Elimination of EU roaming charges implies a move towards regulated wholesale rates

On the 3^rd of April 2014 the European Parliament voted (with some amendments) to adopt the Commission’s proposal to end roaming charges in the EU by the end of 2015. This was part of a wider vote in support of the Commission’s proposed regulation for a “Connected Continent”, the term used for the telecoms single market. The regulation must be approved by parliament and the European Council. With this, the Commission also moved a step closer to regulated wholesale prices and hence the structural separation of mobile networks into NetCos and RetailCos.

In essence the Commission wants EU consumers be able to use their mobile phone within all EU countries in the same manner as they would at home. “…Further reforms in the field of roaming should give users the confidence to stay connected when they travel in the Union without being subject to additional charges over and above the tariffs which they pay in the Member State where their contract was concluded.”

However, the problem with this is that most consumers chose domestic tariff plans with bundled minutes and data plans, so that within the bundle the incremental cost of usage for consumers is nil. Selling bundles also makes sense from a mobile operator’s perspective because most costs are fixed. In contrast, in a roaming situation an operator’s costs (the wholesale rate an operator has to pay to the visited network) are proportional to usage – i.e. variable. The Commission and the Parliament appear to be aware of this problem, and the adopted text states that operators “may, notwithstanding the abolition of retail roaming charges by 15 December 2015, apply a “fair use clause” to the consumption of regulated retail roaming services provided at the applicable domestic price level, by reference to fair use criteria. These criteria should be applied in such a way that consumers are in a position to confidently replicate the typical domestic consumption pattern associated with their respective domestic retail packages while periodically travelling within the Union.”

Much will depend on how the “fair use clause” is written. If we take at face value the text “consumers are in a position to confidently replicate the typical domestic consumption pattern associated with their respective domestic retail packages while periodically travelling within the Union”, this may mean that customers on large minute and data bundles can use these freely at any time across the EU. Alternatively the EU would have to define what “periodically travelling within the Union” means. Does it mean 30 days a year, or 180 days, or how much? Assuming the Commission does not want to place limits on how much Connected Continent consumers are allowed per year, there will be no time limits. Taken to an extreme, a mobile user could shop around for the cheapest SIM-only deal in Europe regardless of his or her country of residence. A prime example is EU parliamentarians who shuttle between their home country, Strasbourg, Luxembourg and Brussels.

The fair use provision is designed to address the problem that it is ultimately impossible to regulate retail prices without regulating wholesale prices. The Commission appears to be aware of the difficulty in defining “fair usage” and the implication for operators’ margins. The adopted text states: “In addition, the Commission should by 30 June 2015, in advance of that final abolition of retail surcharges, report on any necessary changes to the wholesale rates or wholesale market mechanisms, taking into account also mobile termination rates (MTR) applicable to roaming throughout the Union.” This is the real bombshell because it heralds EU regulation of wholesale prices.  In the same way as the EU has driven the regulation towards lower MTRs this may happen to wholesale prices.  The target might be a Reference Wholesale Access Offer, for example with the €0.002 per Mbyte of data rate imposed on Hutchison 3 Austria to allow their acquisition of Orange Austria to go ahead.

In regulating mobile tariffs, the EU is focusing only on roaming charges, whereas international call pricing is also highly unbalanced. In most cases international calls are not included in a mobile minute bundle and charged at a premium. This leads to oddities. For example, for a UK mobile subscriber with a bundled minute plan the incremental cost of a call to a UK mobile numbers is nil. Hence for a call to a UK number that is roaming in Poland, the marginal cost to the caller is nil and, according to the EU roaming charges cap, the called party pays no more than €0.07 per minute to receive the call. The marginal revenue to the UK operator is €0.07 per minute. However, if a UK mobile user calls a Polish mobile number the price paid is substantially higher. For example, Vodafone’s standard to Europe call price is £1 a minute (€1.20). In other words, Vodafone’s incremental revenue is 17 times higher, although costs are the same.

The Commission also proposed that for European fixed calls “operators will have to charge no more than a domestic long-distance call for all fixed line calls to other EU member states. Any extra costs have to be objectively justified.”  Will the same principle be applied to mobile operators? If yes, the scenario where a consumer buys a SIM in one country and uses it in another becomes practical. In this scenario, where within the EU distance and geography no longer matter for mobile retail prices, the retail activity of a mobile operator might evolve into what is in effect a pan-European MVNO with an “always best connected” value proposition, regardless of the access network used. Under these circumstances, who will then want to bid for spectrum and invest in networks?

