Good morning ladies and gentlemen

Introduction

I am asked to talk about the future of mobile communications from the perspective of users.

I see that I am to be followed by the representatives of Vodafone and Deutsche Telekom AG, two of the leviathans of telecommunications. They have the advantage over me of determining what they condescend to offer to the market. If not the speakers themselves, then their bosses, are engaged in the face-to-face lobbying of Commissioners and Chancellors.

It is impossible to consider the future without recalling the past and making an effort to understand it. Those who are unfamiliar with the past are doomed to repeat it.

The sad state of affairs into which we have presently fallen is still unravelling.

The prices of shares are still being readjusted.

The value of assets is still being reappraised.

The past adjustments to accounting books are slowly being rectified.

In 1841 Charles Mackay wrote an authoritative history of early financial bubbles. It was entitled Extraordinary popular delusions and the madness of crowds. Ironically, it was just as the railways were booming, creating the next bubble.

We are now in the final stages of the most recent and the greatest of all economic bubbles.

A couple of years late, we now know what fin de siècle really means. The Dot Com business was far, far greater than anything imagined by the stock manipulators of South Sea Bubble or the Compagnie de la Louisiane ou d'Occident.

One of the end points was the auctioning of spectrum for the third generation.

Supporters of auctions had asserted that businesses knew the value of spectrum much better than bureaucrats. They convinced governments that this was the best way to allocate spectrum. The risks and delays of legal actions brought by operators over beauty contests, not least the one in the Republic of Ireland, worried governments greatly.

What had not been anticipated was that the value at auction might be related not to the tedious business of selling voice telephony and SMS, but to the vastly more exciting business of selling paper certificates with the names of the mobile phone companies printed on them. That the leaders were also getting substantial share options was, doubtless, a further temptation.

We are invoked by Christianity to be the keeper of one's brother. This translates into the question of whether we might have been spared at least part of the present mess if "we", whoever that is, had but crossed the road and done something to prevent the self-immolation of the mobile operators.

It is tempting to wonder whether the mobile operators, as such asiduous employers of pharisees, sadducees and the like, are not excluded, but I digress.

Some people imply or sometimes even say openly, that the money should be returned. It never seemed very practical to me to prise £21,500 millions out of the hands of the Chancellor of the Exchequer, a rather dour Calvinist. Moreover, it was paid as an act of free will, a concept very well understood by Calvinists. I do not think that heart of the German Chancellor is any less hard on this subject, not least because of the loss he has incurred by the fall in the value of the shares in Deutsche Telekom AG.

However, undesirable the present state of the mobile telecommunications world, we have to live with it.

It seems that after a gap of many months we are once again to have some acquistions to be considered under the Merger Regulation. The defenestration of Monsieur Messier may have put the total control of SFR within the grasp of Vodafone.

The position of users is one of extraordinary reluctance to see further consolidations in mobile markets. These seem to be exercises in financial engineering rather than in the delivery of economic or technical benefits to customers. There has been nothing whatsoever in this for us.

The operators engaged in these takeovers, including the companies represented on the panel, have fought and lost campaigns of bitter resistance to user demands on regulatory issues. These include Mobile Number Portability (MNP), international mobile roaming charges and call termination. In each case such benefits as we have obtained have required enormous expenditure of energy. There are member states where a decree nisi can be achieved more rapidly and more completely than the change of mobile operator with the retention of the number..

Consolidation would be very much less bitter and distasteful if any benefits at all went to the customers. They go exclusively to the shareholders.

Clearly consolidation below the level of four mobile operators is something we would not wish to see and could not accept.

Issues

The main issues I want to address this morning will be:

• competitiveness
• interntional mobile roaming
• call termination charges
• data services
• it ain't over
• conclusions

Competitiveness

In the past I could talk about the non-competitiveness of the mobile sector in relatively casual terms, though it has always been an extremely serious concern. Looking ahead to 25th July 2003, I have to be both systematic and accurate. Doubtless what I say and what is put on the INTUG web site can and will be used in evidence, whether or not anyone here Miranda-ises me.

For half a decade we have faced a great divergence between on the one hand the rhetoric of the mobile operators and on the other the realities of the various markets. We are constantly told that mobile telecommunications is fiercely competitive. Indeed it is the most competitive thing anyone has seen since 1776 or, perhaps, October 4004 BC. The former is the year in which Adam Smith published An inquiry into the nature and causes of the wealth of nations.

