Regulation of international roaming in the European Union—Lessons learned

Telecommunications Policy 36 (2012) 736–748

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Telecommunications Policy URL: www.elsevier.com/locate/telpol

Regulation of international roaming in the European Union—Lessons learned$ Jorge Infante a,n, Ivan Vallejo b a b

´n del Mercado de las Telecomunicaciones, Bolivia 56, Barcelona 08018, Spain Comisio International Telecommunications Union, Place des Nations CH-1211 Geneve, Switzerland

a r t i c l e in f o

abstract

Available online 1 September 2012

This paper analyzes the evolution of prices and competition in intra-EU international roaming markets. It addresses three main research questions: (i) to what extent have market forces by themselves brought competition to retail roaming markets? (ii) Has the evolution of market dynamics in wholesale roaming improved competition? (iii) Is wholesale regulation sufficient to lead to a reduction in retail roaming prices? Data show that there has been little price-based competition both at wholesale and retail levels, despite prices being well above costs and the significant margins allowed by regulation. Available data from the period preceding the entry into force of the first EU roaming regulation also point to the same conclusion. Lack of competitive pressure in retail roaming markets and inelastic demand give little incentives for retail roaming service providers to lower prices. Wholesale international roaming markets have complex competition dynamics. They are characterized by the reciprocity of wholesale roaming agreements and traffic internalization inside transnational groups. These circumstances limit price competition at the wholesale level. The traditional regulatory approach applied to electronic communication markets has been primarily focused on wholesale regulation. However, empirical evidence shows that even if wholesale charges are reduced, retail roaming markets continue to operate at very high retail margins (for example, more than 200% retail mark-up over wholesale charges for data roaming services and incoming calls). This proves that in international roaming markets wholesale charge reductions are not necessarily passed on to retail prices. It can thus be inferred that wholesale price regulation alone is in most cases not sufficient to ensure that benefits are passed through to end users. & 2012 Elsevier Ltd. All rights reserved.

Keywords: Roaming Regulation European Union Mobile BEREC Price regulation

1. Introduction Growing economic and political integration in the EU implies an increase in intra-European travel.1 As a result a growing number of intra-EU travellers have an interest in using their domestic mobile services in a convenient and transparent way when abroad. Mobile operators provide this seamless access by means of international roaming services

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The views expressed in the report are those of the authors and do not reflect the opinions of CMT, ITU or its membership. Corresponding author. Tel.: þ 34 93 6036284. E-mail addresses: [email protected] (J. Infante), [email protected] (I. Vallejo). 1 Despite the economic downturn, from 2005 to 2010 there was a 4% increase in trips to EU27 countries made by residents of the five most populated EU countries (France, Germany, Italy, Spain and the United Kingdom). The growth was particularly significant for business trips, which increased 24% during the period. Data retrieved in March 2012 from Eurostat’s online database. n

0308-5961/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.telpol.2012.06.014