Either way, we are moving to a situation where the EU mobile industry is subject to extensive price regulation. And yet, the EU Directorate General for Competition is totally focussed on preserving competition at network level and in-country consolidation of mobile operators is hard to achieve. This makes little sense. Now that the cost of calling has come down, perhaps Neelie Kroes can afford to make a call to Joaquín Almunia (Vice President of the European Commission responsible for Competition Policy) and attempt to sync policies.

Written by Stefan Zehle, CEO, Coleago Consulting

European commission proposal ignores the fundamentals: We need to create an environment that attracts capital into the EU telecoms sector

The European Commission’s adoption of regulatory proposals for a Connected Continent announced by Neelie Kroes on the 11^th of September 2013 are as polemic as can be expected from a politician. The headline grabbing proposal deflects from the failings of member states to adopt sensible policies with regards to developing the telecoms sector. In its opening paragraph the proposal declares that “The overarching aim is to build a connected, competitive continent and enabling sustainable digital jobs and industries; making life better by ensuring consumers can enjoy the digital devices and services they love; and making it easier for European businesses & entrepreneurs to create the jobs of the future.”

To achieve these objectives substantial investments are required. Only 12 days prior to the Commission’s proposal, on Thursday 05 September 2013, PwC published a detailed analysis which showed that mobile operators cannot make adequate returns on capital employed. For the past three years the return on invested capital (ROIC) made by Europe’s telcos was below the cost of capital of around 8%-9%. In the mobile sector this is in part due to the high spectrum licence fees charged by national governments.

And yet with statements such as “It is also essential that citizens … are protected from unfair charges and practices such as roaming rip-offs and opaque contracts” the Commission conjures up an image of ultra-profitable telecoms operators which fleece consumers.

What the European telecoms sector needs most is a climate with the regulatory certainty which is favourable to investment. Only investment in the sector will achieve the Commission’s aim – which we all agree with – of excellent fixed and mobile internet connectivity and communication without borders within the EU.

Furthermore, the Commission proposal contains contradictions. Vice President Neelie Kroes said “The aim is to gradually make the telecoms sector a “normal” economic sector with limited ‘ex ante’ rules and responsibility shifting to ex-post regulation” and then demands that “Operators will have to charge no more than a domestic long-distance call for all fixed line calls to other EU member states. Any extra costs have to be objectively justified.”  “Normal” economic sectors do not “objectively justify” prices based on cost but charge what the market will bear. The image of the Coca Cola bottle in the proposal is a fine example. The price per litre of Coca Cola varies hugely between a discount supermarket and a beach club on the Cote d’Azur. And yet, nobody suggests regulating prices for Coca Cola.

On the positive side, the proposal highlights member states’ regulatory failings and tardiness in allocating spectrum for LTE.  This, with a call for a European authorisation for telecoms operators – and by implication European telecoms regulation – is a very positive development. This is a prerequisite for the much needed consolidation in the EU telecoms sector which will then give investors a chance to earn adequate returns.

Written by Stefan Zehle, CEO of Coleago Consulting

EU in a muddle over roaming rules

The FT commented on the effect of profitability the proposed EU roaming rules may have on EU mobile operators, not least because mandated wholesale prices open up the possibility of arbitrage.  It is evident from the Case M.6497 “Hutchison 3G Austria Holdings GmbH / Orange Austria Telecommunications GmbH, Commitments to the European Commission 11 November 2012”, that the European Commission is well aware of this issue.

As part of the Commission’s approval to acquire One Austria, Hutchison Austria entered into certain commitments, notably to publish a Reference Wholesale Access Offer and host up to sixteen MVNOs.  The interesting bit is the data pricing stated on page 29 of €0.002 per Mbyte. This sets an extremely low benchmark.

In order to prevent this low rate from being used by operators outside Austria, clause 36(l) on page 25 of the Reference Wholesale Access Offer states that the MVNO, “The MVNO shall not seek to sell MVNO services to any customer whose residence or place of business is outside Austria.”