We are told to stand back in awe and wonder. We are told that forbearance from regulation is required if this wonderful edifice was not to collapse in a heap of dust. Whether the vertiginous descent of the share prices of the mobile operators to their present level amounts to a collapse into heap of dust I need not be the judge, since there are financial analysts in the room.

The realities of the various markets have been very disappointing. Customers do not see competitiveness but only advertisements, balloons and the like.

The general consumer is faced with a complexity of tariff offerings which he or she may only otherwise see in the purchase of a house or a pension.

Nobody ever admitted to getting the best deal for mobile, since nobody ever admitted of having fully understood the deals on offer. Many parts of the tariff schemes are utterly unknown, notably the prices of calls to domestic and especially foreign mobiles, to say nothing of international mobile roaming charges.

The FCC has issued its Seventh Report on the state of competition in the Commercial Mobile Radio Service (CMRS) which concludes that:

... in the year 2001, the CMRS industry continued to experience increased competition, subscribership, and innovation as well as lower prices for consumers, and increased diversity of service offerings.

During 2001, wireless operators continued to fill in gaps in their national coverage through mergers, acquisitions, license swaps, and joint ventures. In parallel with this process of footprint building, mobile telephone operators continued to deploy their networks in an increasing number of markets, expand their digital networks, and develop innovative pricing plans.

http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-223382A1.pdf

Yet concerns were also expressed about the limits and lack of competition in rural areas. More generally, there is a fragility in competition, given the risk of consolidation.

The European Commission's Seventh Report identified a number of bottlenecks to competition, notably call termination charges in mobile networks.

International mobile roaming

The story of internaitonal mobile roaming is long and the worthy of an epic poem. The battle by users to drive down the prices to something which reflects their costs has dragged on for some years. It has been fiercely opposed by the mobile operators.

It is relatively easy to show that something is very badly wrong.

Let me take the example of calls between Belgium and Hong Kong SAR. Belgium uses calling party pays, while Hong Kong uses receiving party pays, so we should allow for air time there on certain calls. We can see a range of prices in the two tables, going from 14 Eurocents up to more than 313 Eurocents for what is basically the same call, with some fairly minor variations in the network elements.

Sources:
1. http://www.belgacom.be/web/res/documents/tariffs/Benefit+_EN.pdf
2. http://customer.proximus.be/download/internat_fr.pdf
3. http://www.smartone.com.hk/cgi-bin/cyberface/roaming.pl#pulldown
4. http://www.smartone.com.hk/cgi-bin/cyberface/idd.pl?show=tariff
5. http://www.hkt.com/NASApp/cs/ContentServer?pagename=PCCW/PCCWHK/ProductsServices/ProductContent&cid=1007415912878&pagelang=eng&columnid=2#
6. http://www.hkt.com/NASApp/cs/ContentServer?pagename=PCCW/PCCWHK/ProductsServices/ProductContent&cid=1007415920121&pagelang=eng&columnid=2#
7. http://www.everdialback.com/rates.asp
8. http://www.mobistar.be/en/optimum/1595/bill.htmll

Some Hong Kong tariff information is available from the NRA at http://www.ofta.gov.hk/frameset/consumer_index_eng.html

Exchange rate 1 EUR = 7.6 HK$

Proxiumus, a Belgacom/Vodafone company, evidently thinks nothing of giving its customers an 81 page brochure to download in a file of almost 9 megabytes. You are invited to take it with you on holiday, doubtless alongside your copy of yellow pages, the proceedings of the European Convention and Lord of the Rings in Elvish. All this in spite of a Code of Conduct on the provision of information on international mobile roaming costs.

Initially roaming was a novelty, it did indeed have a higher value to users. At that time the operators were national and had to make complicated arrangements for roaming. Yet the numbers of roaming customers grew and it became an everyday event. Its value to users declined as it became accepted as an everyday reality.

At the same time the operators grew by acquiring each other to create mult-national platforms. Yet, somehow those international networks have been unable to deliver truly international services. For practical purposes, we continue to live in the early 1990s in terms of roaming.

