| The regulation of mobile
telecommunications
INTUG and EVUA Plenary
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Good morning ladies and gentlemen
Over the next few minutes I want to try to cover the major issues in the regulation of mobile telecommunications. I will try to avoid unnecessary legalistic detail and try to set everything in its commercial context. I will try to identify areas where we have work to do, whether by more intensive commercial negotiations or by working with regulators.
The text will be available on our web site with links to other documents where that seems appropriate or useful.
The major issues remain, as they have been for some time:
First, I want to tackle the question of the financial markets. I will
skip over whether or how they might be regulated. That is beyond the scope
of even EVUA and INTUG.
The operators more than welcomed being classified in the same box as the dot coms. They joined the madness of their own free will -- they actively sought that status. However, it was to be their own very special doom when the crash came.
The damage caused by the delusions of third generation profits is still being identified. The elimination of the debts and the writing down of over-valued assets will continue for some time. By the end, billions of once valuable acquisitions will have ceased to exist.
Meanwhile, the financial markets continue to have considerable effects on the sector. They are driven by sentiment and by rumour much more than underlying market realities.
The extent to which the financial analysts ever understood the regulatory environment for telecommunications remains open to doubt. Estimations of income from m-commerce seemed to assume that telecommunications regulation and competition law did not exist or could be wished away.
Since the "dawn raids" and the rulings of certain NRAs the financial analysts have been paying much more attention to regulatory matters.
The sharp decline of stocks means that many telecommunications analysts were sacked. A simpler and cheaper method of tracking the sector had to be found. It seems to be a case of shooting the messenger. It is also avoided having to ask, let alone answer, questions about the value and independence of their work.
Having lost any sense of trust in the mobile operators and having abandoned growth as the unifying force of the known universe, the financial analysts now use a simple and rather unimaginative yardstick.
The operators are placed under great pressure to ensure that their Average
Revenue Per User (ARPU) is rising steadily or that the decline is being
stabilised. They must report ARPU month by month. Table 1 shows the ARPU
for Vodafone for last year and this year.
| Table 1 Vodafone Average Revenue per User in 2001 and 2002 | ||||
| Germany | Italy | Japan | United Kingdom | |
| EUR | EUR | JPY | GBP | |
| January | 27 | 28 | 8,100 | 24 |
| February | 24 | 25 | 8,600 | 23 |
| March | 27 | 30 | 7,200 | 24 |
| April | 24 | 28 | 8,100 | 22 |
| May | 25 | 29 | 7,600 | 24 |
| June | 25 | 30 | 7,700 | 23 |
| July | 26 | 31 | 7,500 | 23 |
| August | 26 | 30 | 8,100 | 24 |
| September | 25 | 28 | 7,800 | 23 |
| October | 26 | 29 | 7,400 | 24 |
| November | 24 | 27 | 7,800 | 23 |
| December | 24 | 28 | 7,600 | 22 |
| January | 25 | 29 | 7,500 | 23 |
| February | 23 | 26 | 7,200 | 22 |
| March | 25 | 30 | 7,600 | 24 |
ARPUs are being forced up by a concerted drive from operators to increase revenues from:
I regularly receive mailshots inviting me to spend €1,000 to learn how to squeeze more money out of customers. One of the best made claim concerning the massive revenue potential in GPRS roaming. Yesterday it was one offering a £999 report, in full colour, on the joys of wireless sex and how this can improve your ARPU.
Goldman Sachs undertook some sensitivity analyses on the revenues of
leading European operators. Their assumption was that a regulatory intervention
might take the form of a sudden sharp drop in income on roaming and call
termination. The results for various reductions in both roaming
and termination charges are shown in the Table 2. The financial performance
of operators would be substantially hit. In reality, the cuts might be
staged at different times over several countries.
