Research Notes

EU mobile roaming policy is a bomb under the MVNO industry and DG Comp’s merger conditions

Europeans have been dissatisfied with the EU government for years. Political parties skeptical of Brussels have had a resurgence. To combat its image problem with the voters, pro-European politicians have pursued the policy of free mobile roaming as a means to make the EU popular again.  While the impact to consumer prices in the short run is minimal (there are already products on the market that offer a better value), the long term consequences for the mobile industry are disastrous.

Strand Consult’s satirized the EU’s aggressive effort to impose price controls in its April Fool message announcing that the EU would harmonize caffe latte prices across the 28 member states.  While most readers recognized the joke, there are a number of bureaucrats in Brussels who support such central planning, especially with mobile subscriptions. Without fail, the European Commission releases press announcements in time for spring and summer vacation to say that the “roam like home” project is on track.

It’s unfortunate the European Parliament and Commission did not conduct more industrial analysis before pursuing free mobile roaming, particularly because it contradicts the long-standing policy to support service-based competition in the mobile industry through mobile virtual network operators (MVNOs). Simply put, there is also a big difference between the types of consumers that network and virtual operators attract and the associated average revenue per user (ARPU). The many firms in the mobile industry have developed competences to address different market segments, for example the corporate market, ethnic groups, discount segments and so on.

There are huge cost differences across the 28 member nations from spectrum to building a running a mobile network to customer acquisition. Plus each EU nation has a different set of contract requirements. Customers must sign up for 24 months in some countries while in others, there is a maximum of 6 months.  To be expected, operators vary widely in each of these markets, but nonetheless the EU believes that topline price can be harmonized without regard to the underlying costs.

Who will pay the bill for “roam like home”?
The predictable effect of roaming regulation is that Europeans will get lower prices when they roam at the expense of higher prices when they are home. In other words, the EU is forcing a tradeoff of cheaper prices for 12 days a year when one is on vacation abroad but then experiencing a price increase for 353 days a year in the country where one lives and works. The mastermind of this idea is EU parliamentarian Jens Rohde.

Already in Ireland, Denmark, and Norway, operators are raising prices for some offers while eliminating roaming for other offers all together.  More price increases are on the way in anticipation of the regulation in what can be called the “Jens Rohde effect.”

The new roaming policy will cause many of Europe’s mobile operators to lose money on some customers when they roam. In the short run, the loss will attempted be covered by revenue from national traffic. In the longer term, many of Europe’s mobile operators will need to raise prices to cover the shortfall in roaming losses.  Operators have already begun to raise prices with more to follow before summer 2017.

What “roam like home” means for Europe’s MVNOs
Across the EU, there are far more MVNOs than network mobile operators, by a factor five in some countries. Some MVNOs are more successful than others, but among the successful firms, they have figured out how to buy traffic at a low price and sell it at a relatively higher price. Some successful MVNOs have a profit margin of about 25%. But using the income MVNOs earn on national traffic to subsidize international traffic will cripple many MVNOs.  To put it into perspective, for many MNVOs the revenue earned from a single customer in 17 months is equal to the cost that the same customer expends in 17 days of roaming in a single year. Moreover MVNOs typically operate in one makret and cannot cross subsidize their loses form other business lines, which network operators might be able to do. 

It is not an exaggeration to say that the EU’s “roam like home” model is a ticking bomb under the MVNO industry. While the roaming policy will be hard for the entire industry which has suffered declining ARPU for more than a decade, MNVOs are least equipped to adapt to the Commission’s heavy-handed rules on roaming.

“Roam like home” is a bomb under DG Comp’s merger conditions with regard to MVNOs
Over the years, the EU competition authorities, Directorate General for Competition, has approved a number of mergers in the mobile industry with requirements to enable MNVOs in the respective markers. In Austria, Germany, and Ireland, just to name a few countries, DG Comp believed that improving the conditions for selected MVNOs was crucial to ensure competition in the presence of a merger and imposed such remedies. 

While the EU may claim to have “analysed” the roam like home policy, there is does not appear to be any publicly available report about the costs and benefits of roam like home, or a regulatory impact assessment particularly with regard to the MVNO market. As prices are beginning to rise in Ireland, it will be interesting to see how roaming policy will affect markets in Austria and Germany. In a classic example of bureaucratic incompetence in which the left hand does not know what the right hand is doing, the two units of the European Commission, DG Comp and DG Connect are on a collision course with regard to MVNOs. While DG Comp imposes conditions for mergers to promote MVNOs, DG Connect promotes the roam like home policy which undermines their profitability. Strand Consult has already described the lack of Commission’s understanding of the MVNO market in the research note EU Competition Commissioner Margrethe Vestager is a Gifted woman who should spend some time to get acquainted with how the telecommunications market works

The EU is moving further and further away from evidence-based regulation toward the world of emotion. In an desperate attempt to shore up its image, it willingly preys upon one of the most vital and important industries, mobile communications. After a dozen years of bad telecom policy, the EU is one of the least attractive places to invest in the world and its shortfall for telecommunications is €600 billion and growing. Sadly the EU has long ago given up on market fundamentals and instead wants to regulate itself to growth. The dismal situation for the mobile industry in the EU contrasts to the US where markets are buoyant, and the mood for investment is positive.

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