and their mobiles rather than their home phones.

Certainly Talk has got a reaction. A range of parties have expressed a view, including the Minister, the Commerce Commission, TUANZ, 2degrees, and the blogosphere. Even DPF himself has weighed in.

I want to make three points. First, why we are launching Talk. Second, why it is good for competition. And third, what the implications are for the Minister’s decision on mobile termination rates.

Why Talk

Talk is a great deal. In particular, you should buy Talk and give up using your landline. You pay too much for it anyway.

We all know that New Zealand mobile users are very keen on text messaging. New Zealand has amongst the lowest prices and highest usage for text in the world. But the same enthusiasm doesn’t extend to talking.

Our research tells us that three quarters of customers wait till they get home to make a call longer than five minutes. Talk is part of our response, letting customers get on with what they want to do with their mobiles.

This is not the only change we are bringing to prepay this year. Recently we introduced cheap international calling rates for our top destinations, but it began in 2006 with Best Mate TXT2000, $2 for 2 hours off-peak, and the introduction of Family in 2008. There is much more to come.

Competition

2degrees has argued for years that it cannot compete without a laundry list of regulatory concessions. 2degrees has not deviated from this line despite the numerous changes that have been made to accommodate it. But with several hundred thousand customers after just over six months, 2degrees is already one of the most successful new entrants in the world. I see the Commission this morning reported 2degrees’ market share at 4% as at 31 December. Five percent market share in a year would be very good performance. So 4% percent in around six months is remarkable.

The real question is not what our competitors think, but whether they can match or better Talk. Clearly they can, and they will if they think that doing so will gain them an advantage in the market.

Comparison between headline retail rates and mobile termination rates is not helpful. Operators offer lots of different products, some are higher priced, others are lower priced. All three mobile network operators offer products that are cheaper than MTRs. Some examples:

•             Telecom offers calls from a Telecom fixed line to a Telecom mobile for sixty minutes for no more than a dollar. If calls are long this could easily generate a very low average price (hat tip: Steve Biddle).

•             Vodafone allows unlimited calling between all connections on one business account in return for a monthly fee per connection.   Clearly this also generates a very low average price if usage is high.

•             2degrees offers its customers text messaging to any other 2degrees’ customer for 2 cents a text. Under our agreement with 2degrees, we are required to pay more than four times that amount to text a 2degrees customer.

The Commission does have a cross-check between mobile termination rates and retail prices in its final report. It’s not based on the level of any particular retail plan; instead it compares industry average retail on-net mobile prices with mobile termination rates. Talk shouldn’t affect that average.

Decision

The Minister needs to decide what to do with the Commission’s termination rate recommendation. He can send it back to the Commission for more work or accept the undertakings as recommended by the Commission.

Accepting the undertakings means lower mobile prices from October. Voice termination rates would fall from 14.4 cents (already lower than the UK) to just under 10 cents, and then again to just over 8 cents on 1 January with more falls over time. The undertakings cut text prices to zero.

Sending the report back to the Commission for more work means termination rates stay where they are for a longer period.

The Minister’s decision is quite straightforward. His best choice is to take the money on the table now, accept the undertakings and reduce mobile prices from October. If the Commission wants to look further at retail pricing and the relationship with mobile termination rates there is nothing to stop it doing so.

Hayden Glass
Public Policy
Vodafone NZ