As users we are completely unable to see any price reductions in international mobile roaming charges. Even the largest of Europe's business can do no better than the Vodafone Eurocall scheme and that remains unapproved by the competition authorities.

The market failures are clear enough in those numbers. The prices vary in the most peculiar manner, clearly unrelated to costs. The underlying drivers of cost reduction seem not to affect the prices. The pan-European capacity of the operators again has no effect.

It is necessary to prove collective or joint dominance. To do so, it is necessary to demonstrate that:

1. each member of the dominant oligopoly must have the ability to know how the other members are behaving in order to monitor whether or not they are adopting the common policy
2. tacit coordination must be sustainable over time, that is to say, there must be an incentive not to depart from the common policy
3. must establish that the foreseeable reaction of current and future competitors, as well as of consumers, would not jeopardise the results expected from the common policy

There remains no doubt over the conclusions of the sector inquiry. It is down to questions of timing, of the length of the list of guilty parties and the size of the fines. It is not, by any means, confined to the operators in Germany and the United Kingdom.

The signals to the market have been clear from INTUG, from the European Parliament and from Commissioner Monti himself.

We should, I trust, see an announcement before the end of this year.

The end game seems to have required the CEOs and chairmen of the mobile operators to lobby in person the Competition Commissioner. There are few legal procedures in which the plaintiffs can solicit leniency from the judge in secret before the verdict is delivered.

It will have taken some four years to get to a judgement. Even then we cannot be certain that we will not have appeals to the European Court of Justice. It was entirely avoidable if the operators had behaved sensibly.

There is also a general message about the difficulty in reconciling the pace of market and technological development with the pace of competition law.

Under the new legislative package one of the tests is the effectiveness of competition law to a market or market segment. Part of that will be the tractability with which one can address the problems using competition law. A further problem is that NRAs will be looking to relatively short time horizons of twelve, eighteen or at most twenty-four months. However, competition law remedies take three, four or five years. Thus competition law may never be considered effective within that period.

Call termination charges

I come now to a touchy subject. I am conscious that one of the speakers was once a strong advocate for the reduction of call termination prices. However, since he went over to the dark side, he has reversed his position.

Put in simple lamguage, the mobile operators leverage their market dominance from their own call termination markets into call origination markets. They do this both at home and abroad. Callers and their carriers have no alternative but to route calls through the mobile network operator.

I suppose there would be a very small market for an operator offering calls only to fixed networks.

Originally the higher calling costs were for domestic calls. These prices were kept very high. The Swedish regulator noted that the price had remained unchanged for seventeen years, until the NRA stepped in to force the hand of the operators. Now the prices are, very gradually, being ground down.

The operators discovered, I think by accident, that they could make up the money they lost on call origination and "free" handsets by means of articifially high termination prices. It turned out that customers looked at the price of outgoing calls and very few at incoming calls. There is no evidence that the vvast majority of fixed customers know the cost of calls to mobile networks.

We welcome and support the decision by Post- & TeleStyrelsen (PTS) to find all operators on the Swedish mobile market have SMP. We are confident that PTS will win the appeal by the operators.

There are some PBX-substitutes such as the Vodafone "Wireless Office". These appear to avoid the expense of call termination and are being offered at prices levels that look identical to fixed networks. As far as I can understand there are no other compensating payments. The telephone numbers concerned are available to all callers.

The high price of domestic call termination on mobile networks worked extremely well in domestic markets, bringing operators considerable sums of money without the slightest sign of competitive pressures to drive them down. It was logically and understandably extended to international markets with the further advanatge that the charges were even more obscure. I doubt anyone in this room can tell me the operator codes for more than a couple of countries.

To call a mobile phone in the UK or in Germany, Belgacom will charge a residential customers an additional thirty (30) Eurocents per monute over the price of a call to a fixed telephone. In the reverse direction British Telecom charges an additional fifteen (15) pence. There are some special cases, such as a caller from a Deutsche Telekom AG fixed line to a T-Mobile phone in the Netherlands or in the UK. Here the call is carried exclusively on a DTAG network, yet incurs the same "surcharge" as a call to one of the other operators.

The spot market is a ready source of data for international termination prices. Though it is far from being a perfect source of data.

