The thought of Apple becoming an MVNO and offering its customers IP voice and messaging services as a cheap alternative to conventional voice and SMS is one that keeps many mobile operator CEOs awake at night. It is not just the loss of voice and SMS revenues that alarms operators. It is the risk that the operator would lose so much of its retail business. Network operators would become invisible to many of their (previous) customers.

To reduce the risk of this happening mobile operators in Europe are keeping the cost of wholesale mobile data high enough to deter any MVNOs from offering a service that is attractive to heavy data users. Wholesale prices tend not to be regulated so it is pretty easy for operators to set a pricing structure that would prevent, for example, an MVNO from setting a high retail price for SMS and voice services and a competitive price for data.

But what if regulators did start setting price caps for data wholesale tariffs? Might this be enough to encourage the likes of Apple and Google to enter the MVNO business?

This is precisely what the European Union is in the process of doing for roaming services. And if new players such as Google or Apple enter the roaming data business, as Informa Telecoms & Media believes they will, might this not give them the appetite – and a backdoor into – the national mobile data market?

New EU roaming proposals

In late March the European Parliament, Council and Commission agreed to new wholesale and retail price caps for roaming services for the period July 2012 to June 2017. The glide path for data roaming will see the maximum price of wholesale data fall to €0.05 per megabyte by July 2014 compared with a retail price cap of €0.20 per megabyte. These prices are interesting on two levels. First, the difference between the wholesale and retail price caps means that there is a significant opportunity for new players to compete in the data roaming market so long as they can build enough volumes to justify the investment in setting up a roaming MVNO. Secondly, the price of €0.05 per roaming megabyte is, according to research by Informa Telecoms & Media, about the same price that many mobile operators are offering MVNOs for national data services.

The new EU roaming regulations – which will be ratified within the next few weeks – is designed to help both existing “national” MVNOs and future “roaming-only” MVNOs – to compete with operators in providing roaming services to end users. In the same way that national MVNOs buy national voice and SMS services at a discount of around 50% on retail prices, they will now be allowed to buy roaming services at a discount of 50-70% on the retail price cap.

“Roaming-only” MVNOs will be able to enter the market from July 2014 by offering (voice, SMS and data) roaming services to people who want to stay with their existing operator for their national services. The Commission wants the industry to develop a technology which puts a second identity (dual-IMSI) on mobile users’ SIM cards which allows them to have separate providers of national and European roaming services while retaining the same number for both. There is a variation on this approach which relates only to data roaming. The concept is called “local break-out” with the idea being that when someone crosses an EU –border they can then subscribe, on the spot, to a mobile data service provided by one of the networks in that country. The visited network operator would set the price for the service but it would appear on the bill provided by the user’s home network operator.

European regulators are still trying to figure out the best technical approach for allowing these dedicated “roaming” MVNOs to enter the market. There is some concern that the cost of implementing the dual-IMSI approach will outweigh the benefits in terms of lower costs to mobile users.

Data offers the best opportunity for new players

But the local-breakout option is relatively straightforward and easy to implement from a technical perspective. The real question here is who will have the brand, the marketing reach and the distribution channels to pitch their roaming-only services to end users. We are doubtful that many existing MVNOs can compete in this space because they do not have good enough access to those mobile users who might be interested in buying a mobile-only data service. Another possibility is travel companies, insurance firms or airlines who could offer roaming packs on intra-European flights. But we believe that the most likely players to enter this space are either the operators themselves or smartphone OEMs via their application stores.

Most smartphone users today turn off data roaming when they arrive (or before they arrive) in a foreign country. With an activated data connection many data applications run in the background without the mobile user even benefitting from using service. So, it is possible to run up a high mobile roaming bill even without using the service because most roaming data price plans are charged on a per-megabyte basis.

This is frustrating for smartphone vendors because it means that their customers cannot use their devices when, arguably, a data connection could be most useful to them. There is massive pent-up demand for data roaming services because when people are away from home they could use the Internet for a whole range of communications, information and entertainment services that they may be able to access at home using other media. In the case of Google, no data connection means no advertising revenues.

Data roaming could also be a lucrative opportunity for players such as Apple or Google. By the end of this year there will be close to 100 million Android and 50 million iPhone users in Western Europe. The profile of iPhone and Android users correlates closely with mobile roamers because they are mostly high-end consumers and business users. Furthermore, both Google and Apple would be able to market roaming services via their applications stores, Google Play (formerly Android Marketplace) and Apple’s Applications Store.

Neither Google nor Apple has commented on this potential new opportunity but we think it inevitable that they will assess its potential. The easiest way for them to enter the market would be either to set up an MVNO business themselves and go around negotiating deals with operators in each country or, what  is more likely,  to work with an operator or MVNO (or MVNE) who already has these agreements in place.

If Apple or Google do enter the market, and their customers like the idea of buying a service from them rather than the operators, it would only be logical for them to look to start providing services in national markets. As we pointed out earlier, operators can use wholesale pricing approaches to prevent an MVNO from being competitive in the retail market. But such is the level of competition between operators in many European markets that it is quite feasible that one operator would take the view that it has more to gain than to lose by acting opportunistically and becoming the preferred wholesale partner of a smartphone OEM. Once this happens then Apple or Google will have the chance to become fully-fledged providers of mobile services.

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