Running Scared
By Carlo Longino, Thu Aug 08 00:00:00 GMT 2002

Operators often fear mobile number portability, but with good reason?

“In the end, the winner will be the consumer.”

So said David Edmonds, the chief of Oftel, the UK telecommunications regulator, upon the launch of mobile number portability (MNP) in the country in 1999. It’s no surprise, then, that most mobile phone companies oppose such efforts. The FCC in the United States was the latest regulator to capitulate to the carriers, delaying mandating MNP in the US for at least two years, the industry’s larger carriers saying it would cost them $1 billion in the first year and $500 million per year after that (they’re also selling ocean-front property in Arizona if anybody is interested).

Consumer advocates champion MNP as a key device in ensuring competition; indeed 40% of US consumers recently surveyed said they wouldn’t change providers simply because they didn’t want to change their number. It’s a concern for businesses, especially small ones, as changing numbers requires changing business cards, letterhead, Web sites, and advertisements – not only at the cost of reprinting, but the cost of lost business as well.

What really scares carriers isn’t the capital outlay or that – gasp! – they’d have to work together, but the prospect of losing customers in price wars to competitors. Not surprisingly, smaller carriers are often the biggest proponents of MNP, hoping to steal away customers from their bigger rivals. Their worst fears were realized in Hong Kong, where the telecoms regulator there in 1999, not only mandated MNP, but also declared all subscriber contracts void, allowing consumers to jump from carrier to carrier at will and starting a bloodbath that’s left only one of the city’s six operators turning a profit.

The introduction of MNP hasn't had nearly as strong an effect in any other country in which it’s been introduced (less than one percent of subscribers porting their number to another carrier in Spain and the Netherlands, for instance), but that hasn’t stopped carriers fighting it all the way – much to the detriment of consumers.

Hong Kong Jam

The Hong Kong mobile market is probably the most competitive in the world, thanks to MNP. While this situation has been a boon to finicky customers looking for cheap deals, it’s been anathema to the city’s carriers.

The system, which cost an estimated USD 65 to 130 million, works by routing mobile voice and data calls through a database maintained by all six carriers. As soon as a customer changes operators, the database is updated and calls routed accordingly. Unlike simple number-forwarding systems, such as that in use in Singapore (which customers must spend around USD 35 for per year - about USD 35 million per year in total), it also reroutes SMS and data services.

But the damaging blow was struck not necessarily by MNP itself, nor the cost of the system, but by the Telecommunications Authority declaring most contracts null and void, opening the market up to fierce marketing campaigns and fiercer pricing wars. Customer loyalty is practically non-existent as consumers chase after the cheapest plans and freebies offered by competing operators.

The bleeding started in the run-up to the March 1999 launch, when tariffs fell by as much as 60%. Consumers responded in kind, with 100,000 of the territory’s then 3 million mobile subscribers changing in the first month alone. Churn eased off a bit in the following months, but in March 2000 (when all the 12-month agreements signed the year before expired), rates jumped again, with 120,000 taking their number to another carrier, jump-starting the price wars. One carrier would offer 1000 minutes for HKD 100, then the next would offer 90, and so on.

Rates hit around USD 6 per month for 500 minutes at the peak of that year’s price wars, and not surprisingly, carriers watched profits fade thanks not only to the cheap plans, but also huge handset subsidies. CSL, the lone profitable operator, could thank its strong grip on the high-end, business-based end of the market as its saving grace.

Numbers continued to grow through 2001, with over 1.84 million, or 32%, of all subscribers porting their numbers last year, helping contribute to a staggering 70% total churn. And although it’s been bad news for carriers, the Authority says MNP will benefit the economy as a whole USD 60 million by 2009. Tell that to number-three SmartTone, which lost about USD 46 million in 2001 and USD 36 million the year before on the back of a USD 50 million write-off of handset subsidies and other customer acquisition costs.

The country’s high penetration (about 65%) works against operators as well – it dictates that their growth can come almost exclusively only from stealing customers from their competitors. But carriers have eased off handset subsidies, and although tariffs are still low, the added revenue from data services has helped some. But the free-for-all created by releasing every user from their contracts has created sustained damage.

The World View

Several other countries have implemented MNP, but none have seen the reaction witnessed in Hong Kong. Most other regulators have been loathe to force carriers to release customers from signed contracts, and porting a number to another carrier often requires some payment and some time, two things mobile users aren’t big on.

Australia opened its networks to MNP last September, and has seen little effect, since 80% of users are tied down to long-term contracts with high early-termination fees, one strategy for maintaining customers in the face of MNP. Much of the emphasis since the switch has been on “poaching” business customers from other carriers – number-two carrier Optus says its small business sales have increased 80%, while number-one Telstra says it’s maintained its overall 50% market share. Australian users pay a small fee to take their number when they switch carriers, but enjoy the quickest porting around – often just a matter of minutes.

In the UK, users must pay around USD 45 and wait up to a month to switch their number. Churn has actually fallen from 30% to 20% annually since the introduction of MNP, as carriers have had to change their marketing strategies to attract and retain customers. It also hasn’t affected their bottom line in a measurable way, and Oftel says the economy will reap a USD 150 million benefit over 10 years from the move.

It’s clear from these examples that a balance can be struck between carrier and consumer interests with ample support and protection from the regulator. Carriers shouldn’t be expected to lose all claim to their customers; contracts should be honored. But at the same time, consumers shouldn’t be tied down by multi-year contracts and massive termination fees. And MNP requires an infrastructure that someone has to pay for.

It can be hard, however, to predict the effect MNP will have on a country’s markets, but the general trend seems to be to increase competition and drive down prices. Even in the UK, where few consumers (1.5%) have switched carriers and taken their number, prices have decreased (and as carriers will note, so has churn) as consumers have that freedom to change. And in the US, operators gladly interject that prices have already fallen an average of 30% in the last four years and 30% of subscribers change carriers each year anyway.

But the fact that you must change your number when you change carriers plays on many peoples mind in the US, not least at the high-end of the user food chain. But plenty of other restrictions are in place to keep users tied to a certain carrier: SIM-locked phones, incompatibility of phones amongst CDMA networks and between the other TDMA and GSM networks in operation, geographic and coverage restrictions, not to mention the emerging data services. Long-term contracts are ubiquitous, although the newly launched Virgin Mobile and upstart Leap Wireless are doing their best to push pre-paid plans.

In light of these, it’s not unreasonable to give consumers control over their number and in turn a competitive tool. But as David Edmonds said above, the real winner of MNP is the consumer, so why should we expect carriers to be accommodating?

Carlo Longino is a freelance writer based in Austin, Texas. His previous experience includes work for The Wall Street Journal, Dow Jones Newswires, and Hoover's Online.