Ofcom has announced a reduction in mobile termination rates – the wholesale charges that mobile operators charge each other to connect calls to their networks.

From 1 April, Ofcom will place a cap on the rates charged by all four national mobile network operators – 3UK, O2, Everything Everywhere (Orange and T-Mobile) and Vodafone. Ofcom says this will lead to around an 80 per cent reduction in termination rates over the next four years.

Lower termination rates are designed to benefit consumers by reducing the cost to landline companies of passing calls to mobiles, savings which Ofcom expects landline operators to pass on to consumers. Lower termination rates also promote competition in the mobile market, says Ofcom, providing customers with more choice, and operators with more pricing flexibility, and the ability to increase the range of packages available to consumers.

Noting that data rather than voice calls now form the majority of traffic over mobile networks – Ofcom’s own research shows that the volume of data traffic over mobile networks has increased by 104 per cent over the last year – and that mobile termination rates apply to calls and not data, Ofcome believes that over the four year charge control period, they are likely to become a less significant element of mobile companies’ revenue. Data revenue increased by 90% between Q4 2007 and Q4 2009 and Ofcom expects continued data revenue growth in the future. Due to the growing appetite for data services, smartphones and mobile broadband services, Ofcom says it does not expect lower mobile termination rates to materially change this trend.

Current mobile termination rate caps are 4.18 pence per minute for O2 and Everything Everywhere, which will fall to £2.66 after 1 April 2011, and to 0.69 by 2014/15. The rate caps for Vodafone and 3UK are 4.48, falling to the same levels as O2 and Everyhting Everywhere, in the same timeframe.

John Fletcher, a director in KPMG’s Economics & Regulation practice, says that while the move should benefit fixed-line users by reducing the charges made by mobile companies to complete their calls, it  will create a revenue gap for mobile operators.

“That gap could be closed in a number of ways,” says Fletcher. “Mobile operators could increase the adoption of data services, such as mobile internet, increase call and data prices, or reduce the levels of handset subsidy offered to customers. However, no single option represents a ‘magic bullet’ and the operators will need to combine these options as they seek to protect their revenues.”