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| Revenue | EBITDA | Revenue | EBITDA | Revenue | EBITDA | |
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Vodafone
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-1.4%
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-2.3%
|
-2.9%
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-4.6%
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-4.3%
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-6.9%
|
| MMO2 |
-2.7%
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-8.2%
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-5.4%
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-16.4%
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-8.2%
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-24.5%
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| T-Mobile |
-1.8%
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-4.0%
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-3.6%
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-8.1%
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-5.5%
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-12.1%
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| Orange |
-2.6%
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-5.4%
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-5.2%
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-10.8%
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-7.8%
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-16.2%
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These figures were derived from estimates (see Table 3) of the contributions
to the revenue of the operators in different European countries.
| Table 3 Estimates of the revenues from incoming calls and international roaming | ||||
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| % (voice) traffic | % revenues | % (voice) traffic | % revenues | |
| Vodafone | 26% - 39% | 13% - 24% | 2% - 5% | 5% - 14% |
| MMO2 | 38% - 48% | 17% - 27% | 4% - 7% | 11% - 14% |
| T-Mobile | 25% - 39% | 17% - 19% | 1% - 5% | 5% - 14% |
Table 4 shows estimated contributions to APRU using the March 2000 Vodafone
data and the Goldman Sachs estimates.
| ARPU | exchange
rate |
ARPU
(EUR) |
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| 25% | 30% | 40% | 5% | 10% | 15% | |||||
| Germany | EUR | 25 | 1 |
25
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6.25
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7.50
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10.00
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1.25
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2.50
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3.75
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| Italy | EUR | 30 | 1 |
30
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7.50
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9.00
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12.00
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1.50
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3.00
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4.50
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| Japan | JPY | 7600 | 115 |
66
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16.50
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19.80
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26.40
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n/a
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n/a
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n/a
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| UK | GBP | 24 | 0.62 |
39
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9.75
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11.70
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15.60
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1.95
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3.90
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5.85
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Interestingly, Goldman Sachs saw this a Euro-centric issue. They did not seem to anticipate that regulators in other parts of the world would take similar action.
I would emphasise that INTUG does not share that view. We have gone to some trouble to keep regulators in all parts of the world fully informed of the issues and are working with them to address the market failures.
You can hardly expect regulators in other parts of the world to fail to notice abusive practices or remedies for them--especially if there are formal findings.
In the first instance, they do not need to do more than to invite their own GSM and CDMA operators for a discussion concerning whether they too make so much money from roaming and termination. That would be a major step forward.
The political basis for such actions is self-evident.
One legal basis for actions on termination charges lies in the WTO Commitments which require cost-oriented interconnection, while the roaming charges can be addressed by competition law or simple regulation.
At some point, someone in the financial markets will realise that the managers of the mobile operators are, if anything, voice people and that they have no experience of data or of services.
They will have to come to terms with the fact that 3GSM stands for Third Generation Serial Murders. They have so far killed:
It is gratifying that the financial markets have become aware of the
regulatory issues, even if it is a little late in the day.
Japan is working hard to make a success of 3G. In an important sense, it is a special case, since the 2G standards used were uniquely Japanese. PHS and PDC were not used elsewhere.
NTT DoCoMo continues to be bullish. In March in Brussels they made a presentation in which they claimed they would be able to show live golf on a 3G handheld device. I remain sceptical that a white ball some 1.68 inches across can be shown on a screen that is somewhat smaller in size. On such a screen it will require a practised eye to tell the difference between Arnold Palmer and Tiger Woods, let alone whether the ball is going into a bunker or the hole.
There are some people who are so unimaginative as to believe that 100 per cent mobile teledensity is a ceiling. NTT DoCoMo provided the following estimates for 3G devices in Japan:
South Korea has achieved a remarkable lead in fixed broadband, some 16% of the population and some 50% of households. The national strategy appears to be two-fold. In the first instance to roll-out a fixed network with a view to the export potential of infrastructure equipment and handsets. Secondly, to develop a fixed broadband market on which new services can be explored and developed with a view to moving them later to wireless networks.
The Koreans plan to understand how customers use broadband on the cheaper fixed networks before they go to wireless.
In particular, the South Korean are targeting the lucrative global games market, where they wish to overthrow Japanese ascendancy.
They have already made substantial progress there towards 3G, through the deployment of CDMA2000 both 1X and in recent weeks 1X EV-DO. South Korea is aspiring to be the world leader in wireless broadband.
