Examination of Witnesses (Questions 20-39)
Mr Steve Jordan, Mr Nick Blades, Mr Christian Salbaing
and Mr William Pedder
5 FEBRUARY 2007
Q20 Lord Fyfe of Fairfield: Committed
to the price reduction?
Mr Jordan: They have said that they are going
to reduce their prices. Some operators have said they will reduce
their prices.
Q21 Lord Fyfe of Fairfield: They
are going to continue to reduce their prices. Would you care to
comment on the likely impact upon their profit margins?
Mr Jordan: They will be squeezed. That is what
is going to happen. Wholesale prices and retail prices are both
going down. What is happening in the market is that there is competition
at the wholesale level, and there is negotiation. As we said,
those are commercial decisions between operators and they are
going down, and they have gone down in recent years at the wholesale
level; and that is shown in the retail level of prices.
Q22 Lord Mitchell: Looking at technological
developments in the future, do you anticipate that voice-over-Internet
protocol, with the ability to sit there with your mobile phone
and Skype—that that wide area network, as it were, is going
to have an effect on your industry and its prices?
Mr Salbaing: Being the operator that has introduced
Skype on our networks already, I can comment on that. In fact,
the rosy picture that you have painted is not quite so rosy because
for a market to be competitive it has to operate in the appropriate
way. The reason I mention this is that Skype is basically a data
service, the same way as text messages and searches, which are
basically using our network to exchange data. At the moment I
cannot say that the market for data roaming is working in any
efficient way. The average price per megabyte of a wholesale deal
between operators is €7.50 per megabyte. If you take your
average video clip, you would pay let us say 90 pence in the UK
and it would cost you £25 if you were downloading that same
clip abroad. Skype we have introduced on our networks because,
again, we do not charge each other between the three networks
to roaming. That is a free charge. As soon as we enter the realm
of data roaming, you cannot use Skype. You can do it technically,
if both networks were technically able to do so, but the pricing
structure of the wholesale market for data is such that it is
simply not economical. To give a simple example, on the monthly
flat fee that we charge our customers for all Internet, including
Skype, which is £5 per month, there is a one gigabyte limit.
At €7.50 per megabyte, it would cost you €7,500 for
that one gigabyte, which we charge £5 for in the UK. The
market is progressing and tariffs are coming down, but the reason
why we are vocal in supporting wholesale regulation is to make
sure these market impediments are removed.
Q23 Lord Geddes: I want to try and
get on to your views on the Commission's proposals, particularly
to what extent they are proportionate. To help myself with that
question, I wonder if you could answer the one before? As in so
many other industries, the competition in this one that you are
involved in in the UK is fairly fierce; there are a lot of people
in on the action. How does that compare with the rest of the EU?
Mr Jordan: I would say competition is strong
in most countries. There are three or four operators in most countries
in Europe; that means there is potentially strong competition.
The UK market, because of history, is extremely competitive because
operators have near equal market shares and you have a new entrant
in terms of Hutchison. So you have almost a unique situation where
the market share is between four larger operators. In other countries
you have one or two bigger operators and smaller new entrants—but
the dynamic is strong in all of those countries. Prices have been
falling across Europe 5 per cent a year for the last four or five
years in terms of retail prices—on average, across all markets.
Q24 Lord Geddes: Can I come to my
more general question to both of you, O2 and 3: do you consider
that the Commission's proposals are proportionate?
Mr Jordan: We do not consider they are proportionate.
The more we have examined them, they appear to be more intrusive
in getting close to market management. If the intent was to protect
customers from high retail shop bills, then that could have been
done quite simply by a protected retail tariff that customers
opted for, and they guaranteed that they would not pay more than
X amount, with some wholesale regulation as well. There are a
lot of proposals floating around at the moment. The original Commission's
proposals basically were too granular in the way they divided
up the market into different types of calls, so calls in a country
and calls to home, which were not entirely meaningful and would
be complicated for customers, and they did that both at the wholesale
and the retail level. We think they set those levels too low to
enable competition to operate. Therefore, what you would get is
a much more intrusive management of the market than would be necessary
if it was intended to address this issue.
