Mobe operators warn of ruin if regulators set roaming charges

The last thing you want when you get back from a holiday abroad is a £200 hike on your cell phone bill, brought about by what are seemingly invisible roaming charges, and usually because the office phoned you, not the other way around. So the battle between the GSMA, representing cellular operators everywhere, and the European Commission, is being keenly watched.

The GSMA put out an opinion this week which is supposed to tell us that putting caps on roaming charges has already failed and the effect of doing it has reduced investment in Europe’s mobile infrastructure. In other words, black is now apparently white, and white is most clearly black.

It claims that the European Commission argument in favor of roaming price caps was that mobile operators make excessive profits and that lower roaming charges would lead to more overseas calls being placed.

It then proceeds to show that the industry’s return on capital employed (ROCE) is just 9 per cent. But since most European operators move their profits around artificially in order to avoid taxes on profits, and since ROCE is a direct function of profit before tax, this is an annoyingly useless as a piece of data. The best way to consider the success of a cellular operator is as a function of its free cash flow after Capex requirements. Vodafone for instance for many years showed no profits, but many billion dollars in free cash flow (last year it jumped from losing over £2bn to making £9bn).

The GSMA says that other industries such as software and pharmaceuticals throw off 20 per cent ROCE, and cite management consultancy AT Kearney for collecting these figures.

We can tell the GSMA why the lowering of the price caps hasn’t stimulated roaming demand. It’s because there is still no way to predict what the price of an overseas call is likely to be, so people still engage in activities like buying a local SIM card when abroad, to avoid what remain as massive, profiteering tariffs.

This campaign is now being fought on SMS texting, having been lost on the subject of voice roaming. The GSM Association claims voice caps have “done nothing for consumers”, saving average families just a few Euros, but at the same time it has “undermined the profitability and long-term prospects” of European cellcos.

Black, once again, masquerading as white. It cannot cause huge loss of profits, if it has only saved a few pennies. These contradictions are hurting the operator’s case and making the GSMA look amateurish.

European telecoms commissioner Viviane Reding has warned operators that they must convince her this month that they will cut text and data charges voluntarily, or she will take legal action. She claims data costs within the EU are up to 10 times higher than when users are at home (for UK users, texts cost about 21p abroad, compared to 5p at home, and data can be over £4 per megabyte). Danes are even more unlucky, with a nine-times difference when traveling. Reding wants caps set at about 8p per text, though many regulators want the figure to be less than a penny.

As for the claims that the mobile industry’s capital spending has slipped back, from 13 per cent of revenue in 2005 to 12 per cent in 2006 to 11 per cent in 2007, that is all about when operators build out 3G and its HSDPA extensions and has nothing to do with voice or data roaming charges.

"Europe’s mobile industry is in the midst of another major investment cycle to deploy new services, such as mobile broadband, video downloads, mobile television and mobile email, which enhance Europeans’ daily lives and the economic competitiveness of the continent," said Tom Phillips, chief government & regulatory affairs officer of the GSMA. "However, it is clear that the high level of investment required to provide these services across Europe won’t happen if regulators continue to distort the market by setting prices."

Of course the operator’s attitude to investment in Mobile broadband and Mobile TV is legendary - it waits until the very last minute, when some upstart renegade cellco disrupts the market by going ahead and investing, before spending so much as a penny to introduce such services.

Copyright © 2008, Faultline

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