Examination of Witnesses (Questions 47-59)
19 FEBRUARY 2007
Mr Damian Reid, Mr Simon Grossman and Mr Richard
Feasey
Q48 Chairman: Gentlemen, thank you very much
indeed for coming. For the benefit of the shorthand-writer and
those in the public gallery, I am going to ask you, in a minute,
to introduce yourselves, for the record. We think there will be
divisions, votes, in the House of Lords, and if there is a vote
called I will declare a break of 10 minutes, if you do not mind;
it will delay us but we will come back and start where we left
off. Mr Feasey, would you like to start, and identify yourself,
for the record, please?
Mr Feasey: Thank you. My name is Richard Feasey.
I am the Public Policy Director for Vodafone Group, so I am responsible
for our company's relationship with the European institutions,
amongst other things.
Mr Reid: I am Damian Reid. I work for Orange.
I am responsible for Strategy, but that included regulatory and
public policy matters throughout last year.
Mr Grossman: I am Simon Grossman. I am Head
of Government Policy and Mobile Regulation for Orange in the UK.
Q48 Chairman: Because we have got
Ofcom, the regulator, in theory coming at 5.15, if we are not
delayed, can I ask my colleagues to be succinct and brief; and
if you feel, when you read the draft evidence, that anything you
have said needs to be supplemented, we would welcome further evidence.
Let us proceed. Perhaps I could start by dealing with question
number one, which we have outlined in general terms. The Commission
has indicated, in the past certainly, that the industry has failed
to reduce the cost of roaming. Is that a fair charge?
Mr Feasey: No, it is not. We have seen competition
in roaming as we see across the range of services that we provide
to our customers. Roaming is not sold to our customers as a discrete
or a separable service, it is part of the overall relationship
that we have with customers when they come into a shop or `phone
us up to buy mobile services from us. At least in my company's
case, we have already announced that, over the past year, so comparing
2005 with 2006, prices for Vodafone's 30 million roamers in Europe
fell by 20 per cent. That is rather faster than the general rate
of deflation in mobile prices during that period; so the charge
that prices have not fallen we think is unfounded. We have also
said that by April of this year, so two months from now, we expect
prices to have fallen by 40 per cent relative to the prices that
our customers were paying in 2005.
Q49 Chairman: Thank you. Incidentally,
thank you very much for your memorandum, which was remarkably
clear and very helpful to us. Mr Reid?
Mr Reid: I would agree with much of what Mr
Feasey has said. I would emphasise the fact that roaming is part
of a bundle of services that we sell, which usually includes a
handset and a domestic tariff plan. The prices of all of those
services have been declining, or, in the case of handsets, the
subsidy has been increasing, so the consumer has been in a progressively
better position across the full range of mobile services over
the past few years. For its part, Orange has taken action in the
retail market by offering bundles of roaming minutes to its customers
at discounts of more than 25 per cent; we launched that initiative
in May last year. It is a different form of offer from Vodafone,
showing innovation and diversity in the market, which is also
important. We note that the GSMA, who are not here today, have
announced that roaming prices have fallen by 25 per cent in the
most recent quarter, i.e. the quarter ending December 2006, compared
with the average price in 2005. On the wholesale side, which is
also an important element of this, we have entered into agreements
with a number of major operators throughout the European Union
to reduce wholesale prices by more than 50 per cent. We have taken
the first step, in October of last year, reducing wholesale prices
from around 75 cents, on average, to around 45 cents, and we are
committed to reduce them further, to 36 cents, in October of this
year. We believe strongly that the reduction of wholesale prices,
as a natural economic consequence, will lead to lower retail prices,
so we have put in place the framework for lower retail prices.
Again we believe that roaming prices are coming down and will
continue to come down, which should be seen in the light of the
complete consumer bundle.
Q50 Lord Dykes: As you know, one
of the UK operators has scrapped its roaming charges for UK users
in those countries where there is an affiliate network. Do you
expect other companies to follow suit in doing that as well?