Those countries which have not licensed 3G are now markedly more cautious.
The GSM Association met Commissioner Erkki Liikanen on 21 May to discuss how to ensure 3G was a success. You can read the Press release. They were seeking deals and concessions on:
The European Commission issued a somewhat supportive Communication on the roll-out of 3G networks [COM(2002)301]. However, it offered little tangible benefit to operators and was rather less bullish on the business case. Indeed the Commission seems to be more technology neutral than ever before.
The reality was that the 3GSM operators were asking for a softening of regulation, especially the market definition for call termination. They are deploying all the political muscle they can manage.
The references to M-Commerce are a euphemism for wanting to keep all or at least more of the revenue flows. The legality of that under the regulatory framework remains unclear. Moreover, there is very strong competition case law, which says that the operators will have to be non-discriminatory in the way they provide access to services.
They have made little progress in the sharing of infrastructure. This is severely limited in order to comply with competition law.
We already know that the operators have built a firewall into GPRS. This is to ensure that they can control and thus charge for third parties who need to authenticate your handset and position in terms:
In many respects it is now too late for the 3GSM operators to obtain concessions. Changes in licence conditions would have ended up in court in acrimonious disputes. The new legislative framework is in place and takes effect on 25 July 2003, though it was framed in much more optimistic times. The member states have already begun to transpose the legislation and a few are preparing for market tests.
The power has been passed from the Commission to the NRAs and they show limited capacity to be bent to the will of the operators. Moreover, the new package is clear in the process to be followed.
The operators could offer pan-European, trans-Atlantic or global call origination if they wanted to, but they elect not to do so.
Termination has been and will continue to be a highly contentious matter. The Independent Regulators Group (IRG) defined it as a single operator. A similar conclusion was reached by the Competition Directorate-General in the KPN case.
So that, for example, in Belgium, there is not a national termination market, but three separate markets, one each for:
The response of the 3GSM operators has been complex. They have claimed that such competition is "unfair", something about which I suppose they have special knowledge. They have sought to have the rules interpreted so that WLAN and UWB can be used only in limited ways. They have also sought to acquire WLAN operators and integrate it with their services to impose their sort of price levels.
We will need to ensure that efforts to block access to this technology are not successful.
About one year ago INTUG raised the question of data protection and its implications for international mobile roaming services. We set this out in an issues paper. We remain extremely concerned that the operators and services providers have not addressed these.
Without clearance from national data protection authorities, mobile services will be constrained to national markets.
The 3GSM operators will need to act on data protection if the development
of services is not to fail.
As the numbers from Goldman Sachs indicated, roaming is a big contributor to operator revenues, up to 14 per cent. Consequently, they will defend it with all the tenacity they can muster. They are deploying all manner of sophisticated and sometimes spurious arguments to delay the process.
INTUG collected initial data in late 1998 which it published in early 1999. As a result the European Commission included international mobile roaming in a sector enquiry launched in July 1999. Data were collected from operators by DG Competition during 2000, which was the basis for a Working Document that December.
Wim van Welzen MEP called them a cartel in the European Parliament in February 2001.
After a quiet period from the Commission there was the excitement of the "dawn raids" in July 2001 by DG Competition and the UK and German competition authorities.
It has since gone quiet again and we continue to await an outcome from the Commission. One rumour was that they would make a statement of objections just in time for the summer holidays.
A market definition for international mobile roaming was included in the new legislative package in order that NRAs were sure to examine it for competitiveness. These markets must now be examined by the NRAs to determine if they are competitive and, if not, to impose measures such as cost orientation on operators of force market entry.
INTUG has raised the issue of international mobile roaming and will continue to present information to:
Slowly, we get the message over. We will continue to raise the roaming wherever there is an opportunity.
However, we need more evidence of the cost to business and of the scale of the burden. We also need representations to governments. Anyone with details of their corporate costs would be very welcome.
It remains too early to make a competition law analysis of roaming charges for data traffic. The market for GPRS, such as it is, is still too poorly developed.
Some of you are customers of Vodafone and T-Mobile, subscribing to Eurocall and to Worldclass. These schemes are so similar that might be photocopies.