Here the European Commission has contradicted its avowed aim to create a single telecoms market. Effectively the consumer who lives in Austria could buy a service from an MVNO, but not for example a customer in Germany. A German MVNO might also wish to buy services from Hutchison Austria at these rates to offer a seamless service that covers both Germany and Austria.  This would be a very practical benefit of the single market in telecoms. However, the Commission put rules in place which prevents this from happening.

This is an extraordinary contradiction which shows that the Commission is in a muddle over the issue. At the core is that the part of the commission dealing with competition appears to be out of step with that part that works on telecoms.  It also highlights that the fears voiced by EU mobile operators are real.

I wonder what would happen if a customer of an Austrian MVNO using the Hutchison Network moved from Austria to Germany. If the MVNO does not disconnect the customer Hutchison Austria would complain.  The MVNO might then sponsor that customer to bring a test case that on the grounds of single market provisions, the MVNO does not have the right to disconnect the customer.

Neelie Kroes has made the roaming proposals without having thought through the full impact on the mobile industry.  This deserves much greater consultation.

Written by Stefan Zehle, CEO, Coleago Consulting

Challenges for EU mobile operators

The European mobile telecoms industry is now at the maturity stage of the industry life cycle.  While the introduction of LTE is still a relatively recent event, there is limited revenue growth and consolidation is starting to set in. Rather than being challengers, in some ways mobile operators themselves have started to look like the old fixed line operators at the start of the telecoms market liberalisation in the 1980s.  National fixed line incumbents (PTTs) went into defensive mode as the EU’s Customer Premises Equipment directive ended their monopoly on the supply of telephones and PABX and the opening to competition of long distance and international calls forced operators into rebalancing and cost orientated pricing.  The European Commission predicted significant contributions of market growth and benefits to consumers and businesses and there is no doubt that the policy delivered this. Indeed, without the EU’s effort to push for liberalisation of telecoms markets we would not have today’s innovative mobile telecoms markets with multiple mobile operators.

Now these very mobile operators are on the defensive as the EU increases pressure to create a single telecoms market and puts its weight behind wholesale price transparency and net neutrality. Three of the statements made by Neelie Kroes, VP of the European Commission responsible for the Digital Agenda in her speech of the 9^th of July 2013 impact significantly on operators:

• —  “Blocking or throttling services isn’t just unfair and annoying for users – it’s a death sentence for innovators too. So I will guarantee net neutrality.”
• —  “European calls shouldn’t count as a costly international call; not within a true single market. …. so any difference in price must be objectively justified by additional costs.”
• —  “In a true single market, there are no artificial roaming charges. It’s irritating, it’s unfair, it belongs to the past.”

In her speech Ms Kroes also addressed the issue of cross border consolidation: “If you’re allowed to operate anywhere in Europe – authorised within an EU framework — then you should be able to operate everywhere in the EU. … Like a single authorisation system with supervision by the home member state.”

While as yet true cross border consolidation has been rare, we already witness increased consolidation within markets either outright through M&A or through RAN sharing. RAN sharing is encouraged by some regulators in order to deliver mobile broadband coverage in rural areas and better LTE speeds in a wider band. For example, the “mutualisation” of spectrum was central to the 800MHz licence award in France. Regulators are well aware of the threat to competition posed by RAN sharing but in a mobile broadband world the economics of deploying LTE in a wide band favour RAN sharing.

These factors – cost orientated pricing, net neutrality, and consolidation – will shape the European mobile industry during the coming years.  They may even lead to the unbundling of mobile access from the provision of services, just as we have seen in the fixed network. Implicit in consolidation at network level is increased price transparency at wholesale level to allow multiple operators to compete fairly at retail level. In this context the elimination of roaming charges points towards the end of the traditional Inter Operator Tariff (IOT) roaming wholesale tariffing. Possibly within the EU bureaucracy someone has already been tasked with drafting a directive that would require EU mobile operators to publish a “reference access price offer”.

Let’s imagine a future where Apple or Google obtain wholesale access (MVNO) agreements in each of the European states and, instead of replicating the national mobile operator model, launch a pan-European service where the EU is a single nation, at least in terms of mobile phone service costs. Far-fetched? Well, many consumers already make smartphone choices ahead of network choices and to many people OTT services such as Skype, FaceTime and WhatsApp matter more than traditional phone calls.  We might even see a resuscitation of the trans-Europe dialling code (+388) designated for the European Telephony Numbering Space or ETNS.