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(IRSs). IRSs allow mobile subscribers to use their domestic mobile services (voice, SMS, data) when abroad keeping the same number and in the same convenient way as at home. The usefulness and convenience of international roaming come at some additional cost, both for users and operators. From the perspective of operators, home providers need to contract wholesale roaming services with at least one mobile network operator (MNO) in each visited country. Usually, they conclude agreements with additional operators in each country to ensure network coverage – especially for high-speed data services – in order to increase their bargaining power and benefit from traffic not properly steered.2 In addition, operators incur other specific costs, such as those related with real-time billing systems and international transmission capacity. From the perspective of users, they are charged specific IRS tariffs which are usually much more expensive than the equivalent domestic ones. Data from the Body of European Regulators for Electronic Communications (BEREC, 2010) and the European Commission (EC, 2011b) show that average prices for roaming services are at least twice as much as the corresponding domestic average prices.3 Moreover, the price of incoming roaming calls is partly borne by the receiving party, while in the EU the calling-party-pays principle applies for domestic calls. Pricing differences between IRS and domestic mobile services are indeed relevant and have an impact on the usage of IRSs (EC, 2011a). However, as of today there exist no simple, seamless and convenient alternatives to traditional roaming services provided by domestic service providers (BEREC, 2010; EC, 2011b; Marcus & Philbeck, 2010). This paper examines the data on prices of international roaming services within the European Union with a view to addressing several questions on competition dynamics. First, the evolution of retail prices is analyzed in order to determine whether market forces acting at the retail level allow by themselves for price reductions in retail roaming services. Second, current competition dynamics in wholesale roaming markets are examined with the aim to identify whether they have changed due to the evolution of the strategy of trans-national operators, improvements in steering techniques and the emergence of mobile virtual network operators (MVNOs). Last, the question on whether wholesale price reductions are passed on to consumers in the absence of direct retail regulation is addressed based on the analysis of empirical data. A good understanding of the link between wholesale and retail roaming markets is important for policy makers in order to decide on the most adequate regulatory measures, especially because policy targets for roaming are set on retail prices.4 The paper is organized as follows: the Sections 2 and 3 provide an overview of the relevance and magnitude of the international roaming market in the European Union, and summarize the evolution of the EU roaming regulation in the last five years. Section 4 shows the evolution of international roaming prices and costs in this period. Section 5 is focused on the analysis of the three research questions addressed by the paper, based on the data previously presented. Finally, Section 6 presents the main conclusions, highlighting those lessons learnt from the European experience that should be taken into consideration when discussing international roaming regulation in other regions. 2. Market for international roaming services International roaming services account for a small part of the total mobile market, representing around 1% or 2% of total mobile revenues in most regions of the world (Marcus & Philbeck, 2010). The case of the European Union is significantly different: by the end of 2009, just intra-EU international roaming services – that is, excluding international roaming from the rest of the world – accounted for some 4% of the total EU mobile revenues. This is explained by the fact that the EU is composed of small countries which have undergone an intense process of political and economic integration. Moreover, the population has high acquisitive power, and several EU countries are relevant tourist destinations. As found in Paltridge, Otsuka, and Dı´az-Pine´s (2009), the percentage of mobile subscribers roaming internationally once a year is twice as much in the EU as in North America, and ten times as much as in Latin America. Near half of EU mobile phone users have travelled at least once in the last 5 years, reaching 86% in some countries (EC, 2011a). As shown in Chart 1, in 2009 the total market size of intra-EU international roaming was 6.03 billion h, retail revenues being the most important part of the market (4.78 billion h). Most revenues were obtained from voice services (about 70%). International data roaming revenues represented some 15–17% of the total, yet they experienced the highest growth in volume of traffic (44% increase between 2008 and 2009). 3. Evolution of international roaming regulation in the EU International roaming has become increasingly regulated in the EU (Fig. 1). As early as 1999, the European Commission launched a sector inquiry on international roaming prices. The initial diagnosis was that there was a market failure in 2 Although roaming agreements are confidential, data gathered by BEREC confirm that operators conclude roaming agreements with several MNOs in each country (BEREC, 2010). 3 According to Q2 2009 data from BEREC (2010), average price for calls made while roaming was about four times as much as the domestic equivalent; average price for roaming SMS some five times more expensive than domestic SMS; and data roaming more than twenty times more expensive than mobile data services at home. European Commission (EC) (2011b) confirms relevant differences between domestic and roaming prices, although somewhat lower than those found by BEREC. 4 For instance, the European Digital Agenda states that ‘‘the difference between roaming and national tariffs should approach zero by 2015’’. See the Communication ‘‘A Digital Agenda For Europe’’ available at: Eur-Lex.Europa.Eu/Lexuriserv/Lexuriserv.Do?Uri=Com:2010:0245:Fin:En:Pdf.

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Chart 1. Market size of intra-EU international roaming services, 2009. Source: Own elaboration based on data from (EC, 2011b).

Period

August 2007 June 2010

July 2010 June 2012

WL

VOICE

Price cap

Price cap

RL

Price cap / reference offer

Not regulated

Price cap

RL

Price cap / decoupling

WL

Data

Price cap / MVNO access / reference offer

Price cap / decoupling

WL

SMS

July 2012 June 2022

Price cap

Price cap / reference offer

Cut-off limit EU

Price cap / decoupling / cut-off limit EU & RoW

Not regulated RL

WL: Wholesale RL: Retail

Fig. 1. Evolution of international roaming regulation in the EU. Source: Own elaboration.

roaming wholesale markets. The 2003 EC Recommendation on relevant markets included the ‘‘wholesale national market for international roaming on public mobile networks’’ as selected to be reviewed by national regulatory authorities (NRAs). However, competition problems in international roaming markets were difficult to address using the regulatory tools provided by the EU 2003 framework, and none of the NRAs found any individual or joint-dominance justifying the regulation of this wholesale market. Confronted with this situation, the EC adopted a roaming regulation to be applied across the EC (2007). Under this regulation a cap price for intra-EU international roaming was introduced for voice, both at the wholesale and retail levels. The retail cap forced operators to apply by default a given retail tariff to their customers – the so-called Eurotariff – but allowed them to offer alternative tariffs not linked to the cap to those customers voluntarily opting out of this Eurotariff. The assumption was that competition among EU mobile operators and the exploration of the elasticity of demand would allow for lower prices in these alternative tariffs. This initial regulation included also transparency measures based on the reception when entering a visited country of an SMS free of charge informing about roaming prices. The 2007 roaming regulation was reviewed in June 2009 (EC, 2009). The European Commission considered that there was a need to: (a) continue with the cap regulation for voice, lowering the caps in order to adapt them to the reduction of wholesale costs; (b) extend the cap regulation to SMS; and (c) introduce additional regulation for data services, deemed an emerging market segment. No retail price regulation was imposed for data services, and wholesale regulation was conceived as a ‘‘safeguard cap’’ to avoid excessive prices in those cases where roaming customers were in a non-preferred visited network. A new mechanism to prevent ‘‘bill shock’’ in data roaming services was also introduced in the 2009 Roaming Regulation. It was designed to avoid unexpected high bills by means of establishing a cut-off limit for data services (50h by default, adjustable by the consumer). When customers reach 80% of the cut-off limit, they are informed of it via SMS or

