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May 1 2006

CRA International has undertaken an independent economic assessment of the likely
impact of the European Commission’s proposals for regulation of international roaming services as set out in the Commission’s Second Phase Public Consultation (the Consultation Document).1
 

Their analysis demonstrates that there are a number of significant, unintended, effects that the Commission’s proposals are likely to create with the result that the proposals risk leaving many mobile customers worse off. The proposals are likely to force up prices for domestic services on tariffs that allow customers to make and receive calls while roaming.

To avoid these higher prices, many customers would switch to tariffs that do not allow roaming.

Even customers who want to continue to roam may opt to have two mobile subscriptions – one with higher domestic charges that allows roaming and the other to avoid the higher charges for domestic calls. The net result of these effects could be that  demand for mobile services is lowered overall.

Given the scale and risks of the proposed intervention, we believe the net benefit would
be negative, and therefore recommend that the Commission undertake a detailed
assessment. In general, any proposal for highly intrusive regulation should be based on a
thorough analysis of an enduring market problem. Regulation that is not based on the
established regulatory framework and principles can raise the regulatory risk to investing
in the EU overall.

The Commission has put forward three specific regulatory proposals and we summarise
our findings on each below.

(i) ‘Home Pricing’
Under the ‘Home Pricing’ proposal, the retail price for calls while roaming would not be
allowed to exceed the rate charged by the customer’s home network for domestic or
international mobile calls. This proposal has a number of potential flaws:

• Prices for domestic mobile services on many existing plans (e.g. on-net calls) are
likely to be below the actual cost of providing roaming services.
• This could lead to customers in higher cost countries purchasing pre-pay SIM cards
from operators in countries with low domestic prices and use roaming on those SIM
cards for their normal mobile service creating significant financial distortions within
the EU communications market.

• There would also be a significant risk that operators or service providers with higher
wholesale charges may purchase SIM cards for pricing plans in other countries with
low domestic prices. Such an operator or service provider would have an incentive to
make large volumes of calls with the wholesale revenue that they receive on these
calls being greater than the retail prices that they have to pay.

• Such a situation would not be sustainable, as it would create large losses for the low
price operators and most likely lead to price rises to a common level in absolute
terms, despite differences in the underlying cost base between EU countries.
 

• To prevent the risk of large losses, operators would need to set their retail prices on
plans that allow roaming at least as high as the highest wholesale roaming price in
Europe. In this regard, the proposal would impact most the operators that are setting
the lowest prices for domestic mobile services with a risk that competition is distorted.
Going forward, operators would have less scope to compete by undercutting existing
domestic prices.

• To avoid higher prices for domestic mobile services, most customers are instead
likely to opt to be on plans that do not allow roaming (or only allow a small number of
roaming calls) – these customers would lose the option to roam that they currently
have.

• In recent years, many operators have made roaming available to all customers, not
least to recover their investments in specialist roaming service and billing platforms,
but this trend is likely to be reversed.

• Customers who do want to continue to roam would be likely to subscribe to two
mobile subscriptions (and two numbers) with one for roaming and the other for lower
priced domestic calls. If customers end up using separate subscriptions for roaming
services, then there is no reason to expect the ‘Home Pricing’ approach would result
in lower roaming prices.

• The particular effects are likely to vary across the EU depending on how the
regulation impacts the pricing of particular operators and the extent to which different
types of customers would be prepared to switch to tariffs that do not allow roaming or
to acquire two subscriptions.
(ii) Abolition of charges to receive calls while roaming
The second proposal is to abolish charges to customers for receiving calls while roaming
accompanied by a requirement that callers should not face any additional charge to call a
roaming customer. This would have negative consequences given that:
• Operators incur significant additional costs where their customers are called while
roaming as they need to pay the termination charge levied by the operator in the
visited country, which may be significantly above their own termination costs, as well
as international transmission.
Impact of the EC’s proposed regulation of international roaming prices
April 2006
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• There would be a risk that operators or service providers in countries with high
termination charges would purchase SIM cards from operators with low prices and
make large volumes of calls between the SIM cards positioned in each country. This
would provide them with the ability to earn termination revenues significantly above
the on-net retail prices they would need to pay.

• Customers who make regular international calls may also provide the person they are
calling with a pre-pay SIM card from their local operator so as to pay local call prices
instead of international call prices.

• To avoid the risk of large losses, operators would need to raise their prices for
domestic mobile services to cover the costs of both domestic and international calls.
Operators are also likely to seek to limit the ability of their customers to be called
while roaming.

(iii) Regulation of wholesale roaming prices
The Commission has also proposed that wholesale roaming rates be regulated,
potentially in the form of cost-oriented obligations or a capping mechanism. The impact
of wholesale regulation will vary depending on the form of the regulation – cost based
price regulation is a highly intrusive form of regulation that is generally only applied in
cases of enduring economic bottlenecks. Potential impacts of wholesale regulation
include:
• Where regulation reduces wholesale roaming prices, many operators would need
to raise prices for other mobile services (e.g. monthly charges, prices for calls
and data services) to ensure that they can recover their overall costs –
nevertheless operators that are particularly reliant on roaming may incur
significant losses in the transition to new price structures.
• If regulation reduces wholesale roaming prices below the incremental cost of
providing the services for particular operators, those operators may cease to
supply wholesale roaming services.
• Lower roaming revenues risks reducing investment, particularly in more remote
(e.g. tourist) areas or poorer Member States, where network investment is closely
correlated to roaming revenues.
• Regulation risks distorting the pattern of competition through its differential impact
on operators in the same market. For instance, requiring operators to set their
wholesale roaming prices based on their domestic prices would (perversely)
penalise operators that have the lowest domestic prices.
• Operators could use access to regulated cost-based wholesale roaming prices to
set up as MVNOs2 in each other’s markets. This would represent a fundamental
2 MVNOs are mobile service providers that do not operate their own network.
Impact of the EC’s proposed regulation of international roaming prices
April 2006
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change in industry structure with potentially large, longer-term harm to efficiency.
Operators could be deterred from entering each other’s markets as new network
players, reducing the level of network competition going forward.
• Regulation of wholesale prices between EU operators may require that those
lower wholesale prices be passed on to operators outside the EU as a result of
international trade agreements. This would effectively reduce the value of EU
exports while at the same time taking away a key means by which EU operators
could bargain for lower roaming rates outside the EU to the benefit of EU
consumers.

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