Research Notes

EU’s new “Roam like home” model will hurt the mobile industry, restrict competition, reduce the range of mobile products, and increase prices in a number of countries.

EU is suffering the worst identity crisis since the union was created. Politicians and bureaucrats are desperate to demonstrate doing something good for the people. They thought cheap roaming was a sure thing to win satisfaction, but no. This research note describes why the cheap roaming will fail and how the EU’s plan will backfire and create resentment among European consumers.

Let me start by saying that we are not impressed by operators’ ability to communicate the seriousness of these challenges. Strand Consult believes that operators tell the truth about roaming, it will have a negative impact on their stock price.

At the same time there are some naïve people in Brussels who think that high roaming prices is a simple matter that price controls can resolve. If you do not take into account how a mobile operator works, the cost of traffic, the cost of wholesale access, and other cost difference between countries, then the economic consequences of roaming regulation are not so bad.

Strand Consult asked 13 questions to the EU on roaming which they have not answered.  Based on their lack of response, here are remaining about roaming which we believe will impact the market negatively.

  1. Increasing mobile subscription prices in a number of European countries – Countries with low prices, and operators with poor earnings will likely experience increasing prices.
  2. Fewer types of subscriptions – The number of mobile subscriptions with 10, 20, 50 or more GB of data will likely reduce in some countries
  3. Competition in the ISP market will decline – Mobile operators with mobile broadband products trying to compete with fixed broadband providers may withdraw from the ISP market.
  4. MVNOs and others that buy national traffic from mobile operators will experience rising wholesale prices. This will negatively affect competition.
  5. A new arbitrage market will emerge to exploit the regulation. OTT players which do not invest in infrastructure will have some unique business opportunities.
  6. Changed consumption patterns will have structural consequences in a Europe where Margrethe Vestager will not accept consolidation of national mobile operators.

Unfortunately, they policymakers who make these simple calculations do not see what will happen in relation to changing consumption habits, the development of national prices, the availability of services, the supply of mobile plans, pricing in the national wholesale market, the changed the distribution terms, the need to consolidate the industry, and how to “roam like home” will affect the many MVNOs in Europe. If we have to put it very simply, will “roam like home” to have a negative impact on the mobile market and its service offerings.

Analysis – Here are 12 areas that will be affected by “roam like home”
We know from our previous research that many factors come into play when making the kind of end-user price regulation that the EU contemplates. Our experience shows that the new proposals will affect the economy directly and indirectly. In the same way as a price reduction on the price of raw copper (WACC) may be welcome to those who want to lease infrastructure, it negates the policy goal to build next generation new infrastructure. If existing networks are cheap, there is no business case to build new ones. This is an unfortunate outcome for the FTTH industry. We expect “roam like home” to affect the mobile market negatively in 12 ways.