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other mechanisms. Customers may give explicit consent to go beyond the cut-off limit and continue using the service. Otherwise, the data service is disconnected once the cut-off limit is reached. The next regulatory round covers a longer period: from July 2012 to June 2022. The 2012 roaming regulation is based on the proposal from the EC (2011c) and has been discussed in the European Parliament, the Council and BEREC (2011a).5 The regulation for 2012–2020 adds to the existing measures a cap price for retail data services, completing the set of glide paths for all roaming services. It also extends the cut-off limit for data roaming services to EU subscribers travelling outside the EU. Wholesale caps are significantly reduced in 2014 and maintained by default until 2022. Operators must publish a reference offer for wholesale access and have to meet all reasonable requests for access. Retail caps are also reduced, but not in the same measure as wholesale caps. High margins over wholesale charges are given to retail operators with the aim to encourage competition. Indeed, the EC expects to promote competition with one of the key regulatory measures included in the regulation: the decoupling obligations for domestic providers. They will allow European consumers to establish a separate contract for international roaming services with an alternative operator and keep the same domestic phone number when roaming. The regulatory measures will be reviewed in 2016 in the light of the evolution of competition and prices. The main reason behind the extensive regulation of IRSs in the European Union has been a strong political conviction that they were a key enabler to build a true single EU market. An important factor for the successful implementation of such a political will has been the supranational nature of the EU, which allows for transnational regulation of electronic communications services in selected markets where national action by itself is not sufficient. 4. Evolution of international roaming prices in the EU The evolution of intra-EU roaming prices in recent years (2007–2011) has been highly conditioned by the price caps imposed by the EU Roaming Regulation. This has been especially the case of voice and SMS services, where both retail and wholesale caps have been enforced. The starting situation before regulation (mid-2007) was very similar to that in other regions of the world with no price regulation of roaming services. That is, high retail prices compared with domestic ones and with the underlying costs, and high wholesale rates setting a high floor for hypothetical retail price reductions (Paltridge et al., 2009). 4.1. Voice and SMS services As shown in Chart 2, retail prices for making intra-EU international roaming calls using the Eurotariff (that is, the default tariff) have evolved following the glide path defined in 2007 (EC, 2007) and later extended in 2009 (EC, 2009). Interestingly, alternative tariffs, which are not directly constrained by regulation – operators are free to offer whatever alternative tariffs they prefer – have evolved aligned to the regulatory cap. In fact, since Q2 2010 alternative tariffs have been on average higher than the Eurotariff. In general, retail prices have remained pegged to the cap: 11.4% below the cap for the Eurotariff, and 5.8% below the cap for alternative tariffs in Q2 2011. Price reductions have been mainly due to the retail caps introduced by regulation. Wholesale prices for intra-EU international roaming calls have been aligned with the wholesale cap, although they have maintained a relatively higher distance to the cap (17.0% below the cap in Q2 2011) than the corresponding average retail price for calls made. Data on wholesale prices include both balanced and unbalanced traffic, as well as traffic between alliances and independent small MNOs, but not intra-group traffic. Mixing all this traffic has the advantage of providing a simple and comprehensive idea of the evolution of prices for IRS. However, it does not reflect clearly the dynamics of competition in wholesale international roaming markets, as further discussed in Section 5.2. Prices for international roaming services provided by European operators to customers roaming outside the EU are out of the scope of the EU Roaming Regulation. This is also the case of wholesale services provided to extra-European operators. It is however interesting to compare prices for intra-EU roaming traffic with the data on prices for extra-EU roaming traffic (henceforth named rest of the world traffic or RoW). Retail international roaming prices for the rest of the world have fluctuated around three times the average price for intra-EU traffic for both calls made and received (Chart 3). The average wholesale price for outgoing extra-European roaming calls (close to 0.6 h/min) has been two to three times above the wholesale price for intra-EU traffic. It is assumed that EU operators pay the same price they charge to operators abroad for wholesale services, it implies they have a high retail margin for RoW roaming. This suggests a loose relationship between wholesale and retail prices. It is also interesting to note that prices at both levels have remained stable between 2007 and 2010, although costs per traffic unit have been probably reduced due to technological evolution, economies of scale, and the increase in the number of competing players. The situation for international roaming SMS services is somewhat similar to that described for voice (Chart 4). In this case, the average retail price for intra-EU international roaming SMS is at 10ch. The corresponding retail cap is set at 11ch, and the wholesale cap at 4ch. 5 At the moment of writing this paper, the 2012–2022 Roaming Regulation has already been approved by the European Parliament and the European Council, and is expected to enter into force in July 1st 2012.

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Chart 2. Wholesale and retail average revenue per minute for intra-EU roaming calls made, 2007–2011. (Throughout the document, average revenue per billed minute is used as a proxy for prices. This is in line with BEREC’s data collection and analyses on international roaming prices. Data refer to EU only for Q2 2009–Q1 2010, while for other quarters they include also EFTA countries.) Source: adapted from BEREC (2011b).

Chart 3. Average revenue per minute for extra-European voice roaming, 2007–2011. (Throughout the document, average revenue per billed minute is used as a proxy for prices. This is in line with BEREC’s data collection and analyses on international roaming prices. Data refer to EU only for Q2 2009–Q1 2010, while for other quarters they include also EFTA countries.) Source: BEREuropean Commission (EC) (2011b).