Q25 Lord Geddes: Before I ask you
the same question, Mr Salbaing, I can well understand why you
do not like any proposal that manages the market—or the
Commission managing the market; but would that not however be
beneficial to the customer?
Mr Jordan: We think that competition is the
best way to deliver results to customers over time. Regulation,
even with the best intentions, tends to be distortive of the markets,
and this is quite distortive of the markets, what the Commission
has intended. We think competition is best. This does not encourage
a market; it potentially inhibits it, so we do not think it is
proportionate in that sense.
Mr Salbaing: It is interesting to see how the
proposal has evolved since it was first introduced in February
of last year. The initial proposal was to regulate the retail
only, and we thought that was using a sledgehammer to fix a small
problem, and we spent a lot of time with the Commission to explain
that the market failure so to speak was at the wholesale level.
It is interesting to se that the Commission has now agreed that,
and they are now proposing regulating the wholesale first. It
is also interesting that the internal market committee of the
European Parliament commissioned a study by Copenhagen Economics—a
well-known consultancy firm—that confirmed the wholesale
problem was the issue. They confirmed that the level where it
should be reasonably priced is the one we have pushed for 25 cents
per minute. We have put a lot of time trying to convince the Commission.
Long story short—we believe that if we fix this wholesale
problem, ie, the cost of roaming to operators, the competition
will operate to reduce retail prices, and should. We are a Hong
Kong based company; and instinctively, regulated markets are not,
something we are fond of. As a new entrant, in every market—Steve
talked about prices going down in various markets—those
are the markets where, unsurprisingly, there is a new entrant,
and we will fulfil our natural role as a challenger to drive prices
down.
Q26 Lord Dykes: That is in effect
of course saying what was the perception of the Commission and
elsewhere, and also laymen outside, who were trying to investigate
quite a complex industry when you are a newcomer to it: the wholesale
prices and the cartel operation system affect the size of those
supernormal prices and profits, which meant it was quite easy
and rapid for the companies to respond by reducing the price the
minute the Commission threatened to investigate. It was noticeable
that about six countries immediately said, "We are abolishing
roaming charges or reducing our prices substantially"; so
it must have been on the wholesale prices on which they were impinging.
Does it still not mean literally that despite those quite significant
price reductions—you mentioned 20 per cent last year—there
are still significant supernormal profits being generated by these
roaming charges?
Mr Salbaing: I think more can be done to reduce
prices to consumer-friendly levels.
Q27 Lord Dykes: You agree with what
I have said?
Mr Salbaing: Yes. I would not use all the words
that you used, but, yes.
Mr Jordan: I would not use "supernormal
profits" either! One of the issues—and it comes back
to proportionality—is that costs do vary between operators
across Europe significantly. Therefore, it is easy generally to
say you do not like retail prices, and they have a relationship
to wholesale prices that is true; but the wholesale prices also
have relationships to costs of operators, which differ. Therefore,
the question is how you deal with that in a sensible way. We think
competition, encouragement of competition, is the way to do that
in the best possible way.
Q28 Chairman: Can you comment on
the proposal, as I understand it, that it is a process of averaging
over 27 states and then taking a multiple for both wholesale both
within a country and from one country to another, and then a 30
per cent mark-up, as I recall, on the wholesale price for the
retail price? Can you comment on the logic of that?
Mr Jordan: We think that mobile termination
rates are not an appropriate model for roaming rates. They are
a different cost. They relate to terminating calls on customers'
domestic networks. They exclude a lot of costs like retail costs,
costs of supplying phones and marketing costs, which are significant
to mobile operators. They deliberately do that. Roaming is a service
which terminates with calls but originates a lot of calls, and
therefore it should legitimately have some of those costs which
are not included in that. Mobile termination rate also varies
significantly across Europe. The whole problem of this regulation
is that you are trying to have a single regulation for 27 Member
States. You are either going to have a level of customisation
for each country or operator in that; or you are going to set
things at a level that enables competition to operate below that
level in terms of capital. We do not think mobile termination
multiples they have got are high enough to do that. Certainly
I do not think that the costs are related to mobile termination
in the way that it is implied. There are missing costs of retail
costs in that model. There is a mark-up. It assumes a mark-up
on all costs. It excludes retail costs, which should have been
added in and were missed in the original analysis by the Commission.