To date, neither scheme has been approved by the European Commission. They require approval under Regulation 11/62, because they involve collaboration with third parties, firms they do not fully control or own. The criteria for approval of such schemes is economic and technical benefits to customers.
Clearly, these schemes offer no technical benefits and must relay for approval on their economic benefits.
The sectoral inquiry indicates that the Commission considers international mobile roaming to be potentially less than fully competitive. Therefore, economic benefits would have to mean something which was going to move the market to a more competitive basis. The price of one Euro a minute, when you include VAT, is demonstrably not doing that. Nor is it the first shot in a competitive war.
Of course you can never be sure of your colleagues will be on Vodafone or T-Mobile and thus they may well incur higher charges.
Both operators have plenty of scope to offer very much better prices. These are likely to be welcomed by DG Competition. In particular, a non-roaming tariff, the Holy Grail of "Europe is my country", "Scandinavia is my country" or "Miteleuropa", would be a very welcomed development.
Strangely, although we are told that roaming is a "principle" when we leave our national service, there is an exception. Vodafone New Zealand customers can make international calls in Australia without a roaming premium, they are charged exactly as if they were at home. A higher charge is usually claimed to be justified by the allegedly higher value to the caller. Why this scheme is not available in Europe or the USA remains something of a mystery.
I hear stories of operators telling customers that the Commission or the NRA will not allow this or would not countenance that. My impression is that much of this is ill-informed nonsense. The role of the Commission is not to block, but to encourage the development of the Single Market. It is not to block, but to encourage competition.
INTUG would be happy to take up with the Commission such instances on behalf of users.
Some operators or some individuals within operators like to blame Brussels
for their instructions to pump up the roaming revenues.
In a few cases the operators have been making so much money that they have paid customers to receive calls.
In Italy this had to be abandoned, since parents were phoning their children from the office not only to chat with them, but also to top up the credit on their pre-paid cards. It gave a wholly new meaning to cross-subsidy.
The position of the operators is that mobile telecommunications is a single indivisible entity, that you cannot subdivide it. They have argued that you should label the black box "competitive" and not look inside.
Initially, this was also the position of governments and regulators. They were content to leave mobile operators to grow, to thrive and to compete. However, in time they have begun to treat mobile voice telephony as just another industry and subjected it to inspection.
The series of very expensive mergers and then the auctions made them suspicious, nobody rationally gives away so much money.
Fixed operators had begun to complain some years ago about the high prices they had to pay for calls to be terminated on mobile networks. These were increasingly important to them and the prices were very high and the margins they could make correspondingly low. They could compete on fixed-to-fixed prices, but not on fixed-to-mobile prices.
We have therefore seen a number of regulatory actions in the last couple of years.
We heard yesterday from Ann-Marie Engvall of the Post & Tele-Styrelsen how the NRAs in Europe have re-thought the problem. SMP had been treated as something associated with a large market share. Now the market for termination is seen as an individual operator. This decision was taken under the existing regulatory regime, without waiting for the new legislation.
It is equally applicable in other EU Member States.
The Competition Directorate-General has recently begun the end-game of a complaint from Worldcom. Here it has made public the arguments showing that KPN discriminated against other fixed operators in the termination of mobile traffic.
While the problem of pumped up prices for call termination was initially domestic, the operators have seen the opportunity to extend excessive pricing to international calls to their mobile networks.
In the language of competition law, they used their dominance in their domestic call termination markets as a lever to exercise power in the call origination markets of foreign countries.
In simpler language, if you want to be able to make calls to our network, you will pay our price. There was and remains no way around.
In terms of retail pricing let me take the example of calls to myself. You will have to pay more to call my GSM phone than my office phone, regardless of whether you are in Belgium or another country. For example, the price differences, the "premium" to reach a Belgian GSM, are:
From 25 July 2003 the relevant market under the new legislative package will be the single operator termination market.
Only a few nerds can tell you the codes for mobile phones in other countries. In the case of Belgium it is +32-475, 486 and 497.