Mr Feasey: We have a large footprint in Europe,
where we have a large number of affiliate companies, and that
has enabled us, two years ago, so some time ago now, to launch
a service called Vodafone Passport, where our customers pay the
same price as they would pay were they in the UK. The strapline
is to take your home tariff when you are abroad with a single,
one-off fee of 75 pence for each call. The reason why we have
that 75 pence fee is there are real differences in the costs of
providing service to customers when they are on overseas networks;
there are costs, for example, of conveying the calls back to the
home network which are not faced in the context of providing a
service to the customer within the UK. An important aspect of
this, from our point of view, which I think we share with the
Commission, is a need to have a pricing regime which is clear
and simple and understandable by customers. I do not think that
means the total elimination, and the research we have from our
customers is that they do not expect or anticipate the total elimination
of any differential between the cost of making calls when you
are roaming and the cost when you are at home.
Q51 Lord Geddes: Does not that mean,
effectively, that for a majority of your customers you have cancelled?
I declare an interest in that I happen to be a Vodafone customer
and I am a Passport holder, in that context, so I pay 75p plus
local calls?
Mr Feasey: You do.
Q52 Lord Geddes: Is not that cancellation,
effectively?
Mr Feasey: It is cancellation with the addition
of a 75 pence charge; that is the fundamental difference between
when you are at home and when you are abroad. We think that is
a pretty attractive offer to our customers, and thus far about
12 million of our 30 million roaming customers in Europe agree
with you and have taken that service.
Q53 Lord Mitchell: I use Passport
also and I have a vested interest in it. I spend a lot of my time
in Italy and, as you may know, you can turn to the right and turn
to the left in Italy and you get a different service provider
on your `phone; sometimes it is Vodafone IT, sometimes it is TIM,
or sometimes it is Wind, you do not know which it is going to
be. When I signed up to Passport, nobody told me, and I reckon
I am smarter than the average, that actually it applies only if
I am using Vodafone IT, and I have never seen that put anywhere.
Here am I, using somebody else's network, thinking, "Fantastic;
75p a shot and the rest is domestic rate," but actually that
is not true.
Mr Feasey: I am happy to have a look at the
sales materials, but I think generally we have tried, first of
all, to encourage our customers to remain on the Vodafone network,
clearly that has attractions to us as well as attractions to customers,
and we have, I think, consistently, certainly since—
Q54 Lord Mitchell: But I am a little
old lady, of 63, or something like that; how do I know, when I
have my 'phone, I have to go onto Vodafone IT, how do I know how
to set my 'phone and prioritise it so it goes onto Vodafone IT?
Mr Feasey: We are very happy to explain that
to you, but you can see very clearly, on all the handsets, which
network you are roaming on at any particular point in time.
Q55 Lord Mitchell: How would I know
how to prioritise it on my 'phone? What I am trying to get to
is that, for the average person out there, they have no way of
taking advantage of Passport, for example, because it requires
a technical expertise and a knowledge which is not made available
to them?
Mr Feasey: We make available, in all of our
contacts with our customers, and we are very happy to explain
to customers, how they can override manually the network to return
to Vodafone. In fact, for the overwhelming and vast majority of
the traffic, our customers that travel around Europe stay on the
Vodafone network; we have only a very small percentage of the
total calling which is undertaken by Vodafone customers these
days which occurs off the Vodafone network. We are very keen,
and our first response to your concern is, to continue to try
to do that ourselves. One option would be simply not to make it
possible for customers to make telephone calls in the event of
no Vodafone coverage overseas. Our experience has been that there
are a number of customers who wish to have the benefit of access
to a number of networks when they are roaming because that maximises
the probability that they would have coverage when they were travelling
abroad.
Q56 Baroness Eccles of Moulton: Mr
Feasey, in your introduction you referred to the cost of connecting
a call that was an internal domestic call and connecting a call
that was made overseas. Could you say a bit more about that, because
it is quite confusing to us to understand what the difference
in actual cost would be? I do not mean price, I mean cost.
Mr Feasey: One important consideration is that
the vast majority of calls which are made when our customers are
roaming are calls which are made back to their home country. For
example, Vodafone UK customers, predominantly, when they make
a call when they are roaming, will call back to the UK rather
than, for example, calling a local number in Spain. The first
head of cost involves the conveyance of that call internationally
from Spain, for example, back to the UK and then the completion
of that call to whichever network the customer happens to be on.