4.2. Data services Chart 5 shows the evolution of intra-EU data roaming services, where no retail cap has been set so far by regulation. Instead, a wholesale cap is in force since July 2009 and it has evolved following a glide path: from 1h/Mb in July 2009 to 0.50h/Mb in June 2012, by the end of the 2009 Roaming Regulation. In the period 2007–2010 there have been significant

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Chart 4. Wholesale and retail average revenue per SMS for intra-EU roaming SMS, 2007–2011. (Throughout the document, average revenue per billed minute is used as a proxy for prices. This is in line with BEREC’s data collection and analyses on international roaming prices. Data refer to EU only for Q2 2009–Q1 2010, while for other quarters they include also EFTA countries.) Source: Adapted BEREC (2011b).

Chart 5. Wholesale and retail average revenue per MB for intra-EU data roaming. (Retail average revenue per minute refers to calls made or received by EU subscribers roaming outside the EU. Wholesale average revenue per minute refers to revenues received by EU operators from operators outside the EU for the voice minutes of extra-EU subscribers roaming in the EU) 2007–2011 (Throughout the document, average revenue per billed minute is used as a proxy for prices. This is in line with BEREC’s data collection and analyses on international roaming prices. Data refer to EU only for Q2 2009–Q1 2010, while for other quarters they include also EFTA countries.) Source: Adapted from BEREC (2011b).

reductions for both wholesale and retail intra-EU data roaming prices. These dynamics are consistent with the fact that data roaming is an emergent market segment, as proven by the significant increase in the volume of traffic on a year-onyear basis (BEREC, 2011b). Operators are still exploring different business models (including new data plans, billing structures, additional services, etc.) to cater to the growing demand for ubiquitous Internet access through an increasing number and diversity of handheld devices.

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It is interesting to note that while both retail and wholesale intra-EU data roaming services have experienced reductions in prices, the relevant decrease at wholesale level has not been completely passed on to the retail level. This may be a strong argument to justify the imposition of intra-EU retail data roaming caps. All the more, taking into account that mobile data services are expect to grow in importance. Indeed, both BEREC and the EC have advocated for the extension of the retail cap regulation to data roaming services (BEREC, 2010; EC, 2011b), and this has been included in the current proposal of the 2012 roaming regulation (EC, 2011c). 4.3. Costs In parallel to the discussion of roaming caps, the EU regulatory bodies have had to deal with the question of estimating the underlying costs. This has been necessary to ensure that caps were reasonably above costs and there were no margin squeeze situations. The underlying costs of wholesale roaming services are mainly derived from network cost elements. These elements and the remaining wholesale cost sources (for example, share of common costs and marketing costs) generally correspond to the ones included in the regulatory accounting developed by NRAs to calculate MTRs. They are therefore well known. BEREC estimated the maximum wholesale cost for outgoing voice calls at 10ch/min, incoming voice calls at 8ch/min, SMS at 2.7ch/SMS and data at 15ch/MB (BEREC, 2010). These are conservative estimates which prove that current wholesale roaming prices are well above costs. A later study carried out by BEREC (2012) including forecasts for 2014 proposes even lower cost estimates, and confirms the previous finding that costs remain well below prices. Cost allocation at retail level is more difficult to ground on factual evidence, taking into account current data available. The determination of retail mark-ups over wholesale charges is more a debate of global pricing issues than part of a technical work on costs (BEREC, 2010). Despite these difficulties, the EC estimated that 30% would be a reasonable retail mark-up (over wholesale charges) for roaming retail services (EC, 2006). BEREC proposed a range of retail mark-ups spanning from 10% to 50% (BEREC, 2010). Even taking the highest retail mark-up proposed (that is, 50%), it is clear that current retail roaming prices are well above costs. It can be concluded that in the current context international roaming prices and underlying costs are loosely related. This is one of the main arguments given by the EC to prove the lack of competition in roaming markets and justify its intervention (EC, 2007, 2009, 2011c). 5. Lessons learned 5.1. Very limited competition at the retail level Until the EU regulation introduced wholesale caps, high wholesale prices were considered to be the main cause of high retail roaming prices as compared to domestic ones and underlying costs. This situation changed for intra-EU international roaming, as from 2007 the wholesale caps allowed for significant reductions in retail prices. The evolution of retail roaming prices in this new situation (see Section 5.3) has shown that one of the key competition problems in the provision of international roaming services lies at the retail level. Each home provider controls the E.164 numbers assigned to the customer for both domestic and roaming services, making it very difficult for alternative providers to supply perfect substitutes for international roaming services. Frequent travelers have at their disposal some non-perfect substitutes – for example, dual SIM phones or global MVNOs – as well as specific roaming tariffs associated to high or particular consumption patterns.6 However, these alternatives are too cumbersome for non-frequent travelers taking into account that roaming represents a relatively small part of their communications bill. As a result, most consumers simply use their domestic subscription when using mobile services abroad (EC, 2011a), basing their choice of mobile operator on domestic prices and in some cases on handset subsidies, but seldom on roaming tariffs. This situation implies a lack of incentives for mobile operators to compete on international roaming prices. Additionally, empirical evidence has shown that the elasticity of demand for international roaming services is low. Elasticity assessments from different source – such as CMT (2009), EC (2011b), Europe Economics (2008), Marcus and Philbeck (2010) – indicate that international roaming voice services are characterized by a low elasticity of demand, ranging from 0.2 to  0.4 according to the different assessments. Only data roaming services have been found to have a relatively elastic demand:  1.23 according to EC (2011b). Various reasons could explain the low elasticity of voice and SMS international roaming services: inertia of consumers, the relevant difference between domestic and international roaming prices, the current financial crisis, or simply a lower need to communicate when relaxing in holidays. In any case, if demand for international roaming services is more elastic than estimated, market agents have not availed of such dynamics. As a matter of fact, groups with large footprints across the EU and enjoying their own cost-oriented prices for wholesale inputs have not offered in general significantly lower alternative tariffs to their customers. For instance, in countries such as Spain, the Czech Republic or Germany trans6

