Justifying the regulation of mobile telecommunications

The text of a speech by Ewan Sutherland (Executive Director, INTUG) to the EuroForum Conference Regulating Mobile Telecoms - implementing the latest technolgoy across Europe. Held at the Radisson SAS Portman Hotel London on 12 and 13 October 2000.

It is good to know that regulators are finally taking an interest in the profligacy of telecommunications operators in giving away all their money to governments. I refer, of course, to banking regulators, concerned that banks are taking undue risks which might endanger their viability by extending credit to Telcos who use it to pay for air, all on the promise of massive paybacks.

What I want to do today is to make a case which justifies the regulation of mobile telecommunications. This is in direct and express opposition to the ever more outrageous claims of the GSM Association that any regulation will result in the failure of the GSM and UMTS experiments. The operators asserts that mobile telecommunications is a single market which experiences full and untrammeled competition, the likes of which has never been seen in our lifetime. It is a line they sell to anyone willing to listen and some who prefer not to. I prefer to refer to them as an SSO, a State Sponsored Oligopoly. While others prefer to call them a cartel.

It is wrong to think of mobile telecommunications as a single market, it is several:

• retail or "high street"
• pan-European business services
• fixed-to-mobile termination
• roaming

There is a solid case which can be made that the allocation of spectrum, given the absence of new entrants, constitutes a special right under Article 86 of the Treaty. This imposes on governments and on the European Commission very strong obligations to ensure that the special rights are not abused, for example, by imposing high prices.

There are general competition law arguments which justify controls over the operators as they seek to obtain leverage from the spectrum they have bought. They will have to be careful, since competition law proscribes them using market power in GSM to leverage the market for 3G/UMTS.

People and especially the GSM operators say we should rely on competition law. However, there are very serious problems associated with that. There is very limited jurisprudence in the sector. In crucial areas it will be necessary to apply the concept of "joint dominance". However, to do so will be a long process with an uncertain outcome. It should be recalled that the principal beneficiaries of uncertainty and prolonged judicial delay, apart from the lawyers, are the incumbents. Thus when they ask for a system of slow and ineffectual remedies they do so know they are to gain from it.

More rapid then many aspects of competition law are the merger controls. The undertakings made in the Vodafone-Mannesmann case should allow third party access to the pan-European network. However, there is not evidence of anyone having used this undertaking. It looks suspiciously as if the Merger Task Force was given to believe that the undertakings had a value which the commercial players either do not see or cannot obtain. Any further deals on these lines will have to be fundamentally rethought.

It is worth looking at the timescale on the present investigation into roaming charges. INTUG began to gather data in 1998. The European Commission became aware of this in February 1999 and decided on an inquiry in July 1999. It launched the inquiry in January 2000 and will produce interim results in October 2000. The case will run into 2001. It is hard to argue that this is an expeditious process. The anomalies and abuses are fairly easy to grasp, but getting proof takes a long time.

Had action been taken two years ago, then the savings to businesses and to consumers would have been considerable. The total cost amounts to several hundreds of millions of Euros which the operators have been able to add to the cost of doing business in Europe. This is not doing anyone a favour, it just makes Europe less competitive and makes us look a bit simple. It is not even helping the GSM operators, who have come to live off income from roaming and termination charges, maret where they can avoid competition.

Since INTUG is closely associated with the issue of roaming, let me look at that in some detail, at least at the remedies.

The first problem for most people is that thet have no idea what the roaming charges are, despite a contract with their operator. This is largely because the operators make little effort to make their own customers aware of roaming charges. Some operators even refuse to supply the data. Several operators are likely to be in breach of EU Consumer Protection law. That issue now goes to the Health and Consumer Protection Directorate-General (DG SANCO) for them to sort out. the Proposal for a Directive on Universal Service and Users' Rights contains good safeguards which should ensure operators provide both the price today to check my future spending and the price of two months ago so that I can check my bill.

The prices for international calls on mobile phones are still much to high. In many countries the levels of competition have been too low to drive down prices. It is essential to get the number of operators up to the maximum the spectrum and the market will support.

The outrageous cost of roaming is not exclusive to the European operators. Colleagues in Asia and in the USA encounter the same problem. If you look at Voicestream, a potential Deutsche Telekom subsidiary, then you find on their web site a nice database interface for roaming charges. It lets you pick your country and in each country you pick your operator. However, the answer seems always to be USD 2.27 per minute, whether in Belgium or Belarus, Italy or Indonesia and regardless of operator. This seems an extremely high price which could possibly be justified for some calls in more exotic locations. However, for a call using a GSM tri-band phone from, say, the UK to the USA it suggests a massive profit margin. (A wholesale price for a trans-Atlantic call is around USD 0.03.)

There is a wide range of potential remedies.

It would be possible to have DG Information Society impose a benchmark. Benchmarks are well known in that DG and the operators have failed to overturn their validity, despite valiant efforts. The justification is that the Inter Operator Tariff is set by operators, that it is presently not regulated and that it is not subject to market forces. There is no reason why an operator should ask another operator to reduce a price. Interestingly, the IOT is generally above the retail price, though it does not carry the vvery heavy marketing costs of retail tariffs. (The high marketing costs are primarily due to the need to replace the twenty to thirty per cent of customers who abandon each operator in a year - the so-called churn rate.) A figure of around EUR 0.38 per minute at peak times seems about right for this. It reflects the lower prices we see between the Scandinavian operators.

To overcome the problem of not knowing the cost of call it would be possible to put the price on the screen of the GSM handset. This feature was built into the GSM standard some time ago. Of course, real time pricing is used for pre-paid cards to reduce the value on the card. If you dialled a number and it showed the cost as, say, 1.40 Euros per minute then you would be better able to manage the costs than waiting eight weeks for a bill.

The operators claim they have no responsibility for foreign roaming tariffs. This is strange, since often the foreigners are their own affiliates or subsidiaries, e.g., Orange and Itineris. It would be possible to introduce compulsory Carrier Pre-Selection (CPS) onto the home operator when roaming. Thus, a Proximus customer based in Belgium when visiting Italy would roam using the TIM network, but calls would be carried only over the air by TIM, thereafter Proximus would arrange to terminate the calls. That way, they would have to accept responsibility for the prices of the calls. Although not all operators have networks in all countries, they do have partners and alliances which could pick up the traffic. At worst, they could do deals with the national operators. What they could not do in such circumstances is to blame arbitary prices set by uncontrollable foreigners.

Another possible step would be the introduction of new entrants. It is now almost a traditional way to stir up competition in telecommunications. Since there is no more spectrum, then it would have to be Mobile Virtual Network Operators (MVNOs). Regulators, often at the behest of governments, have delayed the introduction of MVNOs, in order to support the mobile operators. That time is now over, we desperately need the competitive entrants.

I began by commenting on the auctions. Let me observe that in this sort of market, there is a profusion of technologies, fixed and mobile. One technology overtakes another very quickly. The life-cycles are short and already the words "fourth generation" have been spoken. In California the Blackberry is a big success. It is a dedicated electronic mail appliance. Interestingly it runs on the bi-directional pager network at very modest cost. If I want to advertise a retail establishment, then it might be cheaper to put a Bluetooth appliance in the window than to do a deal for a location based service with the likes of Orange or Vodafone. If UMTS is too expensive there are ways around. Never underestimate the power of finance ministers to find more spectrum, not the least from the military who could be persuaded to release it in return for a few frigates, bombers or tanks. I am not saying that I want UMTS to fail, but I am suggesting that if a few operators were fail I would not lose a lot of sleep. There are plenty of new companies and new technologies which could replace it.
 

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