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

How the Telefonica Deutschland / E-Plus merger could play out

This week it was reported that the European Commission and the German telecom regulator (Bundesnetzagentur) are applying pressure to Telefonica regarding their planned takeover of KPN’s subsidiary E-Plus in Germany.

We think on balance the deal will get approved but both parties will need to make significant concessions to get it done. This will be especially the case with regard to spectrum holdings and as we saw in Austria commitments to support virtual operators and branded resellers (i.e. wholesale access). There is always a chance that the concessions are so onerous that they may effectively destroy the deal.

The combined entity will have approximately a 39% mobile customer and 32% mobile service revenue market share in Germany, so the European competition authorities (and the German telecom regulator) will no doubt review it very carefully. Revenue market share figures would of course look much lower if the fixed and mobile markets were combined and no doubt KPN/E-Plus and Telefonica Deutschland will be arguing for this. They have a point, given the recent €7.7bn deal by Vodafone to acquire Kabel Deutschland and the fact that Deutsche Telekom sells fixed and mobile services effectively under one brand.

Regarding spectrum, the combined entity will on the face of it have a whopping 64% of the 1800MHz and 54% of the paired 2100 MHz bands, so it is likely that regulators will require a sale or handback of some of the holdings in these core bands.  In the less scarce 2600MHz band, it holds 42% of the spectrum. A similar situation was seen in the UK with regard to 1800MHz spectrum when EE was created from the merger of Orange and T-Mobile. It is possible that the other German operators will lobby to have “excess” spectrum handed back rather than sold so that the merged entity does not benefit. Some of the excess spectrum is due to for renewal in 2016 and the merger will reduce competition for these frequencies.

By contrast, in the very scarce and more valuable sub 1 GHz bands, it holds 33% of the 800MHz and 29% of the 900MHz spectrum, so there should be less of an issue here.

Clearly the deal is going to require significant concessions.  It makes sense for the competition authorities to scrutinise these deals to ensure that monopolies are not arising and customers have enough market choice.  Yet at the same time, telecom operators need to generate acceptable returns in a fiercely competitive and mature market. A difficult balancing act for the competition authorities.

By Scott McKenzie, Director, Coleago Consulting and former supervisory board member of E-Plus

Wi-Fi offload won’t reduce the need for more mobile spectrum

During the Wi-Fi Offload Summit in Frankfurt on Jan. 23, a number of interesting developments in the Wi-Fi space were presented. A key question for mobile operators is whether Wi-Fi offload reduces the growth in mobile broadband (HSPA and LTE) traffic and thus the need for more mobile spectrum.

Research presented by Deutsche Telecom from tests in Hamburg and Rotterdam showed that when Wi-Fi is advertised and available free of charge in a particular area, this immediately generates substantial Wi-Fi traffic but does not reduce the volume of mobile data traffic. Towerstream Inc. presented conflicting evidence from its outdoor Wi-Fi offload network in New York.

From other findings presented, it is clear that both Wi-Fi and LTE traffic are increasing dramatically. Perhaps what is at work here is the Jevons paradox, which proposes that as technology progresses, the increase in efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource. The increasing availability of free Wi-Fi coupled with a rapid uptake of smartphones and cheap tablets would underpin this theory as one feeds off the other.

The growth in Wi-Fi is also driven by the desire of shops and malls to engage with shoppers on their in-store Wi-Fi networks. There is marketing value for retailers to have shoppers on their Wi-Fi network as soon as the shopper walks into the store. EE in the U.K. is turning this into a small business line, equipping supermarkets such as ASDA with a Wi-Fi infrastructure. Rather than identifying shoppers at the checkout when they swipe their loyalty card, ASDA hopes to be able to identify and engage with shoppers from the minute they are within the store’s Wi-Fi coverage. For example, coupons could be sent to a handset at the beginning of the shopping trip and can be used right away rather than languishing at the bottom of a shopping bag. This is just one of the many marketing benefits of free in-store Wi-Fi.

The simultaneous growth in Wi-Fi and LTE traffic may also be explained by the fact that Wi-Fi has other uses compared to cellular. The proliferation of TV Anywhere apps turns tablets and laptops into TV outlets, and in Canada, Bell has launched the first wireless TV proposition. TV over Wi-Fi creates a surge of Wi-Fi traffic in residential areas. Other devices in offices, public indoor spaces and outdoors rely increasingly on Wi-Fi connectivity because it is cheaper and more flexible than cable connections. This all takes Wi-Fi capacity in cities and raises the Wi-Fi noise floor.

In regard to the rapid adoption of tablets, all are Wi-Fi-enabled, but few are 3G (HSPA) or LTE-enabled. As people take these tablets out of their homes they will look for Wi-Fi access, thus increasing Wi-Fi hotspot usage. However, smartphones have a personal hotspot feature and where tablets are not in Wi-Fi coverage, we are seeing “cellular on-loading” from Wi-Fi devices.