There will be a prize of a genuine Swedish anorak for anyone correctly submitting a list of all the mobile network codes for all forty-three CEPT countries by the end of lunch.
The obvious question is why is there such a big price differential. The operators offer the answer of "convenience" and the higher value of ensuring that you get to speak to the person you want to, when you want to.
The real answer lies in the abuse of dominance and the avoidance of competition.
The wholesale prices can be found from Arbinet which has a spot market
on fixed and mobile termination prices (see Table 5).
| US$/min | Mobile | Fixed | Difference | Percentage |
| Netherlands | 0.1590 | 0.0104 | 0.1486 |
1428.8%
|
| Sweden | 0.1300 | 0.0090 | 0.1210 |
1344.4%
|
| Belgium | 0.1480 | 0.0120 | 0.1360 |
1133.3%
|
| Norway | 0.1292 | 0.0115 | 0.1177 |
1023.5%
|
| Spain | 0.1460 | 0.0135 | 0.1325 |
981.5%
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| Italy | 0.1390 | 0.0132 | 0.1258 |
953.0%
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| Germany | 0.1280 | 0.0125 | 0.1155 |
924.0%
|
| France | 0.1380 | 0.0140 | 0.1240 |
885.7%
|
| Ireland | 0.1338 | 0.0140 | 0.1198 |
855.7%
|
| Switzerland | 0.1635 | 0.0173 | 0.1462 |
845.1%
|
| United Kingdom | 0.1175 | 0.0125 | 0.1050 |
840.0%
|
| Denmark | 0.1240 | 0.0136 | 0.1104 |
811.8%
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| Finland | 0.1240 | 0.0200 | 0.1040 |
520.0%
|
| Czech Republic | 0.1170 | 0.0339 | 0.0831 |
245.1%
|
| Faroe Islands | 0.0830 | 0.0770 | 0.0060 |
7.8%
|
| Romania | 0.116 | 0.10799 | 0.0080 |
7.4%
|
| Liechtenstein | 0.0320 | 0.0300 | 0.0020 |
6.7%
|
| Belarus | 0.1600 | 0.1600 | 0.0000 |
0.0%
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| Ukraine | 0.0749 | 0.0825 | -0.0076 |
-9.2%
|
| Greenland | 0.2290 | 0.2530 | -0.0240 |
-9.5%
|
Here you can see differentials of around € 0.14 per minute at the wholesale level. This works out at some horrendous percentage price differences.
Let me turn now to the World Trade Organisation (WTO).
Signatories to the Telecommunications Annex to the General Agreement on Trade in Services (GATS) are under an obligation to provide cost oriented interconnection to all "major suppliers" in their countries. This definition clearly covers all voice telephony, including mobile, and covers all mobile phone operators. They are operating essential facilities and are also one of a small number of licensed operators. There is no way out of this one, the national governments are obliged to ensure cost oriented interconnection.
So that, for example, Telia has the right to interconnect to Proximus in Belgium at cost oriented prices. That is going to be a lot close to 1.2 eurocents than 14.8 eurocents.
However, it is going to take time for this to work through.
INTUG has raised the question of how to regulate mobile termination prices with all the major telecommunications regulatory bodies. Copies of our documents are on the World Wide Web:
We await a positive reaction from DG Information Society. So far the weight of our questions is as nothing to the visits of the CEOs of the mobile operators asking to be let off the hook.
It may soon be necessary to instigate stronger measures. We are still considering the possibility of going to DG Competition with a complaint or a sector inquiry.
We should not expect instant action, regulation is not like that. Especially, when you are asking for reversals of policy. However, we are confident that we will see a grinding down of the prices towards cost orientation over the next two years.
The operators are trying to talk up their costs, by including more of them. They try to explain why GSM networks are so much more expensive then fixed networks.
Of course, they also want to be allowed to delay and procrastinate.
They are presently appealing in the UK against the decision of OFTEL. The Competition Commission is being used as the means to get what they consider real prices into the public domain.
INTUG strongly encourages companies to take measures to monitor the costs of domestic and international calls to mobile networks. The first issue is to get a measure of the problem. Then we need to take action to discourage calls to mobile phones wherever this is practicable.
