Examination of Witnesses (Questions 1-19)
Mr Steve Jordan, Mr Nick Blades, Mr Christian Salbaing
and Mr William Pedder
5 FEBRUARY 2007
Q1Chairman: Gentlemen, a very warm welcome.
Thank you very much indeed for coming to Sub-Committee B. This
is the first evidence session. We intend to report before Easter
in order to make a contribution to the proceedings in the European
Parliament and further deliberations by the Commission, and indeed
for the European Council. We are taking evidence from the Minister,
from consumer groups, and we are going to Brussels to talk to
Commissioner Reding and others. Can I ask you to be brief and
succinct in your responses, as I know you will? We are all lay
men and lay ladies, and therefore if you could try and keep the
complex descriptions—we have already discovered that termination
and roaming mean different things—if you could speak in
simple, plain English! Perhaps you would like to introduce yourselves
for the shorthand writer's record.
Mr Salbaing: Christian Salbaing, Managing Director
of Hutchison 3G (Europe).
Mr Pedder William Pedder, Director of Corporate
Affairs of Hutchison Whampoa (Europe) Ltd.
Mr Jordan: Steve Jordan, Head of European Regulatory
Policy, O2 (Europe).
Mr Blades: Nicholas Blades, Head of Regulatory
Affairs for O2 (UK).
Chairman: Is there anything that you
would like to say at the outset, or should we press on with questions?
As you know, the record is produced in draft for you to consider
in case there are any inadequacies or you wish to correct anything.
Q2 Lord Dykes: The Commission, launching
its investigation, has flatly stated, gentlemen, that competition
has failed to reduce costs of roaming. Do you agree?
Mr Salbaing: I will start, as a new entrant
and one of the operators that has been driving competition at
various levels. The starting point for us has been the cost of
roaming. You can present it in various ways, but I think it is
a fact that one of the real problems with roaming is that customers
coming back from holidays are often horrified at some of the charges
that have been made. When this came about, we stated that we were
in agreement with the Commission and those who stated that roaming
per se was expensive. What has happened since is that, looking
at the causes of that, we came out very strongly with a diagnostic
that the reason for that is that the wholesale cost of roaming,
that is the cost that operators charge each other for roaming
on to each other's network, is also very high. With the very high
cost of roaming and with the mark-up that operators charge beyond
that, you end up with a result that is a multiple of what domestic
calls might be. I would agree that we have a problem here in the
market.
Mr Jordan: We do not quite agree with that position.
We think that insufficient analysis has been done to really state
this case properly. Competition takes time to operate, and, as
people can see, certainly over the last few years and increasingly
now there are a number of products out there competing and offering
certainly attractive prices to customers. In fact, retail roaming
prices came down between the summer of 2005 and the summer of
2006 by over 20 per cent, in terms of price per minute; so that
is a real reduction in retail prices. We think the market is operating.
No market is perfect, but the market is operating.
Q3 Lord Mitchell: I must say that
I am your nightmare personified because up until last summer I
was employed by my company, which just picked up all the charges,
and now I am picking them up myself, so I have suddenly, with
horror, seen the bills come in. Can I ask you one thing about
roaming that I just do not understand? I am not with any of your
companies, so I am probably off the hook on that one! I have a
house in Italy, and when I go there and I want to call the UK
or receive calls, it is a matter of chance which particular network
I connect to when I am in Italy. In fact, I can stand still in
the same place and I can see it changing from one to the other;
but presumably the charges will be different whether I am on Vodafone,
IT, or Telecom Italia or whatever, and I do not understand it.
It does not make sense to me, so could somebody put me out of
my misery?
Mr Salbaing: I think there is a technical issue,
and then there is a pricing issue. The technical issue is that
the mobile telephone is a radio receiver and must latch on to
an operator. I do not know where you live in Italy, but it is
likely that—
Q4 Lord Mitchell: It does not when
I am in the UK.
Mr Salbaing: That is because you will have in
the UK a local subscription locked on to your provider, whereas
when you are in another country your telephone will look for the
coverage, and unless there is a thing called traffic direction,
which some operators apply, you have the option—
Q5 Lord Mitchell: How many people
know how to switch on to traffic direction?
Mr Salbaing: Not very many, but it is not very
difficult, I can assure you.
Q6 Lord Mitchell: Not very many and
not very difficult—do you agree, not good enough?
Mr Salbaing: I would agree. The good news is
that in our case we are present in Italy and we introduced a plan
two weeks ago that says if you are in the UK on 3—and I
would agree on this with Mr Jordan, that when the operators are
left to introduce plans it is good value; but if you are a 3 UK
customer and you are in Italy on 3 Italy, you will pay a UK local
call rate if you call back home. That is what we call the 3 Like
Home Tariff. So there is progress and competition between operators
but that does not apply if, as a 3 UK customer, you happen to
be roaming on Vodafone or on Telecom Italia, because then we have
to charge our customer the wholesale price that is charged to
us by Vodafone.
Q7 Lord Mitchell: But the members
of the public with 3 who go to Italy do not know this, and they
do not—
Mr Salbaing: Actually, in our case it is automatic.
If you are in 3 coverage you will automatically have that tariff
applied.
Q8 Lord Mitchell: How many other
operators do the same?
Mr Salbaing: None that I know of.
Mr Jordan: We take a different commercial approach
to this. We understand that problem and believe that customers
want to pay the same price and know what they are going to pay,
whatever network they are on, so it will not make a difference;
so we have a range of tariffs where it does not matter what network
you are on; you will still pay the same. That is a different approach.
Some people prefer the Hutchison approach, and some would want
ours; it is customer choice; but there is not one way of responding
to that issue. We recognise the issue that customers do not understand
paying different prices on different networks.
