The single telecom market which had to be
In the last few years many people, including me, believed that the phasing-out of roaming surcharges would have shaken the European telecom market, transforming the current puzzle of distinct domestic markets into a unified, single and big European telecom market. This was apparently the scope of the legislative initiative encompassing the roaming reform proposed by Commissioner Kroes in 2013, the Single Telecom Act also known as the Connected Continent (which ended up with Regulation 2120/2015). Indeed, we expected that once roaming surcharges would disappear, users would be able to subscribe mobile services from any operator in the EU, thanks to the fact that any domestic mobile tariff would be valid elsewhere in Europe. To make an example, a French citizen would purchase a Finnish mobile SIM from a Finnish operator if he/she believes that retail tariffs in Finland are more convenient than in France. In such circumstances, competition would fiercely emerge at cross-border level, with European citizens looking at better mobile tariffs available abroad, while mobile operators would be targeting clients everywhere in the UE, not only in their domestic market. Thus, the mobile European market would have rapidly becoming a unique competitive space leading to rapid consolidation amongst telecom operators, with the main groups (Telefonica, Orange, Deutsche Telecom and Vodafone) shopping abroad in order to be able to achieve continental scale.
The European institutions would have welcomed such development. In particular, since 2015 the offices of DG Competition have resisted plans for domestic consolidation by telecom operator, while letting open a window for cross-border mergers. The head of Competition directorate, Margaret Vestager, rejected mobile mergers in UK and Denmark, while imposing remedies in Italy, with this making clear that the time for domestic consolidation had ended. According to Vestager, mobile operators could continue to merge only at cross-border level while the phasing-out of roaming surcharges would provide the right incentive for that. The fixed market would have followed, since the biggest mobile operators in Europe are integrated with fixed networks.
What’s gonna happen instead
Despite the above, the expected consolidation in the mobile market is unlikely to happen. This is due to the final mechanism, introduced with regulation 2120/2015, setting the end of roaming surcharges. The retail and wholesale regime should be examine separately.
The Roaming-Like-At-Home regime introduced by Regulation 2120/2015 does not mean the European citizens may actually use a SIM card everywhere in the EU without paying roaming surcharges. In fact, the regulation prohibits permanent roaming, that is to say roaming services to be used in competition with domestic ones. In other words, European citizens may enjoy a free-roaming regime only when temporarily traveling abroad, not in order to get more favorable retail tariffs from foreign operators. The latter behavior is considered abusive or even fraudulent by the regulation.
While imposing the end of roaming surcharges by June 15, 2017, regulation 2120/2015 sets wholesale roaming access tariffs which are completely misaligned with domestic retail tariffs. Fact is, beginning from June 2017 the operator’s cost to provide roaming abroad will be 7,7 Euro per Gigabyte, with a decreasing glide path ending up with Euro 2,5 per Gigabyte in 2022. Such wholesale tariffs are fully inconsistent with domestic practice, since today mobile operators normally sell one Gigabyte for 1 or 2 Euro on average. It follows that many mobile operators, mainly MVNOs and small mobiles, will face losses when providing roaming services at domestic tariffs. The situation may be different for big mobile operators which normally exchange roaming traffic on the basis of bilateral agreements, based on the fact that inbound and outbound traffic are quite balanced. For such operators, wholesale rates have only a nominal value, no losses are incurred.
Because of the above, the phasing-out of roaming surcharges will put small and competitive operators at risk, while big mobile operators will be reinforced. No pan-european competition may emerge from this scenario, as big mobile operators will continue to defend domestic markets (where they can extract oligopolistic profits), while more competitive operators will be unable to be commercially aggressive. Under such circumstances, there will be no incentive for big mobile operators to merger at continental basis. The telecom market will remain fragmented as it is.
Why it ended up like this
Basically, while the traditional telecom industry had to accept the end of roaming surcharges because of political pressure, it succeeded in convincing the European institutions that domestic markets must be preserved because they are still important to make profit and sustain investments. The misalignment between wholesale tariffs and domestic practice has this scope: preventing foreign operators to attack domestic markets by way of convenient foreign/roaming tariffs. In addition, consumers cannot use foreign SIM to escape less convenient domestic tariffs.
As a result of the above, the scope of a single telecom market will be completely missed. On one side, there is no incentive for operators to provide cross-border services and consequently to merge. On the other side, bigger mobile operators are getting reinforced and will have the possibility to increase domestic tariffs, thus strengthening the isolation amongst domestic mobile markets.
Latest news reported that Google is negotiation an agreement with Hutchison Whampoa permitting to the US company to launch a mobile service worldwide charging the same for calls, texts and mobile data regardless of the customer’s location. This seems to be a disruptive entry of the OTT industry into the exhausting discussions about the abolition of roaming surcharges. More recently, Google announced a wider mobile strategy named Project Fi, aiming at providing mobile at a connectivity in more than 100 countries int he world. Commissioner Oettinger, some one who cannot be seen a Google’s friend, welcomed the initiative claiming that the move of Google may be seen as an incentive to close rapidly the discussion about the end of roaming.
One could wonder what could be the real aim of Google in this area. By getting wholesale access from Hutchison (or from any other mobile operator), Google may become an MVNO (mobile virtual operator) and start to operate like Virgin Mobile in UK, Postemobile in Italy, Numericable in France, Telenet in Belgium ecc. However, this scenario seems not realistic per se, because of a few simple reasons:
– the MVNO business is regulated exactly as a telecom business, and I wonder whether Google may be really willing to become part of this complex regulatory environment. Better to remain in the OTT world instead;
– profitability and margins in the mobile sector are decreasing in general. A MVNO must be very efficient to get a positive result because – in the absence of mobile access regulation – the cost of the wholesale mobile agreement is unilaterally decided by the mobile telco (Hutchison in the Google’s case) providing access;
– the roaming business is going to decline in any case, in the EU and abroad, because of a regulatory and economic trend worldwide, although at different speeds (you can still make some good money in some part of the world, but how long?). Therefore, today in 2015 it is too late to enter this market. Roaming tariffs still exists just to separate national markets and avoid cross-border competition, while the absolute margins are becoming negligible for the overall business of a mobile operator. MVNO can make still an interesting business if they are efficient, however such margins are likely much lower than margins of online advertising.
Thus, Google’s objective in this area may be somewhere else. More likely, the move of Mountain View can be seen as the irresistible rise of OTT services over connectivity, with the latter becoming a simple commodity with a value destined to decrease over time.
In fact, operating as an MVNO (and thus becoming a regulated player) could make sense only if the envisaged business is more sophisticated than providing mobile connectivity. Google could think to bundle its platform and services with connectivity in various forms, in order to reflect the market trend whereby search and video are migrating from fixed to mobile. This strategy could be reinforced by Zero-rating tariffs: in other words, Google mobile users would have a preferential price to access service supplied or simply hosted by Google. Net neutrality supporters wouldn’t like, however.
This overall business strategy may however rise antitrust concerns due to the dominance position of Google in some markets.
A way for Google to avoid telecom regulation, and maybe to minimize antitrust concerns, would be to operate as mere airtime reseller, i.e. offering to users a package of mobile data connectivity everywhere and getting a commission fee from the mobile operator. Since the connectivity service would still be formally provided by the mobile operator selling the airtime, Google would not become an MVNO, and it would escape telecom regulation. That kind of business may be combined with the commercialization of Free-sim mobile devices, as Apple is also considering to do it.