See for example the case of Vodafone Passport, or the specific data roaming tariffs offered by Nordic operators to roamers within the region.

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European operators dominate the market, but average prices for alternative tariffs have been even higher than the regulated Eurotariff (BEREC, 2011b). The European Commission has been cautious about the effects that the extension of the trans-national footprint of large groups could have on small independent operators, such as in the case of Mannesmann’s acquisition by Vodafone in 2000 (Sutherland, 2008). Indeed, the promotion of competition among large groups for the supply of trans-European services has been traditionally balanced against the protection of small national actors. The rationale has been that small operators would not be able to obtain wholesale inputs in foreign countries at similar prices as trans-national groups. Regardless of what could have been the situation if the EC had adopted another approach, groups with large EU footprints do not currently offer significant lower retail roaming prices. This situation points to retail-specific reasons for the lack of competition in prices rather than problems with wholesale inputs. It can be thus concluded that competition forces acting at the retail level have been very limited due to reasons that cannot be solely imputed to the imperfect functioning of wholesale roaming markets. Relevant competition problems remain at the retail level itself, and there is no evidence that the evolution of the market per se, in the absence of retail regulation, will result on an increase of competition at this level. The EC expects that the introduction of the decoupling measures in the next regulatory round will encourage competition at the retail level. The decoupling will have to be implemented by 2014 and will allow consumers to separate the selection of the domestic provider from the selection of the international roaming provider. Its success will depend on consumers’ willingness to opt for alternative roaming providers and operators’ eagerness to compete for these consumers. 5.2. Imperfect wholesale competition This section looks into the evolution of wholesale competition dynamics in international roaming markets with the aim to assess whether it has fundamentally changed in the last years. Before 2003, retail operators were not able to effectively steer their traffic to the wholesale international roaming provider of their choice in each visited country. In general, domestic operators had bilateral agreements with all or most MNOs in each visited country in order to enhance coverage and to profit from roaming traffic coming from these MNOs.7 The operator providing the wholesale service in each visited country was selected by the customer from a list of enabled MNOs displayed in the handset. This choice was based on factors out of the control of the home provider (Salsas & Koboldt, 2004). The result was an almost randomly distribution of wholesale traffic. This situation did not encourage competition among MNOs at the wholesale level. On the contrary, there was an incentive to price wholesale roaming services as high as possible. As wholesale costs could be passed on directly to retail prices, this resulted in high reciprocal IOTs8 leading to high retail international roaming prices (Paltridge et al., 2009). The evolution of steering techniques has enabled home operators to direct a high share of voice traffic to their preferred visited networks.9 Improved traffic steering combined with the increasing number of MNOs in each country was expected to introduce some price-based competition in the wholesale roaming market, encouraging operators to engage in more aggressive bilateral negotiations. On the other hand, several factors have increased the complexity of the wholesale market, such as the growth of transnational groups and roaming alliances, and the introduction of roaming hubs. Wholesale roaming is a reciprocal market, meaning that all MNOs can act as a receiver and as a provider of roaming traffic. When selecting the preferred provider in a certain visited country, each MNO has to consider not only price, coverage and quality of service, but also the revenues to be obtained from its counterpart. This creates important incentives for large players to arrange steering deals among themselves, based on reciprocal price conditions, instead of opting for lower prices offered by small players, which can only offer low volumes of outbound traffic (Shortall, 2010). In summary, in a context of independent MNOs, players in each country will try to balance all their outgoing traffic and get the maximum traffic from other foreign players, leaving small players in a weak position to compete for large volumes of wholesale traffic. The reciprocal character of wholesale agreements has also an impact in the real cost of international roaming wholesale services. International roaming traffic between two MNOs can be divided into two parts: balanced and unbalanced traffic. Balanced traffic corresponds to the quantity of traffic that is symmetric between the agreeing parties. Unbalanced traffic corresponds to the excess traffic coming from one of the parts not compensated by the other part. In a situation of fully balanced traffic, with both parties agreeing to exchange traffic at the same price, the real cost corresponds to the management of the counterpart’s traffic in the own network. In this case, the nominal price is notional in terms of net balance. However, irrespective of real costs, these notional wholesale rates act usually as a reference for the retail arm of the operator to set the price floor, as operators view traffic sensitive charges as raising their marginal costs. In response, operators raise their traffic-sensitive retail prices, even though the underlying cost structure is not necessarily traffic 7 International roaming agreements have traditionally been reciprocal, meaning that when two operators sign a roaming agreement they agree on managing the roaming traffic of the counterpart at a determined price, and on establishing discounts, typically volume-based. 8 Inter-Operator Tariff (IOT): price scheme for international roaming deals between operators developed by the GSMA. 9 Traffic steering is still much more effective for voice services than for data services. In the case of data services, all parameters must be negotiated and network coverage for high speed data access may greatly vary among possible partners. As a consequence, the implementation of steering preferences is less effective.

