Mobile phone users to save £800m a year as charges cut

TELECOMS watchdog Ofcom opened the door to lower bills for millions of mobile phone customers yesterday, after moving to slash connection fees.

The regulator is cutting termination rates – the charges operators make to connect calls to other networks – from an average of 4.3p a minute to 0.5p over a four-year period.

Ofcom estimates consumers will save 800 million a year by 2015 as the cuts are phased in.

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Termination charges are down from more than 23p a minute in 1995 to less than 5p now. And there are further "steady and sustained" reductions to come.

The lower charges pencilled in for 2011-15 should be passed on to consumers and encourage competition in the sector, Ofcom said.

The cheaper rates will mean lower call charges to mobiles for the 32.7 million UK homes and businesses with a landline, as well as lower mobile-to-mobile costs.

"As rates fall and operators adapt, consumers will benefit from cheaper calls and competition in both the UK fixed telecoms and mobile markets," Ofcom said.

But Vodafone attacked the deep level of the cuts. A spokesman said: "A cut of this magnitude deters future investment, makes it less likely the UK will continue to lead in mobile communications and is at odds with the government's vision of a digital Britain."

A BT spokesman said: "BT will make sure its customers see the benefit, with cheaper calls to mobiles, including fixed-price, all-you-can-eat packages that take the worry out of calling mobile phones."

Vodafone was the FTSE 100 Index's biggest faller yesterday as analysts warned lower termination charges would impact on profits provided by the two-thirds of its customers on pre-paid contracts.

Collins Stewart analyst Morten Singleton said: "For years, it has hardly mattered how many calls such customers made so long as they were on your mobile network. As a receiver of calls, the pre-paid customers generated quite decent revenue – and profitability – from the mobile termination rates alone. With these rates finally coming down to a level more commensurate with the costs of providing the service, operators will have to reassess the profitability of their pre-paid customer base."

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Ofcom said the mobile phone market had "changed significantly" since it last set rates in 2007, with many smaller operators now alongside the likes of Vodafone, O2 and the newly-merged Orange and T-Mobile.

The latest cuts follow European Commission guidance, which said rates at a national level should be based only on the real costs an efficient operator incurs to establish a connection, rather than including factors such as overheads.

Ofcom said smaller firms were likely to set their own rates in line with the national operators, helping new providers enter the market with products and services.

The watchdog will consult on the changes until the end of June before concluding its review.