The next generation of faster mobile networks is poised to lower costs for operators and potentially unleash a new price war in the industry in Europe.
As European operators prepare to install the networks, which use a technology called Long Term Evolution, or L.T.E., they are fighting to keep fees for connecting calls to other operators.
That system makes mobile calling in Europe particularly pricey, to the advantage of big operators with large bases of customers.
“Mobile voice calls and short text messages are some of the most expensive forms of data in the world,” said J. Scott Marcus, an analyst at WIK-Consult in Germany. “There is a debate in the industry over whether operators can justify the prices with L.T.E.”
Observers say the technological leap could pave the way in Europe for U.S.-style flat-rate calling plans to all networks.
The world’s largest operators agreed in February to devise a new technical standard for transmitting voice calls between competing L.T.E. networks, which would preserve Europe’s existing grid of regulated termination rates, the per-minute interconnection fees paid by callers. The fees range from 2 euro cents a minute in Cyprus to 15 cents in Bulgaria.
But the superior efficiency of L.T.E. networks will tend to minimize the overall cost of transmitting voice calls, as conversations are converted into tiny packets of 1s and 0s in a process similar to that used by Internet voice services like Skype that give away some Internet voice service free.
Operators, which generate about 80 percent of their revenue from voice services, want to hinder a new downward price spiral. Revenue from termination fees makes up 15 percent of an operator’s sales and profit, said Jacques de Greling, an analyst at Natixis, a Paris bank.
At the mobile industry’s annual convention in Barcelona, a group of the world’s biggest operators endorsed an industry effort to develop the new standard, called Voice over L.T.E., or VoLTE, by March 2011. The group includes Verizon Wireless and AT&T in the United States, Vodafone , Telefónica, Deutsche Telekom and Orange in Europe, NTT Docomo in Japan, and China Mobile.
The standard will define the arbitrary technical parameters operators use to interconnect L.T.E. calls, which is necessary to ensure that L.T.E. devices work in any country. VoLTE, however, is also being devised to function in the current system of termination rates.
Dan Warren, the technical director at the GSM Association, the London-based industry group that is coordinating the project, said the project’s participants — engineers from large and midsize global operators — had based their efforts on the existing European business model of termination rates.
“We have taken the existing commercial principles on the basis that we have to start somewhere,” Mr. Warren said. “We don’t expect L.T.E. coverage to be ubiquitous for some time.”
But some smaller operators are wary.
“By starting with this assumption, we are developing a standard that could make the extension of the termination-rate model a fait accompli,” said an executive at one of the operators that has signed on to support the VoLTE drive. He did not want to be identified because he was not authorized to speak for the group.
The executive said his company was officially backing the effort because it would eventually have to use whatever standard is developed.
“This is an ongoing debate,” said Erik Ekkudden, the vice president for technology and industry at Ericsson, the market leader in network equipment. “We have not seen any major signs of big changes coming in the billing regimes, but that of course could happen.”
Many smaller operators would rather adopt the billing regime used by Internet service providers and mobile operators in the United States, called “bill and keep,” which splits the costs of interconnection between the caller and person being called, eliminating additional costs for callers. The U.S. system has enabled flat-rate mobile plans and has promoted cellphone use.
Despite the push by large operators for an L.T.E. standard that would preserve their lucrative billing status quo, it is uncertain whether they will be able to extend the European system of termination rates into the L.T.E. era.
European regulators began questioning the necessity for termination rates in 2006. That year, operators like T-Mobile, France Télécom and Vodafone lobbied in Brussels against any change, arguing that it would penalize larger operators and hinder investments in new network technology.
But last year, the European Commission, seeking to encourage the greater use of mobile technology, raised pressure on the operators by adopting rules that would require countries to develop a uniform method of calculating an operator’s costs for delivering voice service when determining the termination rates charged in a country. The new rules are expected to reduce E.U. termination rates from a current average of 7 cents a minute to less than 2 cents by 2012.
But already, there are signs that the decline will be even more precipitous.
In January, the Belgian telecommunications regulator proposed lowering mobile termination rates to 1.07 cents by January 2013 from almost 9 cents now.
In Brussels, an advisory council made up of European national telecom regulators is scheduled to consider a plan in May to switch the European regime from termination rates to one akin to the U.S. system. Most operators remain opposed to the change. But given the rapid decline in mobile termination rates, such a changeover may be superfluous.
“We have serious doubts and reservations about the arguments supporting such a change,” said Eric Debroeck, the regulatory director at Orange, the mobile unit of France Télécom. “Termination rates are coming down in some cases sharply anyway.”