Friday, September 21, 2007

A simple proposal for mobile roaming charges.

Update: this would work great if combined with an iPhone/Android App, that would do the selection of networks for you. Either the app maker or the European commission could have a matrix of all costs charged by host mobile networks for mobiles roaming on their network

The EU has finally succeeded in capping the roaming charges that customers have to pay when they use their mobile in another country. Ms. Reding’s proposal was quite simple: a cap on wholesale per minute charges and a cap on retail per minute charges. The caps for the coming years are:
Eurotariff maximum
Summer 2007
Summer 2008
Summer 2009
Mobile calls made abroad
49 cents
46 cents
43 cents
Mobile calls received abroad
24 cents
22 cents
19 cents
This is nice and an improvement to the current situation. However it will not lead to a competitive European market for roaming. For the market to become competitive it would be necessary:
  1. The customers choice of roaming network will have a direct impact on the price paid by the customer.
  2. When a destination network lowers its roaming charges this is immediately felt by the end-customer
In reality neither is the case:
Ad 1. When a customer uses a network abroad, it is often charged two tariffs; one low tariff for the preferential network and one high tariff for the 2-4 other mobile networks in the country. The preferential network often is a sister company of the users home mobile phone company. If a customer decides to use a different network than the preferential network, this will only result in higher charges, since the retail price has been fixed by the home network. The customers choice is limited by its home operator.
Ad 2. When a destination network decides to lower its roaming charges, out of the kindness of its own heart, this doesn’t oblige the home network to charge the customer a different retail price. As shown in the table, there is nothing wrong with charging 46 cents for making a call even if the destination network only charges 10 cents. Not only does the destination network receive less, it also hasn’t become more attractive for the consumer, so there is no way it can make up for its losses in margin by increasing volume.

A simple proposal to end this mess (so it will probably never happen)
Roaming in another country is technically and economically quite simple. There is this person who is not a customer of the destination network, but is a customer of another network, that wants to use the destination network to place a call. For the destination network setting up a call is the same as it does for its own customers, except for one thing: Authentication. It will have to authenticate the roaming caller on its network and see if it has a contractual relationship with the home network of the roaming caller. If it has such a contract, the roaming caller’s network can be billed and therefore the caller can place (or receive a call).
The ONLY thing a home network does for a destination network when one of the home network’s customers roams is to do the authentication and the billing. It doesn’t carry traffic. It is not involved in the routing of the traffic. It acts just like a credit card company. It authenticates that the customer can make the purchase (place or receive a call) and it bills the customer the price (in the process charging the shop a modest fee of a few percent). This is beneficial for the customer, it can buy (place a call anywhere) and it is beneficial for the shop owner (destination network) who knows it will get paid and doesn’t have any risk of the customer not paying.

When applied to roaming a better model would be to allow the home network to only charge a small fee for authentication and billing (2-5%) to the destination network. This way it’s billing and authentication costs are paid for and it’s adequately compensated for its troubles. (Visa has made quite a living on 2%-5% margins) The destination network would then be free to charge the consumer a charge it deems fit, whether it’s a receiving call, outgoing local call, international call etc. When it wants to lower its prices to attract more customers it can do so. The price conscious consumer will be able to switch.
Type of call
Network A
Network B
Local call
25 cents
15 cents
International call
40 cents
25 cents
Receiving call
20 cents
22 cents
10 cents
17 cents
Internet data
1 euro/Mbyte
20 cents/Mbyte
The effect for the consumer would be, that when arriving abroad he/she will be greeted by billboards and SMS-messages of the large networks explaining their tariffs for placing and receiving calls, sending and receiving SMS and even using mobile internet. There will be competition because the network that charges least is most likely to get the most customers.
A smart consumer will even change networks to get the lowest price for each action be it an outgoing local call, incoming call, international call, a call home etc. A smart customer will use Network B for local and international calls, but use A for SMS and receiving a call. (A very smart consumer would even compare the prices abroad to the prices of calling nationally. Think of it , if in France a network would only charge 3 cents per minute to call to a fixed line in Germany, a German might be cheaper off using a French network to call a German fixed line when being in Germany if in Germany this costs 8 cents a minute)
This will promote genuine competition between networks. All of them will want to get some of the revenue of the visiting customers. If there is a network C, it could decide to offer the lowest price for all types of calls and data. When MVNO’s would be allowed to offer roaming to visiting tourists and business people as well, prices certainly would drop. For MVNO’s it’s the simplest way of running a network. No contracts with individual end-users, no need for hand set subsidies, no risk of non-payment, contract disputes etc, just a contract with the home network is necessary.
From a regulatory point of view this idea would be great. It wouldn’t require any kind of regulation in a competitive market. The consumer is free to choose from multiple providers that can all independently set their prices. There is no need for a cap. It’s only necessary to be vigilant for market power and cartels, which is all in a days work. And they should watch out for home networks charging higher percentages, or destination networks posting wrong prices and/or weird schemes. It get’s better. By requiring the home network to only charge what the destination network is charging them, it becomes possible for citizens of the EU to enjoy low tariffs globally. When a Turkish operator is charging $1 per minute, that plus 5% will be the retail price for the end-user. If they have the option to choose multiple operators in Turkey, they can choose the operator that charges the least.
Would this scheme be implemented anytime soon? No of course not! It would promote competition and declining revenues and profit margins. One could expect the whole industry to be heavily against the idea. But it’s great thinking up such an idea.

Update October 29, 2007: Documents obtained by The Times show that the UK government is heavily opposed to getting the consumer a good deal in mobile roaming. The UK governement was giving the operators minute by minute updates on the state of the negotiations in the EU Council, including such remarks as "UK not happy bunnies" when the proposal was geared too much towards the consumers. All in all this shows that an idea like the one above will never see the light in real life.