The variation in fixed termination prices is relatively small within the European Union, with the ezxception of Greece. It is a little greater for the OECD countries. It is really in the Accession countires where prices start to rise. (Turkey has been removed from the data, because the number is substantially over 1000.)  

Figure 1  Index numbers for fixed call termination for OECD countries (July 2002)

Source: Arbinet

The following figure gives the ratio of mobile to fixed call termination prices. The cost of mobile termination in European Union member states ranges from four to fourteen times the price of fixed termination. The variations are extremely difficult to explain. The USA and Canada are 1, because they use Receiving Party Pays (RPP). However, some other countries using RPP have a higher mobile termination price than a fixed price.

Figure 2  Ratio of the spot market prices for mobile to fixed for OECD countries

Source: Arbinet

There has been some modest progress in Japan where the Government has accepted cost orientation for international calls to NTT (see USTR). However, this has yet to be enforced and needs also to be applied to other mobile operators, since they are also major suppliers.

At the ITU I was recently accused by someone from the Vodafone regulatory team of being in "furious agreement" with his firm. I was certainly furious as he well knows. If indeed there is agreement it is on the very limited grounds that call termination should be subject to the principle of cost orientation.

The mobile operators have attempted to redefine cost orientation to include every cost that they can think of. It is not merely the cost of terminating the call, it must also include the bonuses for the directors, masts and transmitters in remote and rural areas, cross-subsidies for hand-sets, high customer acquisition costs, churn management, speculative investmensts in other operators, writing off specultive investments in other operators and, of course, their licence fees. It seems nothing is to be excluded.

3G already looks to be a very expensive proposition in Europe. If operators impose very high call termination prices and the consequent need to get a new and more expensive 3G telephone number, nobody will ever migrate to it. Certainly, few people will call those numbers. This is exactly what the European Parliament warned about, that the licence fees were to be paid by those in other countries not only as roaming fees but in the high costs of calling people with 3G telephones. It raises complex questions about trade between member states.  

There seems to be a disproportionate recovery of costs from calls from fixed networks, compared to those from mobile networks or calls from fixed networks. It seems, at best, extremely unfair.

Data services  

Of course the 64 trillion dollar question is whether the operators can make a single Eurocent from mobile data and services.

I have joked before now that 3GSM stands for Third Generation Serial Murderer. The operators have managed to kill off WAP, HSCSD and GPRS. It may yet prove that the operators are the killer and that there is no application for 3G.

It is sad to have to say that GPRS is dead. The prices are staggeringly high, out by a least an order of magnitude. The bandwidth delivered is poor, despite the small number of users.We have no sense whatsoever that the operators have a clue about what they are selling. The roaming availability is extremely limited.

How can a telecommunications manager be expected to offer someone in his or her company a phone with voice in more than one hundred countries and data in four or five? Let alone justify the punitive prices in those few countries.

We simply do not see the sort of thinking amongst the European operators that takes users to GPRS, to EDGE and on to 3G.

The fat lady sings

The Worldcom/KPN case on mobile call termination is in the end-game and we can expect the full publication of the details in a matter of weeks.

The definition of a single operator termination market under the new legislative package will certainly survive the present consultation by the European Commission. The attempts by the mobile operators to evade this is not something which should be watched by the squeamish. It will then be up to individual NRAs to act over the coming months. On past experience we can expect to see staged reductions down to cost oriented prices.I say that because I cannot see an alternative remedy. you cannot introduce more competition for there is neither spectrum nor money for new entrants. I do not see how non-discrimination could be made to work.

The Competition Commission in the UK ought to finish by the beginning of next year its marathon appeal case from Vodafone and mm0₂. This will provide us with numbers telling us more about the true costs of mobile operators. It has allegedly cost the operators £20 millions in experts, so one might reasonably expect something good for that price.

The European Commission's market definition for international mobile roaming will cause the wholesale prices to be investigated. Again we can expect to see measures put in place to achieve competition.

By this time next year we will be a lot wiser on the competitiveness of mobile telecommunications markets. A year or two after that we should have seen a substantial fall in prices. It seems that Germany has elected to run a year or two behind the rest of the European Union, so that will take a bit longer.

In the background, the financial analysts are trying to work out when and to what extent these regulatory actions will affect revenues and thus justify them in the further lowering of share prices. There is no easy prediction of how they will react, especially with the present spate of bankrutcies and doubts concerning the trustworthiness of the accounts of telecommunications operators.