As regards separating access and service, a line of attack comes from operators such as Rebtel in Sweden and Republic Wireless in the USA. These operators use WiFi offload and “push” their customers to make calls using Skype like services.  Mobile networks are only used in an MVNO fashion when out of WiFi coverage.

Is this the nightmare scenario for traditional mobile operators, where they are relegated to perform the role of the much quoted “dumb pipe”?  Firstly there is nothing “dumb” in operating a highly sophisticated LTE network while migrating millions of users from GSM and HSPA and coping with the mobile data tsunami. Secondly the massive growth in mobile broadband requires huge investments. Investments require returns and therefore it is the pipe where returns will be earned.

This scenario may actually be rather benign for investors in the mobile industry. Rather than fighting subsidy wars, being played off against each other by Apple, and driving up prices in spectrum auctions, operators could get on with building a superb mobile broadband infrastructure in an environment that allows investors to earn stable returns. After all, in the history of the European mobile industry the greatest decline in return on capital employed resulted from the 3G auctions in 1999 – 2002. Let others go crazy!  Investors who are attracted to stable returns would continue to invest in mobile network operators whereas those who seek a higher risk / return profile would invest in companies that provide services over these networks.

What has been the reaction of the mobile operators to threat to roaming and international call margins?  Some claimed that the loss of margin from roaming would lead to price increases elsewhere.   Yes, it probably would i.e. prices would become more cost orientated. This is not necessarily a bad thing for the mobile industry.

As the market is opened up and access is unbundled from other value chain activities, this provides an opportunity for new competitors. Operators such as Lebara and Lyca had some success in competing on the basis of low cost international calls from mobile phones. MVNOs such as Truphone, WoldSIM, roamline.com arbitrage the difference between wholesale and retail prices to deliver cheap roaming. Mobile operators watch these trends carefully and will not make general price cuts on high margin services if this reduces overall profits. They are responding in smart ways by offering low cost roaming to those who seek it. For example, EE of the UK which focusses on LTE offers “inclusive unlimited roaming minutes and texts for an extra £5 a month on a 24 month roaming plan”. Here we can see the future of roaming tariffs. The bigger threat is to those niche operators because their arbitrage opportunity reduces.

In response to lower intra-EU roaming charges some operators increased roaming prices outside Europe, but not in a cost orientated manner.  Most operators are wedded to a zonal pricing approach, pretending that somehow costs increase with distance. That’s nonsense.  Some of the highest Inter Operator Tariffs are levied close to Europe. For example, Tunisian mobile operators collude to set wholesale roaming prices as high as €1.50 per minute. While a European operator’s retail price for roaming in Tunisia of €2 per minute including VAT might seem high, it barely covers the wholesale cost. In some other markets much lower wholesale roaming prices can be obtained. This is also evident from the countries covered by EE’s unlimited international roaming deal which includes Europe and an odd mixture of countries including Australia, the US, Peru, Turkey, etc.

And what about the subsidised contract customer, i.e. the customer supposedly “owned” by the operator? After all the separation of handset and SIM was one of the great innovations of GSM because of its potential for increased competition. It is not necessarily the case that a customer life time value is higher for a consumer with an operator provided subsidised smartphone compared to a SIM only smartphone customer with a 30 day rolling contract.

Operators are aware of these trends and their offers are evolving in a segmented response to changes in the regulatory and competitive environment. There may be bumps along the road, but I am optimistic for the future of the mobile industry as a sector worth investing in.

Written by Stefan Zehle, CEO Coleago Consulting

Misguided approach to EU intervention on roaming charges

In her speech on the 9 July 2013, Neelie Kroes, Vice-President of the European Commission responsible for the Digital Agenda, reiterated her assault on roaming charges within the EU. There is talk of regulatory intervention to eliminate roaming charges within the EU.

