Mobile Termination Rate Cuts in Europe Likely to Add to Revenue Pressure

Fitch Ratings says in a new report that further mobile termination rate (MTR) cuts are likely to reduce European mobile operators' service revenue growth by 2%-3% per annum over the next three to four years. However, the cuts by themselves are not expected to have any rating impact on telecoms issuers.

MTR cuts in Belgium and Portugal in early 2010 indicate that national telecoms regulators are willing to make further significant reductions, continuing the trend of the past four years. MTRs for the leading operators in western Europe have fallen to about EUR6 cents per minute at end-2009 from around EUR12 cents per minute at end-2005. Termination charges currently account for about 12%-15% of European mobile service revenue.

"Cuts in MTRs in isolation are not expected to lead to negative rating action for European telecoms issuers," says Damien Chew, Director in Fitch's TMT team in London. "But further cuts in MTRs are likely to contribute to the overall regulatory and competitive pressure which we have factored into our outlook for the European telecoms sector."

Fitch estimates that these regulatory cuts are likely to continue to have a significant direct impact on underlying EBITDA, of an approximate 10% reduction over the period 2005-2013. As these cuts have taken place gradually over time, operators have been able to rebalance their tariffs and adjust their costs accordingly.

The impact on profitability is likely to be less than the impact on revenue, with EBITDA reduced by less than 2% per annum. The EBITDA impact of lower MTRs is partly offset by falls in an operator's mobile-to-mobile termination costs.

The indirect effect of MTR cuts is harder to quantify, but the possible effect is for intensified competition. The MTR makes up a significant proportion of the marginal cost of carrying voice traffic, especially for the smaller operators in a given market. A lower marginal cost could allow smaller operators to offer more disruptive pricing strategies.