INTUG encourages you to negotiate, individually and collectively, with the operators over call termination prices. They will have to reduce them eventually, some commercial pressure would certainly do no harm. You can never tell, you might get a good price.
In the near future we are going to have to look at the costs associated
with the termination of SMS and data traffic. These will get more complicated
with the adoption, some day, of 3G, presenting interesting economic and
regulatory problems. They will not be easy. Already the operators are moving
to increase their revenue from these activities.
From 25 July 2003 it will be a legal obligation within the European Union and will spread to the European Economic Area and to the Accession Countries. It is contained in Article 30 of the Universal Service and Users' Rights Directive (EC/2002/20).
It is hard to see the operators resisting outside Europe, when so many countries have already enforced it. However, there is a rather different debate in the USA, because of the use of receiving party pays.
One recent trick the operators tried in Singapore was number portability only for voice and not for SMS. It is this sort of Kafkaesque trick that gets the operators the bad names they have.
There remain serious problems in the manner in which MNP has been introduced. There is a need to tidy this up to make it more consistent and easier for all concerned. In the UK, for example, the cost of the call to a mobile remains unchanged even if you move to a cheaper operator.
Denmark has gone one step further, or threatened to do so. It is to
introduce cross-portability. It is like cross-dressing for telephones.
At present this is delayed by two years. Once it is operational you will
be able to call a number to discover the cost of calling the number you
want to call. Of course, this will be in Dansk
It has taken time to marshall the forces against the mobile operators. Slowly, the politicians, the regulators and the courts are catching up. The operators are being obliged to comply with the law and the regulations to ensure compliance with competition law and principles of cost orientation are being tightened against them.
We have the appearance of a failure of compliance by 3GSM operators. They have to be dragged to NRAs and DG Competition to force observation of competition law and non-discrimination. Regulation is fought by them as a constant rearguard action.
The mobile operators have displayed a flagrant disregard of competition law and of national WTO commitments. These are now being enforced.
In time, the costs to business and consumers of international mobile roaming and call termination will be cut. How far is hard to say, since nobody knows the true costs of the operators.
The mobile operators made promises to the financial markets that they could not keep. Consequently they are now electronically tagged, their ARPU is measured month by month. If it declines, then their share price will fall. The financial markets act on rumours but only for events which are considered imminent. Regulatory intervention is now very imminent.
The mobile operators tried to pick off the NRAs one at a time. It was a foolish mistake. The NRAs, faced with pan-European operators, fell back and regrouped. They are now a "band of brothers". Individually they may not match the resources of the operators, but collectively they have considerable strength and no shortage of intellectual capital.
The 3GSM operators have repeated their old story too many times, few now believe that they are "fiercely competitive".
Politicians are remarkably adept at spotting people telling untruths. However, in Europe they must remain equivocal, since they continue to say that they believe in 3G, even if they have unspoken doubts about both 3G and the operators.
The myth of European leadership in mobile telecommunications is not yet destroyed, though the reality is there to see.
Neither the regulators nor the financial markets trust the 3GSM operators. The consequences of being caught between the two are far from clear. The scope of the operators for commercial manoeuvres is now limited. In one direction they might reduce their ARPU, while in the other direction they risk further infractions of the law. The financial markets move more quickly, but NRAs and NCAs are not easily evaded.
It is conceivable that at least one major mobile operator will be driven into bankruptcy. A national market might lose a single player. It is unlikely that the competition authorities would allow consolidation to reduce the number of players. It would be expected that someone might come in to buy the assets of the bankrupt operator for, say, 2 cents in the Euro.
As users we need to improve our monitoring of spending for changes and the early identification of problems.
It will be essential to show the "proportionality" of the issues with which we are dealing. It will be enormously helpful if we can show in detail the cost to consumers and to European businesses.
The mobile operators are desperate for money and will try any device to obtain it. We need to spot any problems at the earliest possible stage.
We can also take steps to ensure that in future we buy as corporations and not as individual employees.
As data services are rolled out we need to consider how they are being
regulated. We will also have to work hard to keep NRAs informed of users
views.
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Last updated 19 June 2002.