Asian leadership

On the shores of the China Sea the position is rather different.

There, the market for mobile telecommunications has grown at an impressive rate. It will continue to grow at those rates for some years. A few markets are approaching saturation: Hong Kong, Japan, South Korea and Taiwan.

The Asian operators and their governments did not allow themselves to become addicted to greed, stock options, share price inflation and the like. They have kept to a steady course. They are rolling out 2.5G and 3G while planning for 4G and 5G. It is a very different and longer term perspective with many fewer obstacles and impediments to success. One reason for that, is the desire and necessity to export the hardware to other countries, based on domestic success.

3G is being rolled out in Korea and Japan with some enthusiasm. Korea Telecom, for the benefit of the World Cup visitors, laid on the first international mobile roaming video telephone call using 3G.

One of the most surprising findings of the International Telecommunication Union (ITU) was the extent to which mobile telecommunications has contributed to closing the digital divide. Mobile telecommunications has not only been a major factor here in Europe, but in countries such as Angola, Cambodia, Equador, Morocco and Zimbabwe.

There remain recalcitrant cases, such as India, where mobile telephony is held back by ill-conceived policies and a disappointing lack of imagination.

There is one problem which this good news creates. There are many millions of people in Asia whose sole telecommunications connection is a mobile, they are without a fixed line or cable television. The challenge this creates is to get them broadband access to the Internet at prices they can afford.

Where we see continuing success we see continuing close relations between government and industry. However, it is not only the operators who are involved, but also the manufacturers and the service providers. There is a strong regard for the consumer market and for affordability, not least because of the need to develop an export market.

Conclusions

I am forced to conclude that European leadership in mobile telecommunications has been lost and is irrecoverable.

Let me return to the question of investment. There was "far too much" of this in the dot.com boom and since then "far too little". We do not know how long the bear market will last and until that ends, telecommunications will be out of favour. Consequently, investment is not a very satisfoactory proxy for sucesss of the sector.

The real policy aims should be twofold, some jobs in the manufacture and supply of telecommunications and, the much larger part, the economic gains that come downstream by the adoption of the technologies. That is by the users in the rest of the economy. Thus the measures should be in terms of numbers of customers and spending by customer. We should be looking to see some revenues from data and from value-added services. Until we see that, then success will have been confined to the second generation. We should also be looking for revenues and jobs in services provided over mobile networks.

The loss of leadership was not by the policy-makers or by the users. The policy-makers did what they could to encourage competition and progression to the third generation. The users have willing paid far more than they should and have adopted services when they were only half-way to being decent and with enthusiasm than was indecent.

If there is a cricitism it is that the NRAs did not act earlier to remedy the anti-competitive behaviour of the operators. The NRAs, who might be thought to be those charged with looking out for wayward operators, were strongly discouraged for intervening, as they still are to this day. we heard yesterday DTAG ask for clear signals to the financial market that the regulation was to be lightened. Vodafone assure me that all that is required to let competition rip in international mobile roaming is for the Merger Task Force to "get its finger out". Vodafone would then cut its prices in half..

The failure lies with the operators who were more interested in share prices than in their customers.

We turn now to biblical exegesis, concerning the visiting of sins unto the third and fourth generations. That fate seems now to be beyond all doubt. If Jehovah is self-confessedly a jealous god, he is as nothing to the men in pin-stripe suits and red braces in the City of London and on Wall Street. The sins in question I have already identified as gluttony and avarice, to say nothing of a willful disregard of competition articles of the Treaty of Rome and the WTO GATS.

There is a separate problem in the adjoining financial markets. They have achieved massive leverage of power into telecommunications. It has done very little good and a great deal of harm..

The competition authorities and regulators are now picking up the pieces. Termination prices will finally be driven down. International mobile roaming will become affordable and demand will rise. Competition will be necessary in the services available over mobile data networks. In time, we will remedy the market abuses and failures. Of course, it could have been better if roaming and termination abuses had been arrested quickly. However, it is not clear that it would have forced operators onto real business models.

The case for the prosecution rests.

Doubtless, I will now be torn apart by the lions of Vodafone and Deutsche Telekom.

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Last updated 10 July 2002.