ACCC to regulate wholesale SMS services for the first time

On 17 June 2014, the ACCC announced that for the next five years it will add domestic wholesale SMS termination to the mobile termination services which are regulated in Australia. This is a significant decision for carriers and carriage service providers and is the first time that SMS termination services have been subject to regulation by the ACCC. The ACCC suggests that the effect of the declaration will be "to see SMS termination rates reduce which should lead to lower SMS prices for consumers".

The ACCC's decision to extend the domestic mobile terminating access service (MTAS) declaration to SMS termination services opens the way for the ACCC to make a final access determination (FAD) which sets wholesale SMS termination charges.

Further insight into the ACCC's proposal will emerge shortly in a discussion paper expected in "mid-2014" however the ACCC has signalled that "the MTAS FAD may set regulated prices for the MTAS, and non-price terms of access".

What is the mobile terminating access service (MTAS)?

The MTAS comprises (1) the mobile voice termination service and now (2) the SMS termination service.

In the case of phone calls and SMS messages sent to mobile phones, the call or SMS "originates" from a fixed line or mobile network and "terminates" on the mobile network receiving the call or SMS message.

The MTAS is a wholesale service provided by a mobile network operator (MNO) to other MNOs and fixed line network operators to receive and terminate voice calls and SMS messages on its mobile network. The network operator that originates the call or SMS message purchases terminating access from the MNO that terminates the call or SMS message and recovers those costs in the retail price it charges its customers.

How can the ACCC regulate mobile voice and SMS termination services?

The ACCC has the power to "declare" certain telecommunications services which has the effect of bringing them within the scope of the of the telecommunications access regime in Part XIC of the Competition and Consumer Act 2010 (Cth). The ACCC can declare services after conducting a public inquiry if it is satisfied that the declaration will promote the long-term interests of end users.

The ACCC has conducted a public inquiry and decided to declare the MTAS until 30 June 2019. This decision has two significant consequences for the MNOs who supply termination services:

• standard access obligations: MNOs will be obliged to supply the MTAS on request by access seekers and must take reasonable steps to ensure it provides the MTAS at a technical and operational quality equivalent to that which it provides itself; and
• regulated terms of access: the ACCC has the power to make an access determination to set access terms and conditions (including prices) for the MTAS.

Why has the ACCC decided to regulate mobile voice and SMS termination services?

The ACCC considered that the MTAS declaration is necessary because the MNOs "have a monopoly over the voice and SMS termination services on their networks" and would have "the ability and incentive to deny, or set unreasonable terms of access to these termination services in the absence of declaration".

The ACCC first declared the mobile voice termination service in 1997 and has again decided to extend the declaration for a further five years to 30 June 2019. The ACCC considers that mobile voice termination services are an essential input into two types of downstream retail services: mobile-to-mobile calls and fixed-to-mobile calls. The ACCC remains of the view that there are "currently no effective substitutes" for these services. VoIP services were not considered an effective substitute owing to their "technical limitations" and because they require access to a reliable data connection which is not always available.

The ACCC's decision to declare the SMS termination services for the first time suggests that the ACCC remains focused on the level of competition in wholesale and retail telecommunications markets. SMS termination services too will be declared until 30 June 2019. The ACCC decision to regulate SMS termination services arose from a concern that "mobile network operators are able to keep wholesale SMS termination rates significantly above cost".

In coming to its decision, the ACCC surveyed approximately 237 retail mobile service plans and concluded that declaration of the MTAS is in the long-term interests of end users because it is likely to:

• promote competition in the relevant retail markets, including by improving retail offers to lower spend users;
• promote the achievement of any-to-any connectivity (to ensure end users on one network can continue to communicate with end users on any mobile network); and
• encourage the economically efficient investment in, and use of, infrastructure.

In the case of SMS termination services, the ACCC obtained evidence in its public inquiry which suggested that "MNOs are using their monopoly power over SMS termination services to keep SMS termination prices high, and that commercial negotiations are not working effectively to reduce those prices".

What about MMS termination services?

The ACCC decided not to include MMS termination services in the MTAS declaration. While acknowledging that each MNO has a monopoly over the provision of MMS termination services on their network, the ACCC suggested that there was a lack of industry concern around MMS termination rates and interconnection negotiations. Given this lack of concern and the lower usage of MMS messaging, the ACCC did not consider that declaration of MMS termination services would be in the long-term interests of end users at present.