International roaming services give consumers the ability to make and receive calls via their mobile handset while travelling abroad (called "roaming out"). As usual in the electronic communication sector, roaming services create two financial flows: the customer pays a retail price to its home

provider for making and receiving calls while roaming abroad on a foreign network abroad and, in return, the foreign operator bills the home provider a wholesale charge for the underlying wholesale services called "roaming in" (namely, call origination and transit for a outgoing call or call termination and transit for a received call).

The underlying markets are rather important. The GSM Association estimates that at least 147 million EU citizens (nearly one EU mobile subscriber in three) use international roaming services from their domestic mobile operator: 75% of these users are business customers, while the remaining 25% travel for leisure purposes. The market revenues generated by "roaming in" amounted to EUR 8.5 billion in 2005 and represented 5.7% of returns in the European mobile sector. A recent Eurobarameter (1) survey for the DG information Society and media highlights some interesting facts about the average roamer: 44% of EU citizen visited another EU country for private purposess between September 2005 and September 2006; 53% of EU mobile subscribers use their mobile phone when travelling abroad, but 63% of them use it less often than at home. The average roamers feel that roaming services are too expensive compared to identical domestic services: the cost of international roaming services appears to be the most important reason for using a mobile phone less frequently abroad for 81% of respondents.

Under the "high price" claim of consumers lies the idea of supra-competitive (monopolistic) profits for mobile operators in roaming markets. This view has been shared by the European Commission from the outset, and especially by Viviane Reding, the Commissioner for Information Society and Media (ISM). She thought--and still thinks--that roaming prices neither reflect underlying costs nor the value of calls. These statements have given rise to a sequence of actions by the Commission since 1999 and ultimately led to a regulation proposal.

The double failure of competition law and of the electronic communications Framework

The tension between mobile network operators (MNOs) and the Commission has grown gradually. Table 2 in the annex presents a brief overview of the chronology of events starting from the 1999 sector inquiry launched by the Commission. Two pillars of the European organization were involved: the DG Competition and the European competition rules since 1999, the DG Information Society and Media and the electronic communications regulatory Framework since 2005. Each DG has used its legal power and policy tools to significantly decrease international roaming charges.

The DG competition moved first. Its work gave rise to two cases of abuse of dominant position involving three MNOs: Vodafone in the UK and Germany, O2 in the UK and T-Mobile in Germany. The statement of objections sent in 2004 (UK case) and 2005 (German case) are related to unfair and excessive wholesale prices to other European MNOs during the period from 1997 to September 2003. The Commission believes that this excessive wholesale pricing was detrimental to consumers travelling to the UK and Germany. A few months later, the Commission opened an ex officio investigation under article 81 EC to detect the existence of exclusive dealing agreements between MNOs and to understand why MNOs are not buying roaming minutes from the cheapest MNOs.

Some observers see this first move as rather unsustainable. Firstly, competition law instruments are not well-suited to rapid and overall intervention because of the slowness of the procedure: all the roaming cases are still pendant. Secondly, the belief that the launch of cases may create an exogenous shock, thus lowering the price of roaming services is unrealistic: competition law can only address the behaviour of individual firms and MNOs not involved in the legal proceeding have neither legal nor economic incentives to comply with the Commission's decisions. Thirdly, demonstrating a case of pure excessive pricing raises complex questions about the "normal" or allowed rates of profit in a particular industry and is therefore hard to tackle in a competition law context, where no such formal limits exist. Finally, knowing the very organization of the roaming wholesale markets, more precisely the existence of inter-operator tariff agreements that may include volume guarantee or reciprocal tariffs, and the existence of alliances (Vodafone subsidiaries and partners, and Free Move (2)), the accurate case, if any, may come under article 81 EC (agreements and cartels).

Sector specific law came to competition law's rescue at the end of 2005: DG ISM created a website dedicated to international roaming tariffs comparisons (3). At the same time, Commissioner Viviane Reding gave MNOs an ultimatum: they were either to decrease their wholesale and retail charges for roaming services, or the Commission would intervene strongly in the market. The national regulatory authorities (NRAs) threw in the sponge in December 2005 and the European Regulatory Group (ERG) pointed out that the 2002 electronic communications Framework cannot solve the roaming problem and is unable to solve pan--or trans-European problems. Since the action of NRAs is limited to the wholesale part of the market (4), any action taken by a particular NRA will have no effect on its own domestic consumers, hence infringing its very objective, namely, the protection of its own domestic consumers.

In total, the roaming case caused the failure of both competition law instruments and the existing electronic communications Framework. After being reluctant to intervene and in favour of a "wait and see" position (5), Members of the European Parliament (MEPs) stressed the need for greater transparency and a decrease in roaming prices. The proposal for regulation (6) conceived by DG ISM opened the last round of the roaming case.

