Mobile pricing regulation - transcript

Transcription from podcast

Topic:	Telecoms Partner Rod Kirwan talks about mobile pricing regulation
Speakers:	Rod Kirwan, Telecoms Partner, Denton Wilde Sapte
	Kate Bulkley, Media & Telecommunications Journalist

Kate – Hello, I'm Kate Bulkley and I'm an independent journalist and I'm here with Rod Kirwan. He's a Partner at Denton Wilde Sapte and Rod's going to talk to us about mobile pricing regulation.

Kate – Rod, it seems like the Commission and a lot of Government Regulators across Europe have got in to pricing on mobile in a big way, not just on roaming but also on voice, they are trying to get in to SMS. What is all this about and why now? Why is this all coming to a head at the moment?

 
Rod – Hi Kate. You're right, the last couple of months have seen a number of announcements on all of those, and it's really the culmination of a lot of activity by both European and local Regulators. For the roaming decision, for example, they identified the problem in '99 and there has been numerous warnings in speeches from the Commission and various actions building up. At the end of last year they launched a website to show the differences in prices and show how excessive they were, which was all good for transparency but it didn't change the prices. The time has come to take action, and they've chosen, because of that long history, a very direct way of doing it by issuing a regulation which will have a direct effect in the member states. So the draft has been published, it will probably bite in summer 2007 and it will have an immediate effect to control prices both at the wholesale level (that's the price between operators) and at the retail level, for the first time in the history of mobile in Europe.

Kate – It's amazing really, because we have been in this situation where a lot of the incumbent operators are in markets where they are starting to get less price regulation. Certainly, in the UK, we have seen that recently with Ofcom and BT. There seems to be a sort of a disconnect between mobile and maybe the fixed line old traditional business.

Rod – That's a very good point. 22 years of BT price regulation just came to an end at the beginning of August and so there's no retail price controls now for BT, which is a first. But that's because the Regulator has recognised that over the last 10 years the price of fixed calls has dropped by 60 per cent; there is effective competition in the fixed market in the UK and that consumers have choice. Their remit is to regulate where it's necessary and not to regulate where they think it isn't.

 
Kate – Now you can get down to some kind of arcane discussions about how you define a market, but how important is that, particularly when we are talking about these new price controls that are coming on to mobile?

 
Rod – It's the important first step for Regulators. They can't just impose price controls. They operate in a regulatory framework that means they first have to identify markets and then they have to investigate them carefully and there is a lot of detailed economic work that goes into that. If they then consider the market is dominated by a particular operator, they call that significant market power. If they identify significant market power, they are then obliged to do something about it. They have a range of tools, from the very blunt instrument of price control to finer things, maybe a bit of name and shame, a bit of consumer education or other types of controls. So, the big question then clearly is "what is the market?" because it could lead to all of this regulation.

 
Kate – Now, most of us obviously have mobile phones. In fact, some of us have two and three in Europe. Roaming is a huge cost on anybody's mobile phone bill. Vivian Reding, who is at the EU and is a Telecoms Regulator has made a lot of noise about regulating roaming at the retail level. Now this has gotten under the skin or lets say upset some of the big telcos. Why is she approaching it from this vantage point and why is upsetting the telcos?

Rod – Well, she is very fed up about roaming and the…

Kate – As we all are.

Rod – Well, anyone who just come back from their summer holidays and looked at their phone bill will also be angry, I should imagine. In a way, to answer this, we need to just touch briefly on the other two things you asked me earlier on about SMS termination and mobile voice termination. Those markets are defined, the operators have been identified as having significant market power and price controls have been applied. But the price controls have been at the wholesale level and it's been left to the operators, or the market, to flow those price controls, the cost savings, to flow them down to the consumer in the retail market. That has happened a bit but it's not within the Regulator's control and sometimes it doesn't happen. So, in roaming, it's so excessively priced in the view of Vivian Reding, and they have been warned for so long that she thinks it's really time for action. She doesn't want to take any chances and so she regulates it both at wholesale and retail. At retail, the control is that an operator cannot charge more than 30 per cent above the equivalent domestic charge for that call. 30 per cent is about the margin they make on their domestic calls. So, why are the mobile operators angry? Well, it gets them by the short and curlys. They are going to make a lot less money than they used to on roaming. Roaming is about four times, roughly across Europe, it's about four times the price of national calls and it won't be for long.

