European institutions aim to foster competition in the mobile roaming market through structural change, but the slimmer margins on the table–the result of hefty price caps–may in fact dampen market-entry enthusiasm.
Mobile operators–for whom additional competition is arguably a lesser evil than price regulation–could make more money out of roaming through lower prices and increased usage. But on balance they believe market forces are the best way to achieve this.
A preliminary deal on roaming rules, agreed by representatives from the EU parliament, the European Council and the European Commission (EC) last month, goes much further than the proposals tabled by the EC last summer. From 1 July, retail prices for data roaming are to be regulated for the first time, capped at €0.70 per megabyte, rather than the €0.90 limit previously suggested by the Commission, and falling to €0.20 by 1 July 2014. The deal, expected to be approved by Europe’s council and parliament before current regulation expires on 1 July, also lowers the price caps on voice calls and texts (see charts).
Alongside the tougher price caps, the March deal adopts the “structural changes” proposed by European digital agenda commissioner Neelie Kroes last year. From 1 July resellers and MVNOs will have the right to access networks at regulated wholesale prices in order to provide roaming (together with national services). A more radical proposal–to allow customers to pick a roaming provider separate to their domestic one–comes into effect on 1 July 2014. The regulatory thinking is that these structural measures will boost competition and bring roaming prices down to near national levels. Until the effect of greater competition kicks in, the retail price caps–to be in place until 30 June 2017–will act as safeguards for consumers.
“It’s not obvious that the economics will support new entrants,” says Yves Martin, vice president of group roaming and interconnect at Orange. Under last year’s EC proposals, the margin per MB of data was €0.40, but under the new deal that has been squeezed to €0.15, he explains. “The narrower the margins are, the smaller the competition will be,” says Martin. “There is also fixed investment cost to consider [including technical infrastructure and commercial costs].”
Similarly, in a written response to last year’s EC proposals, the Telekom Austria Group argued that the €0.24 per minute retail price cap for voice (then due to take effect in 2014) was too low and might discourage new market entrants.
It estimated that a retail offer for voice needed to be at least €0.10 below the price cap to be competitive, which, under the previous EC proposals, would leave a margin of €0.08 (after paying for wholesale services) to cover all expenses, including customer acquisition and service implementation costs. It maintained this would not be sufficient. Instead, it proposed a higher retail price cap of €0.30, which it said might encourage newcomers to enter the market and speed up competition. The March deal, however, implies a much slimmer voice margin of €0.04 per minute by 2014, based on Telekom Austria calculations. Although EU regulation is intended to encourage new roaming providers into the market, operators typically argue that stiff price caps will scare new market entrants away.
For many operators, the drive to bring down roaming prices to national levels is a political goal and does not reflect what customers are willing to pay. Just because the cost of delivering voice and data calls over national networks is similar to roaming costs, prices should still be higher: roaming, they maintain, is a value-added service.
“Prices in competitive markets are not set ‘at cost’, but to reflect the different preferences of customers for different services,” says Richard Feasey, public policy director at Vodafone Group. “For example, many handsets are supplied ‘below cost’ because customers value subsidised handsets at the time of purchase and then pay for that with higher call charges later. The idea that all services should earn the same margin is a political construct, not the result of normal competitive markets,” he says.
Indeed, according to Greenwich Consulting, there is an untapped retail data roaming market worth €1.5 billion annually in Europe alone. “We arrive at the €1.5 billion figure on the assumption that roaming consumers will pay around three times more than national rates, and businesses up to six times more,” says Magnus Rehle, a managing director at the analyst firm. “But if operators charge ridiculous roaming rates, up to 120 times national prices in some cases, then most people will switch off their smartphones,” he says.
Similarly, Syniverse, a US-based company that enables mobile operators to give their customers a real-time view of roaming data usage, also suggests that operators are missing out on revenues through over-charging. The company calculates–based on the millions of daily transactions it processes, and some third-party data from Informa Telecoms & Media–that up to 70% of mobile device users do not use data services abroad, and more than half of roamers do not make a voice call. The upshot is that mobile operators worldwide will lose out on roaming revenue worth US$1.2 billion during 2012. “If consumers are given transparency and the right price point, perhaps in a package of voice, text and data, they will use their device abroad,” says Mary Clark, SVP at Syniverse.
And there is some evidence that lower prices can benefit operators. When TeliaSonera lowered its data roaming tariffs by as much as 90% in the Nordic and Baltic regions in May 2011, it subsequently reported much higher data volumes. Despite the drastic lowering of prices, the group says it has been able to maintain the same level of data roaming revenue.
Orange’s Martin says competition, and growing customer demand for better roaming deals, is pushing operators towards the place where regulators want them to be anyway. “Data roaming prices have come down tenfold over the last two years,” he says. “We expect that trend to continue.”
Orange’s ‘roaming bundle’–available in Spain, Belgium and Romania, with France, Poland and the UK to follow–is aimed at light users. Daily bundles of voice minutes, SMS and data are priced differently in different markets; in February Orange said roamers from France would pay around €5 per day, starting in June.
Vodafone UK has a daily EU roaming tariff of £2 for 25 MB of data. The ‘Travel & Surf’ proposition, offered by Deutsche Telekom since July 2011, includes daily and weekly rates. In the Netherlands, for example, day passes for EU roaming start at €1.95 for 5 MB of data, while a large week pass with 100-MB data allowance is charged at €14.95.
The prices charged are still higher than the retail data caps scheduled for 1 July, yet the fixed rates, along with greater transparency–being able to monitor data usage in real-time is becoming more commonplace–are boosting traffic volumes. “A year ago, nearly eight out of ten smartphone users across our footprint did not switch on data roaming when they went abroad,” says Martin. “That has now gone down to 65%.” Orange further reports that from 2009 to 2011, data usage while travelling abroad grew by 131% across its European markets.
Global consequences
Martin suspects that the stricter EU price caps may have unintended consequences. Taking advantage of EU operators’ weakened negotiation power over wholesale prices, non-EU operators, he says, will rake in much higher margins on roaming revenue (especially as most are not subject to price regulation). As roaming is a global market, he argues, stiffer EU regulation could act like a subsidy for non-EU operators.
“The new caps and structural solution will also pave the way for non-European companies to become a roaming provider in Europe, undercutting European prices without any investment in networks whatsoever,” continues Martin. “This could seriously undermine the European telecoms industry.”
Regulators may also do more harm than good, operators typically warn, when they regulate retail prices and make business case assumptions.
“The risks of getting it wrong are particularly acute in the case of an immature market [such as data roaming] where the industry itself is still experimenting with different approaches to pricing,” argues Vodafone’s Feasey. “The demands which different types of users make of data services, the volume of data they consume, and the type of device they use, is much more varied and complex than voice or SMS. A simple price cap cannot accommodate all these differences and is likely to ‘chill’ innovation in the retail market.”