The last step: regulation

The proposal of the European Commission sets maximum prices limits for the provision by all MNOs of roaming services at wholesale and retail levels. This relies on the European Home Market Approach. This principle means consumers and MNOs will support EU wide roaming prices (at a rate comparable to those paid at home by consumers).

There are four types of roaming calls: calling home, calling a third EU country, calling someone within the visited country and receiving calls. The Commission considers the wholesale level first and states that a good proxy for the underlying costs of mobile call (origination, transit and termination) is twice the mobile termination rate (MTR), recalling that almost all MTRs are regulated in Europe. The upper wholesale limit for a roaming call within the visited country is twice this benchmark. To take into account additional costs involved in a trans-national call (international transit for instance), it is suggested that the upper boundry for a home or third country call should be set at three times the MTR. Finally, for a call received, the upper boundry is one MTR since it only requires termination. Retail ceilings are set at a 30 % margin above the underlying wholesale limits in line with the average EBIT margin of 26.8% in the European mobile sector in 2005. To implement the European Home Market principle, the Commission defines a benchmark MTR as a weighted average MTR of all SMP operators in member states. In total, based on the MTR published in the 11th Implementation Report, we get:

Per minute, in EUR cents     Wholesale ceiling        Retail ceiling

Received call                      12,64                  16,43
Visited country call               25,28                  32,86
Home/third country call            37,92                   49,3

The regulation proposed mimics yardstick competition: if a MNO is more efficient than average then it earns more profits. But the benchmark component (MTRs) is not under the sole control of MNOs since it is regulated downward by NRAs (cost orientation). Therefore, it also has a price cap component under the control of NRAs.

On May 23rd 2007, the plenary of the European Parliament voted for an amended version (7) of the European Commission's proposal. The Council reached a political agreement on the proposal on June 7th 2007. The regulation is due to be adopted on June 25th 2007, published in the Official Journal of the EU before the end of June, and will take effect one day after publication. The rather complex system of charges calculations, initially proposed by the Commission, is replaced by a simpler set of three-year price caps called "Eurotariff":

Eurotariff for roaming services per minute without VAT

Maximum limits (EUR cents)
per minute                     Summer 2007       Summer 2008

Calls made abroad                  49                46
Calls received abroad              24                22
Inter-Operator Tariff              30                28

Maximum limits (EUR cents)
per minute                     Summer 2009

Calls made abroad                  43
Calls received abroad              19
Inter-Operator Tariff              26

These new price caps make no distinction between the different types of calls at a wholesale level. The cap is applied to the average wholesale charge, calculated by dividing the total wholesale roaming revenues received by the total number of wholesale roaming minutes sold over a twelve month period. This new cap leaves more discretion to mobile operators when implementing their wholesale tariffs, than the previous proposal. Moreover, the cap is disconnected from MTR and hence from national regulation.

At a retail level, there is no distinction between visited country calls and home or third country calls. Only two types of calls are considered: received and made. For received calls, the voted Regulation is less restrictive (24 EUR cents in 2007 instead of 16.43 EUR cents). For calls made, the 2007 Eurotariff is nearly the same as that proposed by the Commission for home/third country calls, but is higher than that proposed for visited country calls.

Incidentally, the regulation creates a tariff opting system for existing roaming customers and a system to enhance transparency of retail charges. Article 7 of the regulation states: "National regulatory authorities shall monitor and supervise compliance with this Regulation on their territory." Hence, the regulation will be implemented by NRAs at national level and coordinated by the Commission.

The position of mobile operators

During the whole process (i.e. since 1999), mobile operators and the GSM Association have fulminated against the Commission's position. Although they admit that the sector must do more to achieve price transparency and clarity, they are opposed to any direct intervention in the market.

Mobile operators, and especially incumbents and those with subsidiaries all over Europe, claim that roaming prices are decreasing constantly thanks to subscriber friendly offers (like the Vodafone Passport exhibiting domestic price for roaming calls after the billing of a connection fee). Moreover, the development of traffic direction techniques strengthens inter-operator negotiation: domestic operators can direct more traffic to partner networks and obtain lower wholesale charges in return.

In the French case, a decrease in the average wholesale charge can be seen since 2001:

French roaming markets since 2000

                     2000           2001           2002

Revenue              558            787            752
Volume               800            858            1191
Average price        0,7            0,92           0,63

                     2003           2004

Revenue              776            874
Volume               1294           1350
Average price        0,60           0,65

                     2005       2006 (est.)

Revenue              839            791
Volume               1393           1508
Average price        0,60           0,52

Sources: ARCEP and author's calculations

Hence, in France, the regulation will create a 42% drop in the wholesale charge in 2007.

The GSM Association (8) warns that price caps may create a "water bed" effect since mobile services are often bundled, namely that mobile operators may raise their prices for other domestic services if they have to lower international roaming charges in order to maintain an overall normal profit. More realistically, the effect will probably be a slower decline in domestic prices or a lessening of handset subsidies.