Mr Salbaing: This regulation has been in the
air for over a year, so, not surprisingly, a lot of people have
looked at this question of wholesale costs and of roaming. We
pegged it at 25 cents, and we stated it had a generous profit
margin in there. Ofcom said that it should be under 30 cents.
The European Regulatory Group, which is the congregation of all
the national regulatory agencies, has set it between 30 and 35
cents. The Commission set it at a bit more, and Copenhagen at
25—lots of experts have come in, and somehow it finds the
costs as anywhere between 25 and 35 cents, and this is what the
best experts in the area have now said is the cost of roaming.
So the debate as to whether everything has been included, in my
view, is foreclosed. The real issue is how you turn that into
a benefit for customers. We believe that by setting it at the
cost everybody agrees appears to be the reasonable level, we will
achieve that.
Q29 Lord St John of Bletso: In what
ways will the Commission's proposals affect innovation? We had
so much hype about 3G, and de facto we are operating more in 2G;
and the analysis of use of the mobile telephone—essentially
we are talking about voice traffic, SMS and e-mails. To what degree
are the projections—what scope do you have as operators
for e-mail browsing? This raises the issue Lord Mitchell raised
about the effective use of Skype.
Mr Salbaing: We are a 3G operator only, so the
2G debate, for me, is a roaming debate. It is a voice debate,
not a data debate. I highlighted the difficulty with the very
high price of data roaming across Europe. If that is brought down
to an economic level, logic would dictate that people will start
using data services—at the moment, people who are business
users will use it for the reasons that you mentioned. This is
a company-paid account; but at the personal level, the retail
level, people are hesitating to use those types of services, simply
because they are priced out of the market. I think that if a bit
of order and sense is brought into the data market, usage will
increase and therefore availability of these services and all
of the dividends that flow from that.
Q30 Lord St John of Bletso: I would
also like to get the other side, as to what degree this will affect
innovation of the Commission's proposals.
Mr Jordan: One of the things in terms of general
innovation is that the proposals as they are from the Commission
would actually prevent us from offering the tariffs that we have
introduced now. They would not be permissible under that scheme.
They could also mean that it would be difficult perhaps to offer
services which are differentiated—customers that do not
roam—bearing in mind only 50 per cent of customers in Europe
travel and roam; so there is a kind of a mixed benefit question
here on those. On the data side, we see those as growing services,
but still at the innovative and uncertain stage as to how they
are going to develop. The market is not that strong.
Q31 Chairman: Can you help the Committee
in terms of why it appears the Commission has not been able to
assemble significant data on costs? Their proposed approach is
essentially capping prices, wholesale prices and retail prices.
Is it because there has not been sufficient time to do the research,
or is it, as was implied, that with 27 countries and many, many
operators, it is an extraordinarily difficult statistical exercise
or economic exercise?
Mr Salbaing: I think there is a lot available
now on cost. I think the Commission has come out with a pretty
deep analysis of that. The operators in the GSMA, which is the
grouping, the association of GSM operators, has come out with
the help of A.D. Kearney, I believe, with their own figures. There
are websites administered by the GSMA and the Commission where
you can actually see the cost of roaming across Europe that each
individual operator—in our case and I am sure O2—publishes.
There is a large amount of information out there. I support averaging
across Europe for simplicity's sake; and because if you average—the
point Steve was saying—if everybody agrees to compete more
seriously in the market using average prices, is probably a good
idea, as opposed to using peak figures and those sorts of things.
That is why, again, we do not insist on retail regulation because
we think it is going too far and unnecessary. Let operators compete
in the retail market, and let them offer their customers the tariffs,
the way O2 offer and we offer; but let us set the cost of providing
that service at a low enough level that the market will pick up.