Kate – Of course the mobile operators are in a situation where they are facing down pricing pressure, commodisation, they've got things like Skype coming at them, VoIP calling. Is roaming sort of the saviour so far and that’s why they are so upset about doing this?

Rod – It's a perceptive point: what's really annoying them is not just controlling one area, but it's control across all areas. You know, for voice termination - that’s the wholesale charge for mobile networks allowing other networks to connect to their subscribers -they've had price control for a number of years. There's a great phrase that Regulators use called "the water bed effect". You squeeze one end and the other end goes up. So while that price is being dampened another has been high, and the net effect is they continue to make healthy profits. What I think is particularly annoying for the operators now is that there's pressure coming to bare on all three elements of where they make most of their revenue: voice termination, roaming and SMS. The costs, certainly for SMS, for example, are very, very low in delivering an SMS but the average price across Europe is something like 6p a text. The exact price is very difficult to identify because of bundling and the way SMS is sold.

 
Kate – The head of the European Telecoms Network Operators Association says that Vivian is basically taking a populous view and she's just trying to get headlines by doing this retail pricing regulation for roaming. Is there something that the telecoms operators could do that would maybe offset what the Commissioner is trying to do?

Rod – There's been some uncharitable comments about Vivian's legacy. I don’t think she's remaining a Commissioner for long and this would be a great scoop. But that’s uncharitable. The reality is it’s a dysfunctional market. Look at the price and look how excessive it is compared to cost. Why is it that making a call in Poland to Germany costs four times as making the same call from just over the border in Germany to somebody else in Germany? It doesn't make any sense. And also these are relatively mature markets now. These aren't innovative services. The networks are built, they are established, they've had a long period of getting market share, getting return on their initial investment. In a normally functioning market, you would expect to see price come down, but it isn't for technical reasons about the way these markets operate. Coming back to an earlier point, they are very competitive markets. Anyone who's tried to upgrade their handset recently, knows that the operators are desperate for your business. But there are just elements, because of the way it functions, there are just elements where competition doesn’t reach. The main issue for voice termination and SMS termination is on an operator's own network, they are the monopoly power in respect of an individual. So, in order to call you, I have to deal with your network operator. There's no other way of me making that call and that’s the monopoly power – they can charge what they want.

Kate – So, in your view from a legal perspective, is this the right move forward, it sounds like it is, and what would you advise the telecom operators to do in this environment where they are obviously going to have a little more heavy regulation then they have been used to?

Rod – I think it's no use putting your head in the sand. It's definitely coming. But, there's still a lot of room for lobbying and making new arguments. Regulation of roaming – that’s probably going to happen now in the way that it's proposed. Bar some very high level political shenanigans, I don’t think that will change. But for SMS termination, Ofcom has just announced it's going to review the market in 2007. The Commission has made statements in a report published this year that it thinks it’s a market suitable for regulation i.e. hinting price control should be applicable there. France has just done it last year. They've imposed pretty heavy price controls on SMS in France. If you read the tea leaves, price regulation is coming. But each market's different – Ofcom acknowledged that in their statement about SMS termination – so get out there and make your case. There will be reasons why pricing should be different, but I think there has to be an acceptance that price controls are coming and maybe even get smart and start reducing your price now. Some networks have already done that. Vodafone particularly and others have, ahead of the roaming regulation decision, reduced roaming prices quite significantly. Which is smart PR. Prices may go down, but not as much as if the Regulator had imposed price cuts and that’s got to be good for the operators – they stay in control of their price.

Kate – That's great. Thank you very much Rod.

 
Rod – It's a pleasure. Thank you.

This is a technology media and telecoms download from Denton Wilde Sapte.