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Chart 6. Number of MNOs and transnational groups in the EU, 2011. Source: Adapted from BEREC (2010) and updated by authors.

sensitive. The effect of notional wholesale prices has been well analysed in the literature studying the effects of termination rates, such as in DeGraba (2000) or ERG (2009). Another important issue conditioning price competition at a European level is the existence of large groups operating in a relevant number of EU countries, such as Vodafone (14 countries), Orange (10 countries), T-Mobile (11 countries), TeliaSonera (7 countries), Hi3G (6 countries) or O2/Movistar (6 countries).10 More than half of the EU national operators correspond to subsidiaries or are engaged in special agreements with these six main groups (Chart 6). Nearly 80% of all mobile subscriptions in the EU correspond to the four larger groups in terms of subscriptions (EC, 2011b).11 Group operators tend to internalize international roaming traffic as much as possible. In the period from April to December 2009, 33% of intra-EU international roaming voice minutes, 30% of roaming SMS and 58% of roaming data traffic was managed by visited country operators that were part of the same group as the domestic operator (BEREC, 2010). The selection of preferred partners for traffic that cannot be managed inside the group is also affected by the existence of other large groups and the possibility to establish alliances among them. Roaming alliances – such as the FreeMove alliance formed by Orange, TIM, T-Mobile and TeliaSonera – allow operators to negotiate unified roaming agreements reducing wholesale costs between operators (Hualong & Shoulian, 2009). In conclusion, a significant part of wholesale international roaming traffic is managed inside trans-national groups or corresponds to balanced traffic. For balanced and intra-group traffic, the wholesale price arranged between MNOs is notional and does not reflect the real costs, which are those of managing the visited traffic in the own network. However, these prices play a role in setting the floor for retail charges. Prices of unbalanced wholesale traffic of large groups are also affected by internalization strategies and alliances among groups. It can be thus concluded that reciprocal agreements are conditioned by other factors different from genuine price competition among wholesalers, for example, membership of a group or alliance; and outbound volume of traffic offered to other operators. The international roaming wholesale market includes also small independent MNOs lacking bargaining power based on the ability to offer large volumes of international roaming traffic. Among these operators, competition more strictly based on price and QoS could take place. Large operators, at least theoretically, should have the incentive to compete offering lower wholesale roaming prices to small operators. In practice, many times large operators have a limited interest in competing for the low volumes of traffic managed by small independent MNOs because of the fixed costs of setting up each new roaming agreement. Small independent operators usually advocate for regulated wholesale international roaming prices. They argue that their low bargaining power could lead them to margin squeeze situations if retail roaming caps were to be maintained, or anyhow make it difficult for them to launch new aggressive international roaming tariffs. In order to fully understand the dynamics of unbalanced traffic in wholesale international roaming markets, more empirical evidence on prices would be needed. However, data on wholesale agreements are highly confidential. Moreover, they are difficult to interpret, as roaming agreements are usually complex and include different price determinants not directly attributable to balanced or unbalanced traffic. If more detailed data were publicly available for analysis, the application of simulation tools and game theory to wholesale international roaming markets could help shed some light on the real dynamics of competition in these markets. Lastly, to complete the analysis of the wholesale market, MVNOs also offer retail international roaming services. They usually provide them based on the wholesale services of their host MNO, because most MVNOs are focused on domestic services and seldom have the resources and the interest to negotiate their own wholesale roaming agreements. Indeed, MVNOs lack the required economies of scale to make it profitable for them to reach and manage agreements with MNOs in each country. Moreover, MVNOs face a number of barriers that make it difficult for them to engage directly in wholesale

10 This is an estimation of the number of participated MNOs by each group. It is based on BEREC (2010) and it has been updated by the authors for end 2011. Some indirect participations may not be included. 11 Vodafone, Orange, T-Mobile, O2/Movistar.