Having paid for a shiny new LTE device, some customers would prefer to pay another €10-20 a month rather than having to faff about with logging onto Wi-Fi. Asking smartphone users to choose between LTE and Wi-Fi is the antithesis of a ubiquitous mobile broadband experience. However, Wi-Fi 2.0 with SIM-based authentication increases the ease of Wi-Fi access and may even be transparent to the user.

Another factor which determines the amount of LTE vs. Wi-Fi traffic are the policies for applications set in smartphones. For example, which bearer is allowed or preferred for which application. Some apps do not work via LTE; for example. FaceTime on the iPhone. In the U.S., the first version of the iPhone 5 with iOS 6 did allow FaceTime over LTE. This came as a bit of a shock to cellular operators as AT&T blocked FaceTime over cellular on most plans, but subsequently changed the policy. What cellular operators really want is to be able to set policies dynamically based on the app, the location, time of day and perhaps even the type of customer.

Nevertheless, most mobile operators have some Wi-Fi offload strategy. The focus is not so much on relieving congestion in busy areas but to deliver an “always best connected” value proposition. In short, LTE and Wi-Fi complement each other. The growth in Wi-Fi does not reduce the need for more cellular spectrum to serve the growth in mobile broadband traffic.

Written by Stefan Zehle, CEO Coleago Consulting

The Data Tsunami is coming to East Africa

Coleago Consulting discusses regional investment, spectrum and infrastructure strategies at the TMT Finance & Investment East Africa 2013 Conference

This is a really critical time for the East Africa region. Significant decisions about the framework for investment, particularly regulation and spectrum allocation for 3G and 4G, will have a fantastic impact on regional growth.

There are a number of important spectrum auctions coming up across the region and operators are looking at how best to use spectrum, infrastructure sharing, new technologies and business models, to meet the massive demand for data services. The industry is now entering a transformational stage with unparalleled fixed-line and mobile consolidation.

Despite significant growth and achievements achieved over the past decade, major new investment, innovation and infrastructure roll out is needed for the next phase of development.

Highlighting the changing telecoms landscape in East Africa, next week (November 26^th) sees the first TMT Finance & Investment East Africa 2013 Conference arrive in Nairobi.

In my first conference presentation of my new role here at Coleago, I will be making a keynote on “The Data Tsunami: Spectrum Allocation and Infrastructure Sharing” at the event, discussing the actions that regulators and operators are taking to cope with the global “data tsunami” that started building with 3G and is now accelerating with 4G. If you’re attending the event, or considering it, and would be interested in meeting, feel free to contact me – chris.buist@coleago.com

Written by Chris Buist, Director, Coleago Consulting

Bidders in spectrum auction attach a high value to 1800MHz spectrum

The multi-band combinatorial spectrum auction (CCA) in Austria ended on the 21^st of October, with bidders paying €2,014 million for 2x30MHz of 800MHz, 2x35MHz of 900MHz and 2x75MHz of 1800MHz spectrum. The 800MHz spectrum was new spectrum whereas the two other bands were renewals. The only bidders were the three incumbent operators Austria Telekom, T-Mobile, Hutchison.

The overall price paid for sub-1GHz spectrum and the 1800MHz spectrum amounted to €0.85/MHz/pop. This is only slightly less than the implied price for the sub-1GHz spectrum of €0.96/MHz/pop.

The price for sub-1 GHz spectrum is roughly in line with prices paid for 800MHz spectrum in recent European auctions.  The price paid for 800MHz spectrum in Germany was €0.73/MHz/pop (May 2010) and the average in Europe during 2010 to 2013 was €0.52/MHz/pop. So the price paid in Austria for 800MHz spectrum is relatively high. Benchmark prices paid to renew 900MHz spectrum are in the €0.19-0.53 range whereas the implied price paid in Austria amounts to €0.96/MHz/pop.

Exhibit 1: Austrian Spectrum Auction Results

 

However, since the overall price per MHz per pop paid is only slightly lower than the implied price for sub-1GHz spectrum, this means that operators valued the 1800Mhz spectrum very highly at €0.76/MHz pop.  This is significantly above prices paid for 1800MHz spectrum in recent auctions, and certainly massively more than prices paid for 2.6GHz spectrum. Benchmark prices paid to renew 1800MHz spectrum are in the €0.10 – 0.21 range.  In this context the comments by Telekom Austria’s CEO Hannes Ametsreiter, referring to a “bitter pill to swallow,” are quite appropriate.

The auction outcome highlights that in the context of the rapid growth of data traffic, spectrum is becoming an ever more valuable resource. The re-farming of 1800MHz from GSM to LTE requires more spectrum in the short term because spectrum resources cannot be used efficiently. In that sense governments can hold a gun to operators’ heads and demand almost any price.

1800MHz spectrum is the spectrum of choice for LTE in Europe. Most operators have built a grid based on 1800MHz and hence the 1800MHz band provides both an LTE capacity and an LTE coverage layer. In contrast 2.6GHz is “only” a capacity band. I placed quotation marks around the word “only” because LTE capacity is of course very important in urban areas and here cell sizes are quite small. Nevertheless, the in-building propagation characteristics of 1800MHz spectrum are significantly better than for 2.6GHz spectrum and in-building capacity matters for mobile broadband.