Further consideration

It is hard to provide an accurate assessment of the indirect effect that the Regulation on international roaming will have on other mobile services or on mobile innovation, especially due to the existence of bundles in this sector. At least, we may regret that these potential indirect effects have not been taken into account by the European institutions at a time of convergence (between fixed and mobile telephony, and also between media and telecommunications).

A direct effect of the regulation is a move towards a harmonized European mobile market in line with the possible convergence of domestic and roaming voice call prices in the near future, and the generalization of pan-European mobile offers (without price discrimination between domestic and roaming calls). However, the impact of such a convergence is not straightforward. On the one hand, consumers may feel happy about lower roaming charges. On the other hand, convergence does not mean that roaming prices will tend to sink to the level of domestic prices: indeed, domestic prices will probably go up (either directly or indirectly with handset subsidies decreasing, for instance).

Finally, a regulation looks like a "nuclear weapon" used after the failure of both competition law and the regulatory Framework. But, it can be seen as an efficient and complementary tool for the regulation of the electronic communications sector if used with parsimony, that is, in extreme cases. However, regulating both retail and wholesale prices represents major market intervention by the public authorities. In this context, we may ask: when will it end? Price cap regulation looks hard to stop in practice: there will always be the suspicion of a price rise (some may call this effect a market adjustment) by SMP operator. And here is the key issue of the debate: will mobile operators always be viewed as dominant operators in their individual mobile termination markets? Will the regulatory authorities start to look at the whole mobile market to assess SMP position? And, if so, will they reach the same conclusions?

Denis LESCOP

DEFIS, Institut National des Telecommunications

(1) Special Eurobarometer no 269, "Roaming", at the request of DG Information Society and Media, November 2006.

(2) Free Move was founded in 2003 by Orange, TIM, T-Mobile and Telia-Sonera. In September 2006, Amena, part of France Telecom / Orange Group, also joined the alliance.

(3) http://ec.europa.eu/information_society/ activities/roaming/index_en.htm

(4) Commission Recommendation on Relevant Product and Services Markets within the electronic communications sector susceptible to ex ante regulation, C(2003)497, February 11th 2003.

(5) Hearing on "International roaming--Its economic implication" organized by the European Parliament ITRE (Industry Research and Energy) and IMCO (Internal Market and Consumer Protection) Committees, May 4th 2006.

(6) Proposals for a regulation of the European Parliament and of the Council on roaming on public mobile networks within the Community and amending Directive 2002/21/EC on a common regulatory Framework for electronic communications networks and services, 2006/0133(COD), July 12th 2006.

(7) Position of the European Parliament adopted at first reading on May 23rd 2007 with a view to the adoption of Regulation (EC) No .../2007 of the European Parliament and of the Council on roaming on public mobile networks within the Community and amending Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services, P6_TC1-COD(2006)0133.

(8) "When in roam", The Economist, Vol. 383, Issue 8527, p. 82.

Annex

Table 2 : Chronology of events related to international roaming

July 1999         The Commission launched a sector inquiry in to
                  mobile roaming prices

July 2001         Inspections at the premises of MNOs in the UK
                  and Germany

Feb. 2003         Wholesale roaming services are included in
                  the Recommendation

July 2004         The Commission sent statements of objections
                  to two UK MNOs: O2 and Vodafone

Feb. 2005         The Commission sent statements of objections
                  to two MNOs in Germany : T-Mobile and Vodafone

March 2005        The ITRE Committee of the European Parliament
                  organized a hearing on international roaming
                  with NRAs and market players

Oct. 2005         The Commission opened a consumer-oriented
                  website publishing the prices of international
                  roaming across Europe

Dec. 2005         The ERG alerted the Commission that measures
                  taken by the NRA would not resolve the problem
                  of high prices in roaming services

Dec. 2005         The DG Competition opened an ex officio
                  investigation in Members States under article
                  81 EC Treaty

Dec. 2005         The European Parliament Resolution EP2005/
                  2052(INI) called the Commission to develop new
                  initiatives concerning the high charges of
                  roaming services

March 2006        The European Council point out the importance
                  for competitiveness of reducing roaming charges

Feb.-March 2006   First phase of the public consultation on
                  international roaming

March 2006        Second version of the "international roaming"
                  website

April-May 2006    Second phase of the public consultation on
                  international roaming

May 2006          Hearing on "International roaming--Its
                  economic implication" organized by the European
                  Parliament ITRE and IMCO Committees

July 2006         The Commission published a proposal for a
                  regulation of the European Parliament and the
                  Council on roaming on public mobile networks
                  within the Community, together with an impact
                  assessment of policy options related to this
                  proposal

Jan. 2007         Hearing organized by the Industry and Internal
                  Market Committee on the proposal of regulation.

April 2007        Report by Mr Rubig and adoption by the Committee

23rd May 2007     Vote at the European Parliament

7th June 2007     The Council approves rules on roaming charges

Source: European Commission