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Chart 7. Price evolution of intra-EU outgoing roaming calls, 2007–2010. (As in the previous charts, average revenue per minute is used as a proxy for retail and wholesale prices. In this case, average revenue per minute for outgoing roaming voice calls includes both Eurotariff and non-Eurotariff data. Although prices outside the Eurotariff are not regulated, they are affected by the Eurotariff, which is the default and predominant option for intra-EU roaming voice calls.) Source: Adapted from BEREC (2011b).

roaming agreements. For instance, nearly all roaming agreements use the STIRA template,12 which is only available for full members of the GSMA. Since MVNOs are not full GSMA members, this is an obstacle for them reaching direct wholesale agreements. It also reduces price transparency regarding the wholesale rates paid by their host MNO, which makes it more difficult for MVNOs to have information on the pricing of wholesale roaming (BEREC, 2010). The prices offered by MNOs to their hosted MVNOs for roaming services have so far not been regulated by the EU Roaming Regulation, although they will be regulated in the next regulatory round (EC, 2011c). It can be concluded that competition dynamics in wholesale roaming markets have evolved from a situation with no competition – because of the inability to steer traffic – to a situation where operators have much better control of the traffic, but not necessarily translating into more competition. MNOs tend to internalize traffic inside groups, and balance roaming in and roaming out traffic with other players. The significant share of intra-group and balanced traffic makes nominal prices less relevant, because they correspond to real costs only in the case of unbalanced traffic. It is not clear how prices and volumes of unbalanced traffic have evolved and more research based on empirical data – currently unavailable – would be needed to shed more light on this issue. MVNOs have not been able so far to benefit from the lower wholesale prices set by regulation, which has limited their margin to offer disruptive retail roaming prices. 5.3. Wholesale reductions are not per Se passed through to roaming consumers One of the most important issues in international roaming regulation remains to assess whether wholesale regulation alone would be enough to let market actors effectively compete at the retail level. In general, regulatory theory says that intervention should be minimized and that for most electronic communication services acting at the wholesale level and regulating prices for essential facilities should allow alternative providers to compete at the retail level. This section addresses this question based on empirical evidence from intra-EU roaming markets. As pointed out in Section 5.1 international roaming services have been widely acknowledged to escape the market dynamics that assure the transmission of wholesale competition to the corresponding retail markets (BEREC, 2010; EC, 2006; Paltridge et al., 2009). However, since wholesale roaming rates continue to be high, especially when not directly regulated, wholesale international roaming markets have remained in many cases the focus of regulatory attention. This is grounded on some real evidence: as highlighted in Paltridge et al. (2009), available data suggest that wholesale rates in the OECD area account for as much as three quarters of the retail rate, being thus the major contributor to high retail international roaming prices. The European experience with the roaming regulation provides a unique testbed to assess the responsiveness of international retail roaming prices to decreasing wholesale rates. Chart 7 shows the evolution of prices for outgoing roaming calls within the European Union, and the corresponding wholesale rates. In the second quarter of 2007, just before the entry into force of the first Roaming Regulation, wholesale rates accounted for roughly two thirds of the final price. This is in line with the OECD finding about the high share that wholesale charges represent in unregulated international roaming markets. With the entry into force of the EU Roaming Regulation, the wholesale rate was significantly reduced, and by the end of 2010 it was equal to the retail mark-up applied 12 Standard Terms for International Roaming Agreements (STIRA): framework developed by the GSMA in order to simplify international roaming negotiations.

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Regulated retail cap

Avg. retail revenue per billed minute

Avg. EU MTR

Chart 8. Price evolution of intra-EU incoming roaming calls, 2007–2010. (As in the previous charts, average revenue per minute is used as a proxy for retail and wholesale prices. The average European MTR displayed is a weighted average based on the number of subscriptions per country and the nominal MTRs.) Source: BEREC (2011b), and BEREC’s MTR Benchmark snapshots.

by operators. Thus the reduction of wholesale rates accounted for as much as 84% of the total retail price reduction from Q2 2007 to Q4 2010. On the other hand, the retail mark-up has fluctuated around the same absolute value (18 eurocents) after an initial drastic reduction driven by regulation. Taking into account that this initial reduction was forced by the regulated retail cap (dotted line in Chart 7), it is uncertain whether the wholesale reduction would have been passed on (partly or at all) to the final retail price in the absence of a retail cap. In the case of incoming calls, retail prices have also been regulated through the Eurotariff, but wholesale charges have remained outside the scope the Roaming Regulation. This wholesale service comprises the termination of the roaming call in another EU country. Data on transit costs show they are negligible compared to MTRs (BEREC, 2010). Since operators in practice do not apply different termination rates for incoming roaming calls and domestic calls (BEREC, 2010), the wholesale charge corresponds to the mobile termination rate (MTR) of the country where the user is roaming. Thus wholesale charges for incoming roaming calls are (indirectly) regulated, because domestic MTRs are regulated in all EU Member States. Chart 8 shows the evolution of retail prices for incoming roaming voice calls within the EU. In the same figure, the average nominal European MTR is shown, which can be considered a rough estimate of the wholesale charge applied to the service. The situation is the opposite as for outgoing roaming calls: the retail mark-up before the entry into force of the first roaming regulation (Q2 2007) accounted for more than three quarters of the final roaming price. This was possible because at that period MTRs were already regulated nationally, while retail international roaming rates were unregulated. Evidence therefore shows that in this case low wholesale rates were not passed on to the retail level. Retail prices for intra-EU incoming roaming calls were significantly cut in Q3 2007 to comply with the regulated maximum retail caps. However, after this first adjustment, the retail mark-up decreased only slightly: in the fourth quarter of 2007 the retail mark-up was nearly 13 eurocents, and in the fourth quarter of 2010 it was 10 eurocents. This reduction of 3 cents compares with a reduction of somewhat more than 4 cents in MTRs in the same period. As in the case outgoing roaming calls, it is uncertain whether this reduction would have been passed on (partly or at all) to the final retail price in the absence of a retail cap. This is clearly seen in data of Q4 2010, where the retail price for incoming roaming calls was nearly equal to the cap. Unlike in the case of outgoing voice calls, the wholesale and retail share of the final price for calls received has remained fairly constant with the entry into force of the roaming regulation (Chart 9). With the system of caps enforced by regulation, the wholesale-retail balance for intra-EU roaming calls is mainly set by regulation, with little room left for market forces to determine it. In conclusion, empirical evidence shows that wholesale regulation alone does not suffice to ensure that competition at the wholesale level is passed on to the retail level. Therefore complementary retail measures are necessary in order to ensure that benefits are passed through to customers, and reach policy objectives such as facilitating transnational use of communication services by means of lowering international roaming prices.