Lord Mitchell: All I can say is that
I feel I am pretty savvy on these things and I just have the distinct
feeling that people are just ripped off left, right and centre.
Q9 Lord Dykes: On that last point,
Mr Jordan, do you advertise that properly and clearly in simple
form for the customers to realise that they can be charged the
same tariffs everywhere?
Mr Jordan: It is one of our tariffs, yes, so
that is our approach to providing our advice on roaming services.
Q10 Chairman: Telefónica,
with its automatic tariff connection to 3: in how many different
countries does that apply?
Mr Pedder: Telefónica is my colleague,
Jordan.
Mr Salbaing: We are 3 Hutchison. It applies
in all of our territories. If you are a 3 customer anywhere—and
that applies to the UK, Ireland, Italy, Sweden, Denmark, Austria
in Europe, but also it applies in Australia and Hong Kong—it
automatically applies, so it is not an opt-in. If you are a customer,
this is a tariff you will get automatically. Basically you pay
your home tariff wherever you are.
Q11 Lord Geddes: There is a bit of a
merger between this question and the one I was going to come on
to. Firstly, to 3: you have recently explained to us that local
calls in Italy, to go back to Lord Mitchell's example, now cost
the same price as local or in the UK. How big a break is that
in the way the industry worked in the past? Is it in itself economically
viable and, if it is, why did it not happen earlier?
Mr Salbaing: The reason we were able to introduce
that is because we decided amongst the 3 companies not to charge
each other. This goes back to the point I made earlier: the root
of the problem is the tariffs that operators charge each other.
If you keep those high, automatically retail prices will be high.
Just to give you an example, the average cost last year of wholesale
prices across Europe was €0.9. If you add the VAT to that
and the profit margin on retail, you will see that mechanically
you will have an average retail price of over €1.2 or more
for a roaming call. Our view is that if you reduce the wholesale
charge, ie, the charge that we charge each other, very significantly,
there will be a mechanical effect on retail. That is why we do
not agree with Mrs Reding's approach, which sought to regulate
retail prices first. We believe she has it backwards. If the proposal
were to regulate wholesale, there would be the ability for all
operators to reduce their retail prices. We have done so where
we are at both ends of the equation, so that we decide amongst
our companies that we would not charge each other anything, and
therefore we were able to pass on to our clients the savings.
But if at one end I have, let us say, 3UK and Telefónica
Spain, because Telefónica Spain sets the price at wholesale
which I will charge my customer, I am not able to pass that on.
Q12 Baroness Eccles of Moulton: I
am totally confused. Does that mean that O2 Telefónica
and 3 are both wholesaler and retailer?
Mr Salbaing: Yes.
Q13 Baroness Eccles of Moulton: You
are saying you set the wholesale price. I thought the wholesale
price was the price that the retailer had to pay the wholesaler;
so you are paying yourself the wholesale price
Mr Salbaing: No. When you are roaming—let
us say I am 3 UK and you happen to be in Spain. In Spain we do
not operate there, so you have Telefónica, you have Vodafone
and France Telecom. If one of my customers in the UK goes to Spain,
he will obligatorily have to use one of those three networks.
I, being 3 UK, will be charged for my customer roaming on their
network a wholesale charge, whatever I have to pay to the chosen
network, on which I will seek to add a small profit and then VAT.
That is the retail price. So the wholesale charge can be either
something that the other operator on which my customer roams charges,
or, if I happen to be present in both countries what my sister
company charges me, which in our case is zero.
Q14 Baroness Eccles of Moulton: Is
there a wholesale cost that the operators—
Mr Salbaing: Charge each other.
Q15 Baroness Eccles of Moulton: But
is there a wholesale price that you have to pay in order to be
on to the network in the first place?
Mr Salbaing: It is the same one. The wholesale
price that you are charged—in this case Telefónica
Spain will charge me at wholesale because my customer is on his
network. That is the only wholesale price. In order to turn that
to a retail charge to my customer, he will get a bill and I will
say, "You were five minutes on the Telefónica network
in Spain; your cost is X"—and their wholesale price
plus my margin equals retail. There is only a single wholesale
charge, which is what I get charged by Telefónica in Spain.
If it is Italy, because it is 3 Italy we have eliminated that
charge.
Q16 Lord St John of Bletso: On the
pricing, how transparent to the consumers are the wholesale prices?
Mr Salbaing: In the case of 3 Like home it is
extremely transparent, because it is your UK charge. For other
operators there is a number of means, including a website that
is available through the association of operators.
Q17 Lord St John of Bletso: Wholesale.
Mr Salbaing: There is absolutely no transparency
on wholesale. This is something which is an intra-operator tariff.
If it becomes regulated, then it becomes perfectly transparent.
Q18 Lord Fyfe of Fairfield: What
has the industry done since the Commission announced its proposals
in the summer of last year, 2006?
Mr Jordan: It continues what it was doing, that
is competing at the retail level. We have introduced, and other
operators who have spoken about their tariffs—and continue
to introduce—new tariffs which reduce prices. As I said
earlier, between 2005 and 2006 prices went down 20 per cent and
they are continuing to go down. We believe that competition is
acting in the market and you are seeing new offers for people
who want choice of different tariff packages—high users,
low users. We would say things have happened in the market—our
range of Europe tariffs.
Q19 Lord Fyfe of Fairfield: You indicated
your prices had reduced around 20 per cent. Would you care to
speculate how much further prices might reduce say over the next
couple of years?
Mr Jordan: I would not like to speculate too
much. I think they will probably go down equivalent to what they
have. They are continuing to go down at the rate they were, so
maybe another 20 per cent. Some operators have committed to those
figures.
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