The European mobile telecoms industry is now at the maturity stage of its life cycle.  While the introduction of LTE is still a relatively recent event, there is limited revenue growth and consolidation is starting to set in. Rather than being challengers, in some ways mobile operators themselves have started to look like the old fixed line operators at the start of the telecoms market liberalisation in the 1980s.

Now these very mobile operators are on the defensive as the EU increases pressure to create a single telecoms market and puts its weight behind wholesale price transparency and net neutrality. Three of the statements made by Neelie Kroes, VP of the European Commission responsible for the Digital Agenda in her speech of the 9^th of July 2013 impact significantly on operators:

—  “Blocking or throttling services isn’t just unfair and annoying for users – it’s a death sentence for innovators too. So I will guarantee net neutrality.”

—  “European calls shouldn’t count as a costly international call; not within a true single market. …. so any difference in price must be objectively justified by additional costs.”

—  “In a true single market, there are no artificial roaming charges. It’s irritating, it’s unfair, it belongs to the past.”

In her speech Ms Kroes also addressed the issue of cross border consolidation: “If you’re allowed to operate anywhere in Europe – authorised within an EU framework — then you should be able to operate everywhere in the EU. … Like a single authorisation system with supervision by the home member state.”

While as yet true cross border consolidation has been rare, we already witness increased consolidation within markets either outright through M&A or through RAN sharing. RAN sharing is encouraged by some regulators in order to deliver mobile broadband coverage in rural areas and better LTE speeds in a wider band. For example, the “mutualisation” of spectrum was central to the 800MHz licence award in France. Regulators are well aware of the threat to competition posed by RAN sharing but in a mobile broadband world the economics of deploying LTE in a wide band favour RAN sharing.

These factors – cost orientated pricing, net neutrality, and consolidation – will shape the European mobile industry during the coming years.  They may even lead to the unbundling of mobile access from the provision of services, just as we have seen in the fixed network. Implicit in consolidation at network level is increased price transparency at wholesale level to allow multiple operators to compete fairly at retail level. In this context the elimination of roaming charges points towards the end of the traditional Inter Operator Tariff (IOT) roaming wholesale tariffing. Possibly within the EU bureaucracy someone has already been tasked with drafting a directive that would require EU mobile operators to publish a “reference access price offer”.

Let’s imagine a future where Apple or Google obtain wholesale access (MVNO) agreements in each of the European states and, instead of replicating the national mobile operator model, launch a pan-European service where the EU is a single nation, at least in terms of mobile phone service costs. Far-fetched? Well, many consumers already make smartphone choices ahead of network choices and to many people OTT services such as Skype, FaceTime and WhatsApp matter more than traditional phone calls.  We might even see a resuscitation of the trans-Europe dialling code (+388) designated for the European Telephony Numbering Space or ETNS.

As regards separating access and service, a line of attack comes from operators such as Rebtel in Sweden and Republic Wireless in the USA. These operators use WiFi offload and “push” their customers to make calls using Skype like services.  Mobile networks are only used in an MVNO fashion when out of WiFi coverage.

Is this the nightmare scenario for traditional mobile operators, where they are relegated to perform the role of the much quoted “dumb pipe”?  Firstly there is nothing “dumb” in operating a highly sophisticated LTE network while migrating millions of users from GSM and HSPA and coping with the mobile data tsunami. Secondly the massive growth in mobile broadband requires huge investments. Investments require returns and therefore it is the pipe where returns will be earned.

This scenario may actually be rather benign for investors in the mobile industry. Rather than fighting subsidy wars, being played off by against each other by Apple, and driving up prices in spectrum auctions, operators could get on with building a superb mobile broadband infrastructure in an environment that allows investors to earn stable returns. After all, in the history of the European mobile industry the greatest decline in return on capital employed resulted from the 3G auctions in 1999 – 2002. Let others go crazy!  Investors who are attracted to stable returns would continue to invest in mobile network operators whereas those who seek a higher risk / return profile would invest in companies that provide services over these networks.

What has been the reaction of the mobile operators to threat to roaming and international call margins?  Some claimed that the loss of margin from roaming would lead to price increases elsewhere.   Yes, it probably would i.e. prices would become more cost orientated. This is not necessarily a bad thing for the mobile industry.

As the market is opened up and access is unbundled from other value chain activities this provides an opportunity for new competitors. Operators such as Lebara and Lyca had some success in competing on the basis of low cost international calls from mobile phones. MVNOs such as Truphone, WoldSIM, roamline.com arbitrage the difference between wholesale and retail prices to deliver  cheap roaming. Mobile operators watch these trends carefully and will not make general price cuts on high margin services if this reduces overall profits. They are responding in smart ways by offering low cost roaming to those who seek it. For example, EE of the UK which focusses on LTE offers “inclusive unlimited roaming minutes and texts for an extra £5 a month on a 24 month roaming plan”.  Here we can see the future of roaming tariffs. The bigger threat is to those niche operators because their arbitrage opportunity reduces.

In response to lower intra-EU roaming charges some operators increased roaming prices outside Europe, but not in a cost orientated manner.  Most operators are wedded to a zonal pricing approach, pretending that somehow costs increase with distance. That’s nonsense.  Some of the highest Inter Operator Tariffs are levied close to Europe. For example, Tunisian mobile operators collude to set wholesale roaming prices as high as €1.50 per minute. While a European operator’s retail price for roaming in Tunisia of €2 per minute including VAT might seem high, it barely covers the wholesale cost. In some other markets much lower wholesale roaming prices can be obtained. This is also evident from the countries covered by EE’s unlimited international roaming deal which includes Europe and an odd mixture of countries including Australia, the US, Peru, Turkey, etc.

And what about the subsidised contract customer, i.e. the customer supposedly “owned” by the operator? After all the separation of handset and SIM was one of the great innovations of GSM because of its potential for increased competition. It is not necessarily the case that a customer life time value is higher for a consumer with an operator provided subsidised smartphone compared to a SIM only smartphone customer with a 30 day rolling contract.

Operators are aware of these trends and their offers are evolving in a segmented response to changes in the regulatory and competitive environment. There may be bumps along the road, but I am optimistic for the future of the mobile industry as a sector worth investing in.

Stefan Zehle, CEO, Coleago Consulting