The auction outcome, with A1 Telekom (Telekom Austria) acquiring 2/3^rds of the 800MHz band means that the company now holds 53.8% of sub-1 GHz spectrum compared to a subscriber market share of around 39%. As the operator with the weakest cash flow it is likely that Hutchison faced budget constraints. The result is that the market leader managed has managed to acquire a disproportionate share of spectrum.

The design of the Austrian auction and the absence of effective caps on sub 1GHz spectrum holdings suggest that the Austrian government is not particularly concerned about the effects of spectrum concentration on competition. On the other hand, the spectrum divesture conditions imposed on Hutchison (European Commission, DG Competition, CASE M.6497) to clear its acquisition of One Austria, suggests a very different view of spectrum concentration is applied when it comes to approving in-market consolidation.  The only saving grace for Hutchison is that there was no new entrant and so the requirement to divest 2x10MHz the 2.6GHz frequency band lapses; however the MVNO access requirement remains.

While Hutchison managed to increase its sub-1 GHz spectrum holding from 1.6MHz to 2x5MHz, the cost per eNodeB of deploying LTE is 2x5MHz is roughly the same as for Telekom Austria deploying LTE in 2x15MHz in the same band. Furthermore, there are already many smartphones with 800MHz LTE, where Telekom Austria acquired 2x20MHz, but as yet, none with 900MHz LTE.

In the light of this the comments by Trionow, CEO of H3G, describing the auction as a “disaster for the industry” are understandable. Certainly it is a disaster for Hutchison and for a competitive mobile broadband market in Austria.

 

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

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

The new iPad illustrates the importance of mobile broadband spectrum and the device eco-system

The New iPad was launched early March 2012 in many markets world-wide. It appears to be a highly desirable device.  Among its many features Apple touts 4G connectivity. However, a closer look reveals that only the American region 4G bands, namely 700MHz and 2100MHz have been included in the radio chip set.  Of course the device also includes 3G connectivity and here it is compatible with European 3G/HSPA in the 2100MHz band and also in the 900MHz band.

It is likely that  Apple will launch a European iPad version with LTE at 800MHz and 2.6GHz, but in the meantime there is a problem. In Europe, not many operators have refarmed the 900MHz spectrum to 3G HSPA and some operators do not hold any 900MHz spectrum.  This means in Europe mobile broadband access for the iPad is restricted to more densely populated areas where 3G is available in the 2.1GHz band.

This gives T-Mobile and Vodafone in Germany a marketing advantage. The most ardent iPad fans are probably also high voice spenders and can be locked in with a 24 months contract. Even if a European device becomes available in 6 or 12 months, in the meantime O2 and E-Plus are disadvantaged.  For O2 this is all the more annoying because they spend €1.15 billion to acquire 800MHz spectrum in May 2010.  Of course E-Plus who does not have any 800MHz spectrum will remain disadvantaged for the foreseeable future.This matters, because the new iPad is a desirable device and customers making device choices will also have to make mobile operator choices.  Take Germany as an example.  Vodafone, T-Mobile and O2 each purchased 2x10MHz of the digital dividend 800MHz spectrum in the May 2012 auction and deployed LTE and, under the terms of the licence, rolled out the network first in rural areas.  Vodafone and T-Mobile hold 2×12.5MHz of 900MHz spectrum whereas E-Plus and O2 only hold 2x5MHz.  This means Vodafone and T-Mobile are in a position to refarm 2×5 MHz of the 900MHz spectrum to WCDMA whereas the two other operators will find it near impossible.

The lesson here is that spectrum matters, as device manufacturers have to make chipset choice.  The multiplication of bands and technologies introduces technology barriers to competition and switching. This is a very different situation compared to the relatively harmonised GSM world of the past.

From an operator’s perspective, spectrum diversity provides the best device eco-system insurance. However, in Europe where only 2x30MHz of 800MHz spectrum is available, markets with more than three network operators are facing a problem if regulators are keen on packaging the spectrum in a minimum block size of 2×10 MHz.  There are of course benefits of deploying LTE in a channel wider than 10MHz, but the benefits are overstated. Spectral efficiency in terms of bits per MHz only increases marginally when moving for 5 to 10 or even 20 MHz wide channels.  While headline speeds are higher, the user experience is governed by other factors such as the number of concurrent users in a cell, distance to the cell edge, or the position within a building. In contrast the negative impact on competition resulting from different spectrum allocations, particularly in the lower band is very real.

One disturbing aspect about the European iPad launch is that even in Europe, Apple highlights the 4G capability, yet it is not compatible with the European 4G bands. Could Apple not have waited a couple more months and introduced also a European version with LTE 800, LTE 2600 and possible also LTE1800? Of course there is a little asterisk and a footnote “4G coverage is not available in all areas and varies by carrier”. Not all areas? That’s putting it mildly. Not anywhere in Europe would be a more appropriate statement.  Some disappointed buyers will take a dim view of Apple’s marketing tactics.

Written by Stefan Zehle, CEO, Coleago Consulting