While mobile operators may earn good margins on roaming, a mandated elimination of roaming charges is ill conceived because mobile operators in different EU countries face different costs. One of the most significant investments made by mobile operators is in buying spectrum.  For example, for the 800MHz digital dividend spectrum, operators in Denmark paid €0.30 per MHz per head of population (€/MHz/pop) whereas in France, operators paid €0.67/MHz/pop i.e. 123% more.  Some cash strapped EU countries set high reserve prices for spectrum €0.58/ MHz/pop in Italy vs. €0.10/MHz/pop in Denmark. Coupled with differences in deploying 4G LTE coverage, this translates into hundreds of million euro differences in capex.

Furthermore there are significant differences in the timing of spectrum allocations and hence the deployment of LTE which translates into huge cost differences for mobile data. Assuming investors like to earn similar returns, these cost differences will result in different wholesale and retail prices. Therefore it does not make sense to mandate the same retail prices regardless of the country in which the traffic occurs.

If the EU and its member countries are really so keen on a single telecoms market, why not start by allowing operators regardless of their country of operation to select a national telecoms regulator of their choice to regulate them.  I suspect the Danish regulator would attract quite a few “customers” whereas the Italian and Greek regulators might go out of business. The resulting reduction in regulatory costs could be passed on consumers in form of lower retail prices.

Written by Stefan Zehle, CEO, Coleago Consulting

The end of unlimited internet

At last week’s shareholder assembly of Deutsche Telekom, the outgoing CEO Rene Obermann defended the decision to stop selling DSL packages with unlimited data volumes, by arguing that only a few percent of customers will be affected: when reaching their monthly data limit, and that they would need to pay extra to keep enjoying broadband speeds, which he considers a fairer option compared to increasing prices for all users.

Price discrimination is a valid company strategy, found in many products and industries (in mobile telecoms it is already common to charge different subscription prices, e.g. for different access speeds and monthly data allowances). However, the move of Deutsche Telekom to pioneer download limits on fixed line Internet access packages, gives raise to two serious concerns:

First, Deutsche Telekom’s own IP video services will be exempt from the data limit – this already received many comments on violating the principle of net neutrality: as soon as the monthly data limit has been reached, access speed with be throttled to such a low level, that most broadband services such as YouTube won’t work anymore, while access to Deutsche Telekom’s own video service will be unaffected.

The second and more important point – and in most discussions somewhat neglected – is the effect that such a decision could have on the Internet services market. As a vertically integrated operator, Deutsche Telekom is controlling essential access network infrastructure (the local loop), which it needs to provide at regulated terms to other service providers. At the same time, Deutsche Telekom competes with these service providers in the retail market. This recent change in DSL packages has to be seen in context with another Telekom announcement: The use of VDSL2-vectoring to upgrade DSL lines to speeds of up to 200Mbps. This increase in speed (though not necessarily available to all households) could seriously discourage potential investments in fiber-to-the-home installations by alternative providers. Vectoring increases the access speed of a local copper loop only if the whole cable bundle is controlled from one single DSLAM (to manage cross-talk between copper pairs). This means, that to provide this technology, alternative access providers may be forced off the local loop, potentially limiting competition. Deutsche Telekom will still have to provide bitstream access to competitors, but this will come at an additional cost. In this case, the recent reduction in monthly wholesale access charges for the local (sub-)loop by the German regulator may not translate into reduced prices for end-users.

Although it is already part of all newly signed contracts the data limit will only be enforced by 2016. This gives Deutsche Telekom lots of time to observe the market reaction: it may be in their intention to have other competitors follow this example.

This case shows a clever example of a successful incumbent strategy exploiting legacy infrastructure assets and keeping competition at bay. While other countries move ahead with bringing fiber access to buildings and homes (with Russia currently being the fastest growing market in Europe approaching 15% FTTH/FTTB penetration) Germans will need to keep enjoying their copper wires for a while (FTTH penetration is still far below 1%). There is a lot of work ahead for regulators and ministers to assure, that Germany won’t miss the connection in a digital society.

Written by Matt Halfmann, Partner, Coleago Consulting

The end of geography and roaming in telecoms

Today most people are familiar with services such as Skype. Effectively a location independent mobile service, with Skype it does not matter where people call from nor does it matter where the called party is located. Geography has become irrelevant. By the end of Q4 2012, it was anticipated that roughly 50 per cent of international call traffic is likely to have taken place via Skype and similar services rather than traditional carrier traffic.