Q32 Baroness Eccles of Moulton: How
can you set a cost?
Mr Salbaing: By setting the wholesale charges.
Q33 Baroness Eccles of Moulton: The
costs are going to vary.
Mr Salbaing: Sorry, the wholesale charge. I
would say that an interesting thing is that this wholesale charge
is regulated domestically. It is only when you cross a border
that suddenly it is no longer regulated, so it is not inventing
something that does not exist in the market already.
Mr Jordan: I do not know if that is correct.
Roaming is not the same service as mobile termination, and mobile
termination varies. In fact, it varies by 100 per cent in the
UK termination rates, so that is quite significant. The cost issue—if
you ask what happened with the Commission, we saw them on a number
of occasions when they were doing their impact assessment, and
basically they told us that they were doing this against a timeframe
and therefore could only do what they could do within a short
time frame; and therefore, if that meant they could not do a proper
analysis of costs, then that was it. That is why they have taken
mobile termination costs as a marker cost and picked that up to
make an easy reference. It has some relationship. I will not say
it has no relationship to cost—it does; but it is not an
exact marker for international roaming. Basically, they started
that and they did that over six weeks, where, if you are considering
they were looking at costs which should have addressed the costs
variation across 27 Member States and all of the operators within
those, they did not do that. Now, as we get down to the detail,
that is being exposed as an issue about cost variation.
Q34 Lord Dykes: Was that also because
market termination costs was the easiest, simple entity to grasp
to start with?
Mr Jordan: Yes, because it exists. It is regulated
significantly in a number of countries, but not all countries.
The UK is a good example where good cost analysis is done, so
you have good evidence on what costs are, and in other countries
as well—but some countries do not regulate it and do not
do the analysis.
Q35 Lord Dykes: After the HW reference
to 27 and averaging costs and being the simplest approach and
easiest for the outside customer to grasp, would that automatically
have a beneficial effect for the EU10 or maybe the EU8—the
eight countries that have joined apart from the two Irelands,
which are higher income level territories anyway? Would it help
new countries in the sense of them being less developed initial
starting markets in the last years? Maybe they are not but that
might be our impression—both for corporate and for private
customers?
Mr Salbaing: Correct me if I am wrong, but prices
tend to be higher in newly-joined countries than existing ones.
If you were to average, I guess it would benefit operators in
the initial 10 countries.
Q36 Lord Dykes: In the eight?
Mr Salbaing: Yes, it will.
Q37 Lord Dykes: That would be my
assumption.
Mr Jordan: I would add to that that we now have
a particular insight into Spain, which we did not have before.
For example, in Spain, capacity is required to serve customers
for two months of the year where, in the holiday areas in Spain,
40 per cent of the traffic can be roaming traffic, and is only
there for a peak period of two months. There has to be an investment
justification to put that capacity and so that is a different
cost structure to a nation that is uniform virtually throughout
the year.
Lord Dykes: The Marbella axis!
Q38 Baroness Eccles of Moulton: I
just wanted to have one more go at trying to differentiate between
costs and charges and to understand the wholesaler and retailer
relationship. I have probably got it wrong, but what I think I
am beginning to grasp is that somewhere there are real costs—there
must be because you have to start from a base—and they are
absorbed, paid for, by the operators. The operators then trade
between themselves as wholesalers. There are no other wholesalers
in the business, unless you call some of the people who might
buy your supplies from—so the wholesalers in the business
are yourselves. We are talking about roaming only here. You are
trading between each other. In the case of 3, where you have companies
in other European countries, there is no wholesale charge.
Mr Salbaing: There is a cost. We have decided
to zero rate the cost between each other.
Q39 Baroness Eccles of Moulton: Yes,
but that is the cost of producing the service, and you have decided
to do it that way. However, in other cases, like with O2, where
they are operating within a wholesale relationship, with the other
providers in other countries, there is then a defined wholesale
charge, which is then built into the cost.
Mr Salbaing: Yes.
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