6. Conclusions The EU international roaming market is large compared to those of other regions, with a relatively high percentage of mobile users frequently roaming inside the EU. Voice services remain the main source of international roaming revenues for operators, although data roaming services are gaining relevance in terms of volume of traffic and revenues.

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Chart 9. Wholesale and retail price shares for intra-EU roaming calls, Q4 2007 and Q2 2010. (As in the previous charts, average revenue per minute is used as a proxy for retail and wholesale prices. For incoming calls, the average wholesale charge is approximated thorough the weighted average of nominal European MTRs.) Source: Adapted from BEREC (2011b), and BEREC’s MTR Benchmark snapshots.

International roaming has become increasingly regulated in the EU. International roaming prices for voice and SMS within the EU have experienced a decline from 2007 to 2010, following the glide path set by regulation. Although the retail margin for both voice and SMS allowed for competitive roaming offers below the regulated cap, operators have in general not explored these possibilities. This cannot be attributed to the underlying costs, since cost estimates show that current average roaming prices are well above costs. Despite a significant decrease in both wholesale charges and retail prices, intra-EU data roaming services rates are still high compared with underlying costs and domestic tariffs, especially at retail level. International roaming services are sold together with domestic services. Since domestic services weight more than international roaming in the communication bill, consumers’ choice is based on domestic rates rather than roaming prices. This explains the lack of competitive pressure in retail roaming markets which together with inelastic demand have so far given little incentives for retail roaming service providers to lower prices. Data roaming markets have shown significantly higher price elasticity than voice and SMS. However, imperfect competition in data roaming markets persists, which is proven by the high margins at which they operate (for example, more than 200% retail mark-up over wholesale charges). Wholesale international roaming markets have evolved in the last ten years and are currently characterized by complex competition dynamics. A relevant part of intra-EU wholesale roaming traffic corresponds to intra-group traffic, especially in the case of data roaming. Another significant part of wholesale roaming traffic is balanced in reciprocal agreements. In both cases, the negotiated price has a limited relevance, being the real cost faced by operators that of managing the counterpart’s traffic in the own network. Negotiated wholesale prices are more relevant in the case of unbalanced traffic, but there is no empirical evidence on the evolution of prices and volumes of unbalanced traffic. More data and research would be needed in this area in order to assess to what extent there is price competition at wholesale level for this type of traffic. The analysis of intra-EU wholesale and retail roaming prices shows that in international roaming markets wholesale charge reductions are not necessarily passed on to retail prices. This can be clearly seen in the case of intra-EU incoming roaming calls, which face decreasing wholesale charges, and yet operate at very high retail mark-ups (more than 200% over the wholesale charge), only limited by direct retail price regulation. It can thus be inferred that wholesale regulation alone is in most cases not sufficient to ensure that benefits are passed through to end users.

Acknowledgements The authors would like to thank the colleagues in the BEREC International Roaming Expert Working Group as well as the colleagues at CMT for all the interesting discussions and debates on the different aspects of international roaming regulation. Of course, this does not mean that the experts of the BEREC group or CMT endorse all the analyses in this paper. Comments and suggestions from anonymous reviewers and the editorial board have also helped substantially improve the paper, and the authors thank all of them for their feedback. Any error or misunderstanding can only be attributed to the authors. References BEREC (2010). International Mobile Roaming Regulation BEREC Report. Board of European Regulators for Electronic Communications. December 2010. Available at /www.erg.eu.int/doc/berec/bor_10_58.pdfS. BEREC (2011a) BEREC Analysis of the European Commission’s Proposal for a Regulation on Roaming COM(2011)402 of 6 July 2011. Board of European Regulators for Electronic Communications. July 2011. Available at /www.erg.eu.int/doc/berec/bor_11_46.pdfS. BEREC (2011b). 51 International Roaming BEREC Benchmark Data Report January 2011–June 2011. Board of European Regulators for Electronic Communications. October 2011. Retrieved from /www.erg.eu.int/doc/berec/bor_11_51.pdfS. BEREC (2012). BEREC Analysis of Wholesale Roaming Costs. Board of European Regulators for Electronic Communications. February 2012. Available at /www.erg.eu.int/doc/2012/bor12-14_int_roaming.pdfS.

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