More and more people are installing Skype on their handsets or using Facetime on their iPhone, and they are getting used to the fact that calling from their mobile phones doesn’t necessarily have to involve the mobile operator. What’s more they also get video telephony. Increasingly people use WiFi on their smartphones, both at home, at work and in public places. The introduction of WPA2 as well as SIM based authentication which allows automatic connection to a WiFi network without signing in makes it easy for users to route their traffic via WiFi and opt out of traditional telephony.  Operators such as Rebtel in Sweden and Republic Wireless in the USA focus on this opportunity – these mobile operators that use WiFi offload “push” their customers to make calls using Skype like services.

The trend away from making standard mobile voice calls is accelerating with the adoption of LTE. For example, in contrast to older versions of the iPhone, the new iPhone with Apple’s iOS 6 upgraded FaceTime from a WiFi only feature to a cellular feature. AT&T Wireless was the first to allow customers to use FaceTime over LTE if they signed up to their new shared data tariff plan.

During 2013 we will see the start of a fundamental reshaping of mobile telecoms service offerings driven by new services based on the IP Multimedia Subsystem (IMS), the evolution of mobile wholesale as well as regulatory trends. Some operators may go all the way and break the link between the mobile telephone numbers and geography. After all it seems somewhat archaic that in a world where distance does not matter, mobile operator tariffs are still based on location and distance. Location is not an issue with Skype or FaceTime and this is one of the reasons for the success of these OTT operators.

Some operators have already introduced services based on IMS, for example in Canada the Rogers One Number service allows the seamless switching between a smartphone and computer. It allows mobile operators to leverage the proliferation of free WiFi connectivity to in effect extend their network coverage world-wide.  This allows mobile operators to fight back against OTT services such as Skype, WhatsApp and FaceTime by in effect becoming themselves an “OTT over WiFi” player.

There are also traditional mobile services that allow users to avoid roaming charges and thus take at least one aspect of geography out of equation that already exists for voice (Truphone, WoldSIM and other) and data (roamline.com, in collaboration with KPN). The business model is built on exploiting the difference between lower wholesale prices paid by MVNOs versus high inter-operator roaming tariffs by offering customer SIMs with multiple numbers in different countries.

The opportunity to take geography out of mobile pricing is not limited to roaming. For example, Turk Telecom launched a service in Germany and Belgium aimed at the Turkish ethnic segment in these countries. Customers are charged exactly the same amount to call numbers in Belgium or Turkey. Turkcell could add the ability to recharge linked accounts (a Turkish person working in Belgium can recharge the prepaid SIM of relatives in Turkey) and make small mobile payments across borders. Smart, of the Philippines is already going down this route, targeting the Filipino diaspora segment around the world.

As a result of these trends in international call pricing as well as roaming, Geography may soon become irrelevant.

Written by Stefan Zehle, CEO, Coleago Consulting

The APT Bandwagon Reaches Cruising Speed

On the 7th of February Brazil made the decision to make available 698MHz-806MHz for mobile broadband services. The frequencies are those of the Asia Pacific Telecommunity (APT) band plan. ANATEL, Brazil’s regulator, now has the authority go ahead with clearing and the allocating this 700MHz spectrum to mobile operators for mobile broadband use. This should help Brazil to achieve the goals of the country’s national broadband plan (Plano Nacional de Banda Larga).

Of course the process will take time because the process of moving terrestrial TV from analogue to digital will be lengthy. In some parts of Brazil the spectrum could be cleared as early as 2016. Given the size of the country, a regional approach to opening the band to mobile broadband may be possible, although this potentially creates an interference problem.

Brazil’s decision means that the APT eco-system is gaining the scale which confirms it as a mainstream solution for LTE deployment. This means the 700MHz APT band plan may appear in chipsets and more devices earlier rather than later.

Many Asian countries have committed to the APT plan. However, the clearing of the band appears to be slow and countries such as India have only just launched 3G and therefore Region 2 may not be the main driver in developing the device eco-system. The confirmation of the adoption of the APT band plan in Latin America indicates that it will become well-established in Region 2. In addition some African countries have also looked at the APT band plan and the Russian 700MHz allocation is reasonably close to the APT band plan. Therefore we may see the APT band plan being adopted in also in Region 1.

