3 stung by termination caps

Pity poor 3. The streetfighting upstart of the UK operator community, it has been hit hard by Ofcom's decision to cap termination rates. In an interview with the Financial Times, the chief executive of 3 UK, Kevin Russell, has claimed that Ofcom's decision was "absurd" and "anticompetitive" - a position which will ring true (pardon the pun) with the more free-market-minded among you.

However, there is a flipside to this. As we reported a while back, much of this is to do with a rather odd discrepancy that existed between calling 2G phones from a landline and calling 3G phones from a landline. Simply put, there were caps on how much a 2G operator could charge to connect such a call, and how much a 3G operator could charge. Ofcom decided to fix it, seeing as 3G is no longer some freaky new technology, an awful lot of people have 3G phones and it's arguably a bit unfair to expect callers to know what sort of technology the person they're calling is using.

For most operators, this isn't so much of a problem - they run both kinds of networks and can take the punch. 3, however, only runs a 3G network. It never had any kind of cap on what it could charge for connecting calls to its network, and now it has - lopping around 45 percent off its revenue from such connections. Add to that the fact that, because 3 is a smaller network than its rivals, it pays far more to connect calls to other networks than those networks pay to connect calls to it, and it's no surprise that it's smarting.

3 is now taking its fight to the Competition Appeal Tribunal, claiming that it is effectively being forced to subsidise its rivals - slightly wonky logic perhaps, but not surprising given the circumstances. Ofcom's having none of it, of course, and is ready to defend itself "robustly".

All very complicated and behind-the-scenes, but it's an interesting case-study of what befalls the upstarts, not to mention a classic debate of market forces vs regulation.