July and August are important months for mobile operators – at least they are in the northern hemisphere. Important, not because people spend that time buying new mobile phones and the like, because they don’t. Instead they do something far more interesting: they go on holiday. And when they go on holiday, they take their mobiles with them.

As a result, the warm, smug glow of success permeates the quiet boardrooms of almost every mobile operator as ARPUs soar while the lazy summer months pass.
Consumers in Europe though have every reason to be mystified by what is going on. In the world of roaming, they really do not know whether they are living through the best of times or the worst of times.

On the optimistic side, they have been bombarded over recent weeks with messages telling them that the cost of roaming has been dramatically reduced by the benevolence of their service providers. They may even have seen similar announcements from one or other of the telecoms regulators, either at home or in Brussels, trumpeting the latest consumer benefit from the latest regulatory intervention.

But consumers are not fools – and they have long memories. On the negative side they have seen it all before: messages announcing price reductions have arrived in previous summers, followed by large unwelcome phone bills that land on their doorsteps some months later as the summer comes to an end. “You’re not going to fool me again this year,” they think. So in their thousands, they turn off data roaming, they buy local SIM cards, they scout around for free WiFi or any combination of these and other cost-saving techniques.

Which is it then: the best of times or the worst of times? After all, the Lions did humble the Wallabies, a Brit has won Wimbledon, the Tour de France is again claimed by the UK and England are currently dominating the Ashes – surely all things are possible. Perhaps this really is a good time to go roaming?

1st July 2013 saw the latest reduction of roaming charges across Europe. These reductions, forced onto operators by regulators, are part of a series of annual price reductions that have been going on for some years. Regulated retail data prices fell on 1st July 2013 by 40% per MB from €0.25 to €0.15. At the same time there have been more modest falls in the prices for inbound and outbound voice calls and for text messages. These price reductions are clearly good news, but consumers are right to be wary: the reductions are not really significant in the overall scheme of things. Using a phone abroad may cost less than it did last year, but it still costs a lot more than it does at home so the message remains the same: consumers who do not want a big bill when they get home should keep a tight and canny rein both on how and how much they use their mobile abroad.

1st of July 2014, however, may be a different story – but again consumers should not hope for too much. From that date more fundamental changes to the roaming regime are due to take effect. Specifically, citizens in the EEA (i.e. the 27 EU countries plus 3 other countries) will no longer have to get roaming services from the same operator that provides their domestic service. Instead, they will be able to get roaming services from an ARP (Alternative Roaming Provider) or by way of LBO (Local Break Out). Fundamentally, both ARPs and LBO are an attempt by regulators to break the monopoly that mobile service providers currently enjoy and open up the market to competitive forces. The question is though: will either ARPs or LBOs have the desired impact of driving down the market price for roaming to the same level as at home?

First, ARPs. It had been hoped that ARPs would do for roaming prices what MVNOs did for domestic prices. Evidence on the ground however, suggests that there are going to be few businesses, if any, that will set themselves up to be ARPs. If this is right, then clearly something has gone awry in the regulatory framework. In this context the finger looks to be pointing at 2 things: first, ARPs have not been given any rights to steer traffic onto any particular foreign network which leaves them at the mercy of whatever steering decisions the DSP (Domestic Service Provider) may choose to apply for its own purposes; and second the price at which the ARPs are able to buy roaming services for onward resale to consumers is too high for the ARP to be able to establish a viable business.

Second, LBOs. Here the news is better and it does look that LBOs will reach market and will have an impact. LBO’s can be thought of as the mobile equivalent of someone buying a WiFi package when they land in a holiday destination, but instead of buying access to WiFi, the consumer uses his or her credit card to buy access to one or other of the mobile networks in the vicinity. In theory, it may be the identical access on the identical network that the consumer would get via his or her DSP, but it is likely that the price will be dramatically lower, so much lower that it should be about the same price that the consumer would pay when using the mobile back home.

Make no mistake, the goal that the regulators are driving towards is one in which the citizens of Europe can roam freely across the member states with no appreciable roaming premium at all. Given that we Europeans are so used to losing our shirt and much else besides if we even look at our mobiles while on holiday, this may seem to be an unattainable goal. But it is not. In the US it happens already: US subscribers can roam across state boundaries without premiums, irrespective of whether or not they stay on the home network or roam onto another network. True, our American cousins pay more per month for their mobile service, but that sense of having been massively over-charged for a short call or a quick data session is something that they no longer experience. And if it can happen across the United States of America, it can happen across the Member States of Europe. There is no technology barrier here: it is a purely a pricing issue. In Europe, we are simply so conditioned to paying excessive roaming charges that we struggle to conceive of a world where they do not exist.

In all this though, one must not ignore the plight of the operators – because they are in a difficult situation. Whilst having to pay for new spectrum licenses, for LTE roll-out, for refreshes of old technologies and fund expensive new smartphones for customers, the operators are absorbing unprecedented pressure on their revenues. The pressure is from both regulators and market forces – both driving revenues down. Many think that the situation is unsustainable and that something will have to give because increased investment levels in the face of declining revenue is a toxic mix. But regardless of how difficult the plight, this roaming issue is entirely of the operators own making. It was they who chose to exploit roaming by way of super profits, totally disassociating the prices charged from the costs of supply. And it is that particular chicken that is now coming home to roost. One way or another the combined regulatory forces of Europe are going to drive excess profit levels out of roaming.

The correction is coming – it is only a question of how long it will take. July 2014 will be a significant milestone on that journey, but it seems likely that European roamers will continue to be exploited for 1-3 years beyond that point. It is unlikely to be the advent of ARPs that causes the correction. Certainly the annual roaming price reductions are not going to do anything other than reduce slightly the level of excess pricing. LBOs will have some impact but it will be limited. Perhaps it will be the latest initiative announced by Neelie Kroes that will bring down the curtain on this sorry chapter of excess pricing. One thing however is clear: it is not a question of “if”, merely of “when”.

Curiously, mobile operators will be better off in many ways once the correction has occurred. Until that has happened, their customers will continue to behave in a sophisticated way and will swap SIMs, bearers, apps and networks in order to avoid being exploited. In such a situation, true customer loyalty is impossible to build and at the same time, opportunities are created for new entrants to claim a valuable slice of the overall value chain. But once the price distortions have been eradicated, the operators can rebuild some of the loyalty and trust that they seem to be destroying with wilful abandon at present and can fight off the new entrants.

Meanwhile, what is a consumer to do? Well for me, it has to be a SIM card from a foreign operator when I go on holiday. The best package of data that my operator offers to me is £35 for 200 MB which is 17.5p/MB. Contrast that with the deal I can get in Germany on a SIM-only, Pay-as-you-go package – 3GB for €20 meaning the price is 0.67 Eurocents per MB. That is roughly 1/30 of the rate my operator offers. An alternative way of looking at it is that by swapping SIMs, €20 will get me a decent sized data bundle that would cost me £525 if I had got the same allowance from my home operator at its best rate. For me therefore, the decision is an easy one.

Many issues and questions do arise from the above, some of which are listed below. At Azenby we can help and would welcome the opportunity to discuss them further.
1. How ready are the European networks going to be for the new regime by the deadline of July 2014?
2. Is there any way that Non-European operators find a way to benefit from the changes going on in the European theatre?
3. What should a European operator do and what should it be aware of in relation to ARPs, LBO etc?
4. How do the changes in European roaming make things better or worse for OTT players?
5. Should a European operator embrace LBO services or not? And if so, what is the best way to do so?
6. What are the opportunities and risks for a potential ARP entrant?