Exhibit 1: 700MHz Allocation in Russia & APT Band Plan

700MHz Plans	Mobile Transmit	Centre Gap	Mobile Receive
700MHz in Russia	720 MHz to 750 MHz = 30 MHz	750 MHz to 761 MHz	761 MHz to 791 MHz = 30 MHz
APT Band Plan	703 MHz to 748 MHz = 45 MHz	748 MHz to 758 MHz	758 MHz to 803 MHz = 45 MHz

Written by Stefan Zehle, CEO, Coleago Consulting

Do we need telephone numbers?

Already most communications that take place over telecoms networks do not involve telephone numbers. Email and other internet based communications increasingly dominate business and consumer communications. Fixed network voice calls are moving to mobile and Skype like services. By some estimates the last fixed line phone will be retired in 2025. Even if the decline of fixed phones and with it fixed telephone numbers is not that fast, clearly the writing is on the wall.

Meantime in the mobile world, telephone numbers are growing fast. However, sending messages to mobile numbers and calling mobile numbers has started to go out of fashion. Messaging services such as WhatsApp are replacing SMS and increasingly people use Skype on their handsets. Of course Skype also sells telephone numbers, but most Skype users don’t bother to buy one.

The trend away from making standard mobile voice calls is accelerating with the adoption of LTE. For example, in contrast to older versions of the iPhone, the new iPhone with Apple’s iOS 6 upgraded FaceTime from a WiFi only feature to a cellular feature. AT&T Wireless was the first to allow customers to use FaceTime over LTE if they signed up to their new shared data tariff plan. The key aspect about the new tariff plan is that in terms of pricing it is data centric, with voice playing minor role. Most mobile operators still base their tariff plans on a minute bundle with data added to that, but this will change rapidly as LTE becomes commonplace.

If telephone numbers become obsolete this poses challenges not just for operators but also regulators. The world of telephony is organised around telephone numbers and there is an element of sovereignty in country codes and national numbering plans. If telephone numbers become obsolete, governments have surrendered this sovereignty to the internet. This is a frightening prospect to some governments.

Many aspects of telecoms regulation are number focussed. If people no longer need telephone numbers, national regulatory agencies effectively lose control over telecommunications within their borders as well as internationally. The spat at the December 2012 ITU meeting in Dubai over regulating the internet is only the opening skirmish in what is likely to turn into a major battle.

The way in which the obsolescence of telephone numbers will impact will differ between markets. Some emerging market countries still have not fully re-balanced fixed network tariffs, e.g. Tunisia, Algeria, Kuwait to name a few I am familiar with. Subsidising the cost of the line rental from long distance calls will no longer be possible. For example, in the case of Tunisia the fixed line rental retail price would have to increase by a factor of four to cover costs. Such price increases are politically unacceptable and hence it seems tempting to look for money elsewhere, e.g. from Google, Skype (Microsoft), and perhaps even from the most valuable company on the planet, Apple.

The transition will not be problem- free for developed markets. Already regulators fret over the issue of calls to emergency services. On its website Skype clearly states “Skype is not a replacement for your telephone and can’t be used for emergency calling”.

On the plus side, if telephone numbers become irrelevant, operators and regulators will not have to worry anymore about fixed and mobile number portability.

Written by Stefan Zehle, CEO, Coleago Consulting

What to expect in 2013: Coleago’s CEO gives his view on the global telecoms industry

During 2013 we will see the start of a fundamental reshaping of mobile telecoms services offerings driven by new services based on the IP Multimedia Subsystem (IMS), the evolution of mobile wholesale as well as regulatory trends.

Some operators have already introduced services based on IMS, for example in Canada the Rogers One Number service allows the seamless switching between a smartphone and computer. Services of this kind are particularly of interest to operators who are not part of a larger group. It allows mobile operators to leverage the proliferation of free WiFi connectivity to in effect extend their network coverage world-wide. This allows mobile operators to fight back against OTT services such as Skype, WhatsApp and FaceTime by in effect becoming themselves an “OTT over WiFi” player.

