Monday, September 01, 2008

The consequences of meddling

It seemed so easy – nip in and force mobile phone companies to cut their fees and, hey presto! You have a "Europe of results" and everybody will love you.

As it turns out, it ain't that simple. Start interfering with the complex workings of the mobile market and you get all sorts of unintended consequences. That much comes over with crystal clarity from the reaction of Vodafone - one of Europe's largest providers – to the latest meddling by the commission.

As recorded by the Financial Times and the BBC, Vodaphone is vented its anger at Viviane Reding by making the “extraordinary claim” that 40m Europeans could be forced to ditch their mobile phones, all because the EU wants to be loved.

The current battle is about so-called "mobile termination rates", industry jargon for the charges mobile operators impose on each other, together with fixed-line phone companies, for connecting calls to their wireless networks.

These wholesale charges represent between 15 and 20 percent of operators' revenues, and have been an important means of recovering costs. But now, after its "success" with roaming charges, Reding wants these charges cut.

Vodafone's response is that, if they are cut, retail charges will have to be raised to compensate for the losses, pointing out a rather simple truth that seems to have evaded the commission, like: "Failure to recover costs risks bankruptcy."

At stake is a completely re-shaped charging system, adopting a US-style system whereby mobile users pay to receive calls as well as making them. Reding thinks this is a good idea because users there – reputedly - pay lower call charges and make greater use of their mobiles.

On the back of lower termination charges, Vodafone argues that operators will have no option but to raise retail charges for European customers, also warning that the impact of increased charges would be felt by less well-off customers who have cheap pay-as-you-go deals with operators rather than the more expensive monthly contracts.

This is because Vodafone says most of its revenue from pay-as-you-go customers is derived from them receiving incoming calls, which attract termination rates. These customers make relatively few outgoing calls.

On this basis, a survey by the market research firm Taylor Nelson Sofres, commissioned by Vodafone finds that about 10 percent of Europe's mobile phone users – estimated at 40 million - would ditch their mobiles, rather defeating the object of Reding’s latest initiative.

Whatever the outcome, this one looks like running and running, the only certainty being that, by the time the commission has finished meddling, the mobile phone industry will be in about as good a shape as the Common Fisheries Policy.