  1. Roaming will affect national prices – Countries such as Denmark, with low prices will be forced to raise prices to eliminate the gap between national prices and the difference with roaming fees outside Denmark. Given the low ARPU of the industry, there is no place to subsidize roaming traffic revenues from domestic traffic.
  2. Countries like Germany and Spain with high prices will have to reduce prices to counter the arbitrage that this model creates. We expect that the model will mean that classical MVNOs, smaller operators, and operators who have MVNOs outside their home market will look at the arbitrage opportunities by moving traffic from a wholesale model agreement to a roaming model.
  3. There will be arbitrage-traffic – the question is how much, who and where. We know that MVNOs such as Lyca Mobile, Lebara and IP telephony providers in the category as Viber, Skype etc, will look at the opportunities of buying a SIM card in one country and then adding a local number from another country. Then they will market the SIM card in the country where the best arbitrage the price difference. We have already talked with some MVNOs and smaller operators that can see a business model of buying SIM cards in one country and then using it with various local phone numbers in other countries. In fact, as there are currently MVNOs that offer this kind of SIM card.
  4. The number of subscription types will be reduced; there will be fewer products on the market; and they will be within a narrower range. Mobile Subscriptions with 10, 20, 50 or more GB of data will in future be marketed in some countries. Mobile operators with mobile broadband products trying to compete with fixed broadband providers may withdraw from the ISP market, as it can have huge economic consequences if their customers take the product abroad and consume large amounts of data.
  5. It will also affect the national wholesale market – In some countries, wholesale prices for MVNOs are so high that some MVNOs will switch from an MVNO model to a roaming model. For example there are some network operators with MVNOs clients and with corporate clients across a number of countries which they serve by using a combination of their own networks and MVNO agreements. These operators can save significant regulatory and technical costs related to MVNOs and the time and paperwork associated with being in dialogue with regulatory authorities. There are countries and markets where the business case for these kinds of players will continue.
  6. Lower revenues in the mobile industry will mean that operators have to make even more cost cutting exercises. When there is a loss of income, the shortfall must be covered. If it is not employees who will be cut, CAPEX- and OPEX will be reduced. It’s typical of naïve EU policymakers to think that there are no consequences to price controls. You can’t take billions out of an industry with declining revenue and think that everything will work as as before.
  7. In a number of countries (where you still can buy subsidize phones) it will result in an elimination of subsidies for phones. It will change the parameters on which companies compete on and hence on the competitive dynamics in a number of markets. Dealer profits from subscriptions will also be reduced and thus it will affect the competition created through many retail players in a market. For example, if the profit margin on gasoline falls, there will be fewer gas stations, all things being equal. It will lead to less competition and higher gasoline prices.
  8. The price to roam outside the EU will explode. In practice, operators will try to collect some of the money from roaming in Europe by raising the price people pay to use their phones when they leave the EU.
  9. Prices for wholesale customers will increase. The big question is who should pay “roam like home” bill for those who resell a mobile operator‘s traffic. These players must either pay the bill out of their income (something that they cannot afford to do with the thin margins they have), or assume roaming risk and thus the cost. In practice, “roam like home” will affect competition in the MVNO market, a contest which has had a major impact on competition in many countries.
  10. We know that today there are discounts on the EU roaming prices – conversely, we also know that large operators get huge discounts, while small operators get only small discounts. In practice, we believe that the rebates will be minimized, and we believe that smaller operators will be hit proportionately harder than the big operators.
  11. As the regulation is implemented there will be ripple effects across the 28 markets of the EU.  Prices are frequently lower than the underlying costs, so many operators will experience significant losses. In practice, the gradual harmonization of the operators will hurt the economy in reduced output and productivity. These operators must make an extraordinary effort to reduce their costs, and it will be done by reducing the OPEX and especially CAPEX.
  12. “Roam like home” will increase the need to consolidate national markets (there are no significant synergies by consolidating across countries), and it will become increasingly difficult in a Europe where Margrethe Vestager blocks national consolidation. Denmark is a very good example, and it is hard to see how the Danish mobile operators, which are in their 10th year of bad economy should be able to be much more effective. They only have two choices: cut costs and/or minimizing investments – this is what we see right now.

The historical facts show that when politicians make end-user price regulation, it goes really wrong. In Denmark it meant that Telia and Tele2 did not get success in the landline market. The players had a margin of 22% of TDC’s retail prices, which meant that they lost more than TDC whenever regulators forced TDC’s retail prices down. No alternatives in the fixed market in Denmark ever emerged. TDC still owns the fixed line market to this day.

It’s stunning that politicians continue to make the same mistakes and do not inform themselves with the facts or history of the mobile industry.  We all know that you cannot harmonize wages across Europe without it affecting the tax base, people’s purchasing power, the ability of employers to hire etc. Roaming is no different. There is no doubt that the EU is unpopular, but regulation will only make it worse.

If you want to know more about Strand Consults workshop concept contact us here.

Contact us to get a copy of the report

Request the report