Let’s look at a practical example: An operator such as Bouygues in France, Telstra in Australia, or 2degrees in New Zealand introduces a service where its customers are in effect connected to the home network wherever in the world they log on to the internet, whether using a smartphone or laptop with an appropriate client. The customer lands in Singapore’s Changi airport, logs onto the free WiFi and can make and receive calls as if he were on his home network. Initially this might be positioned as a premium service, for say an additional US$ 5 per month. The operator may lose margin on international roaming, but as a smaller operator the roaming margins are not that favourable anyway and more could be gained by attracting new customers. Furthermore, without such offerings the same customer may not make roaming calls anyway, and instead use Skype, Face Time or WhatsApp when out of the country, i.e. completely bypass the operator’s service. There is therefore potentially a lot gain for some mobile operators.

Services which allow users to avoid roaming charges already exist for voice (Truphone, WoldSIM and other) and data (roamline.com, in collaboration with KPN). The business model is built on exploiting the difference between lower wholesale prices paid, for example, by MVNOs and high inter-operator roaming tariffs (IOT), the input cost into roaming retail prices. Some operators, who do not have a lot of roaming margin to lose, may attack and offer their own multi-IMSI services, for, say, an additional $10 per country. In the EU downward pressure on intra-EU roaming comes from regulation and using innovative IMS based services operators may be able to maintain or even increase margins. The conventions which govern how roaming is handled already started to fall apart. There are now special inter-operator deals and “roamer high-jacking”. For example, when a visitor arrives in Jakarta, it is likely that he will be greeted by the Indonesian mobile network with an SMS assigning him a local number.

The opportunity to innovate is not limited to roaming. For example, Turk Telecom already launched a service in Germany and is about to launch a service aiming at the Turkish ethnic segment in Belgium. The service, in conjunction with KPN’s Base, replaces Base’s Ay Yildiz brand. Customers will be charged exactly the same to call numbers in Belgium or Turkey. Turkcell could add the ability to recharge linked accounts (Turkish person working in Belgium can recharge the prepaid SIM of relatives in Turkey) and make small mobile payments across borders. It is easy to see that mobile operators have a lot to gain. Smart, of the Philippines is already going down this route, targeting the Filipino diaspora segment around the world.
Some operators may go all the way and break the link between the mobile telephone number and geography. After all it seems somewhat archaic that in a world where distance does not matter, mobile operator tariffs are still based on location and distance. Location is not an issue with Skype or FaceTime and this is one of the reasons for the success of OTT operators.

Sooner or later someone in the EU will wake up to the fact that charging high prices for cross border calls – whereas within a bundle the marginal cost of in-country calls is in effect nil – constitutes a barrier to EU integration. This is a similar line of reasoning as we have seen with roaming pricing. There is also the precedence of regulation intra-EU retail banking transactions, preventing banks to charge more for intra-EU transaction than for domestic transactions. Again, there is an opportunity for operators who make little margin from international calls. Including international calls in the bundle would make a mobile operators’ service more attractive, possibly even halting the growth of Skype over mobile and taking back business from international mobile call specialists such as Lebara.

We are likely to see offerings from mobile operators where the national number can in effect be used across the whole EU as if the customer was in the home country. Incoming calls will be free and outbound calls will come out of the bundle in the normal way. Some operators are already moving towards this charging model, for example Vodafone’s EuroTraveller which for an extra £3 a day allows customers to use UK bundled minutes, texts and internet in Vodafone’s Europe zone. £3 a day equates to £90 a month, a huge premium that will soon be eroded since there is no link between price and input costs.

In this context the value of a wider international footprint becomes apparent. Some operators may regret that they sold off operations. Dual country “roam-like-home” offerings could be particularly attractive to address certain segments in regions that are well integrated across borders, such as Benelux, Austria-Bavaria, around Geneva and the surrounding region in France, or even Malaysia and Singapore.

The changes are hastened by the rapid decline in mobile termination rates in the EU and other countries as well as regulatory pressure. Data traffic now exceeds voice traffic and soon voice traffic will account for a minor proportion of overall traffic. MTRs based on LRIC will become very small indeed. Eventually location and distance independent mobile tariffs will become a global trend, but it will take a long time in countries, such as Tunisia or Bangladesh, who milk international inbound call termination revenue and visitor roaming revenue as a source of foreign currency earnings.

Written by Stefan Zehle, CEO, Coleago Consulting