Vodafone seems to be the first to succumb to European pressure over roaming charges. Game over? I doubt it: here are ten reasons to think differently... 

You can argue all you want as to whether Vodafone’s ‘unilateral’ decision to reduce its European roaming rates by 40% was a question of the market deciding or the European regulators imposing their will on the company. The cuts announced on 08 May (click here) were indeed in line with those insisted upon by the EC (typically 40%) over many months (click here).

This may be a case of market forces acting as they should, or one of market forces being driven by the threat of regulation against the self-interest of those in control of the market concerned. So long as prices fall and the consumer benefits, you can file this argument under the label ‘Who cares?’.

Now that Vodafone’s offer is on the table, the ‘who did what to whom and why?’ aspect of all this is almost immaterial. More material, however, is where this long-running argument goes next.

Just to recap, Vodafone, Europe’s leading mobile operator, has announced on 08 May:
• a fall in retail roaming rates within the EU from the summer 2005 average of €0.90 per minute to €0.55pm by April 2007;
• a fall in wholesale roaming charges from €0.70pm just now to €0.45pm by October 2006.
These reductions appear to come in within the levels that the European Commission had been threatening to mandate.

Emboldened by the new position, Arun Sarin, Chief Executive of Vodafone, said: “by addressing both retail and wholesale prices, we are providing a platform for sustainable, lower retail prices across Europe in the future. We understand the powerful appeal that roaming has in the aspiration for a Europe in which people can travel, live, move, work and invest freely. We believe the market is the best way to meet customer needs, not regulation".

Sarin was keen to stress that “that the market, led by Vodafone, is meeting those expectations by providing what our customers tell us they want.” This implies that customers want to wait almost a year before today’s excessive roaming charges are rendered moderately less excessive. Way to go!

Against these fine gestures and the supporting language, a number of anomalies float quickly to the surface like waste matter on a still pond. These variously and at times conflictingly cover EU policy goals, Vodafone’s commercial goals, and industry-wide economic issues.

These issues do not exclude each other, but they raise different visions of where pricing goes next. The first five surround the policy aspects of the EC’s policy and Vodafone’s response:
1) motivation: as mentioned, Vodafone claims that its initiative is led by the market. Does it expect anyone – customers, Commissioners, etc – to believe that the 08 May announcement was anything other than a response to EU threats? Thus, while it argues that ‘the market’ is doing its job (in bringing down rates), it is handing evidence to the EC that market forces can be bent to the regulator’s will by merely the threat of regulation.

2) follow-me?: Vodafone might expect that by responding early to EU pressure on roaming charges, within the broad range of benchmarks set out by Brussels, it moves to the top of the class. The theory runs that where it leads, other giants (T-Mobile, Telefónica, Orange) might follow, dragging the rest with them;

3) follow you?: on the contrary, critics will say that Vodafone is abusing a near-dominant position. Its scale enables it to take these reductions (where they do actually impact on its business) in its stride and yet put a far greater squeeze on smaller carriers. The position is analogous with that facing Swisscom Mobile on termination charges last month (click here);

4) Vodafone’s proposed timing of its price reduction lends massive credence to this argument. As detailed above, it will reduce wholesale charges in October of this year and yet will not commit to the reduction of retail charges until April next year. To a non-expert, that looks like six-month windfall of excessive margins, although not including the vital ‘summer season’ of 2006. In terms of wholesale, Vodafone’s a net outpayer. In terms of retail, it’s a net recipient. Do the math;

5) Furthermore, by insisting that the new €0.45pm charge is “conditional upon the requesting mobile network operator offering an average charge of no more than €0.45 per minute (or a lower reciprocal charge by mutual agreement) for all or any European mobile networks over which it exercises management control”, it is again hanging around in the cellular industry’s executive washroom to which only its exulted size gives it the key.

Games with numbers
As a cellular behemoth, one would expect Vodafone to be able to produce underlying figures which back up the economic justifications of these new roaming charges. This is where Vodafone’s case may unravel:
6) national pricing: the stated aim of the European Commission was to drive intra-EU roaming charges to national levels payable when a user of one network in, say France, calls the user of another network in, say, France. Vodafone’s target of €0.55pm compares with theoretical charges in the UK of €0.51-€0.58pm. Very nice.

7) this is fatuous: few would (or do) pay that sum. Instead, contract customers pay a fraction of that within packages of bundled minutes (including roaming with other networks) and savvy pre-paid users buy different mobiles from different operators to avoid these exorbitant charges. So to benchmark “national roaming” charges against those only paid by the sick and the infirm (and the young and the stupid) is crass;

8) this crude mechanism could even backfire as the EC may want to turn its attention to national roaming charges. Something not dissimilar happened in the case of fixed leased-lines in the 1980s.

Beyond the EU
The last two points to consider are related to the wider ramifications for Vodafone itself and for the EC:
9) past experience tells us that once single markets are created, the regulators responsible look to extend their spheres of influence in matters such as tariffs and pricing to neighbouring or global trading partners. The EC has put in place a springboard for doing this, but it’s not yet clear whether it wants to jump. Like the US before it, Europe might hide away from the issue.

10) likewise, Vodafone has seen the sands shift beneath its feet. If it genuinely believes in the principles of the market and “what our customers tell us they want”, it had better start re-thinking its global pricing strategy.

Cynically hedging its bets in Europe is not necessarily the right place to start.
Jim Chalmers