The second head of cost is that there is quite a complex set of
billing arrangements between all the operators internationally,
to ensure that, for example, when a customer is roaming and they
are a pre-paid customer, so somebody who buys a set number of
minutes in advance, we have real-time billing of that customer
between the networks such that the customer uses only the amount
of credit that they have purchased from their home operator, and
there is a very significant and complex set of billing arrangements.
Which meant, when mobile services were first launched in the 1980s,
it was not possible for customers to roam if they had bought a
pre-pay account, and we have only subsequently, as an industry,
made arrangements between all the operators within Europe, and
in fact locally, to allow the exchange of information in real
time to do that. You do not do that in relation to domestic calling
within the UK; there is no relationship with another operator
which requires you to have billing arrangements. Those would be
two examples of the sorts of heads of costs which we would have,
to provide roaming, that we do not have in the case of calls in
the UK.
Mr Reid: I will make just three comments which
go to some of the questions which have been answered. In relation
to the question regarding all operators going to domestic tariff
for international roaming, Mr Feasey explained the Vodafone approach.
The Orange approach is a little bit different. We do not have
the same footprint that Vodafone has. We have operations in eight
EU countries, so it is not as extensive, and, as such, sometimes
we have to take a different approach. Our approach is one which
might lend itself to Lord Mitchell, which is that we have a network-independent
approach and charge the same price, irrespective of which network
you are roaming on. However, that does increase our costs, because
if you are roaming on a network which is not one of ours then
obviously we have to pay the wholesale charge and therefore that
raises the average price you are paying. The question is, is it
better to have a simple approach which people understand, in terms
of knowing the price that they pay, irrespective of which network
they are on, or the cheapest price, if they are able to switch
between networks? I do not say one is right and one is wrong.
I say simply that there is innovation in the market. We have different
approaches. Some will appeal to some customers and some will appeal
to other customers. I think one of the risks of regulation at
the retail level is that potentially you will put at risk some
of that innovation and some of that differentiation which we seek
to achieve, in part because of what our customers want and in
part because of the way we are configured and what we can do.
The second point was in relation to staying on the right network.
The tools are better now to steer customers onto networks which
suit them better. They are not perfect though. I think we can
steer about 70 to 80 per cent of the traffic onto a network which
we select. I suspect Vodafone can do much the same and therefore
they can protect their customers to some extent. The other advantage
of traffic-steering is that it allows us to select a network where
we have a lower wholesale cost, so it increases competition in
the wholesale market, which is perhaps the more important part
of traffic-steering. The third point is in relation to cost. I
think cost is always very interesting, however you need to bear
in mind that we operate in a competitive market where supply and
demand should dictate the price at which we operate. I do not
wish to sit here and say we do not make money on roaming and I
do not wish to sit here and say we make less money on roaming
than on other services. We make more money on roaming than on
other services and there is a very good reason for that, which
is that it is a less elastic service. As a less elastic service,
it makes sense economically to charge a bigger premium for it,
because that is the most efficient use of resources, and I am
sure you can find text which proves that, and that is the reason
we do it. You see it precisely in the way we operate, which is
we subsidise a handset, which is perhaps the thing which the customer
is focused on most, we offer incredibly competitive domestic tariffs,
which is the thing which probably is second on their list; roaming
is third, or possibly fourth, or fifth, on their list and, as
such, they are paying more of a premium for that service. Therefore,
it is not a strict cost/pricing relationship, nor do I think it
should be.
Baroness Eccles of Moulton: That was very interesting.
Thank you.
Q57 Lord Dykes: Members of Parliament—both
Houses really—quite a few are following this and it is very
complicated for outsiders, as you appreciate. I do get the impression
that a lot of the reductions in recent weeks, and a bit before
Christmas but afterwards as well, really were in response to the
Commission launching its inquiry, which was back in the summer,
I admit, and it took a while to get going. There were some changes
fairly soon after that, but before Christmas, maybe there was
a pre-Christmas collection of quite sharp reductions, and so on,
and was not this inevitably the pressure of the Commission's inquiry
rather than genuine decisions made by the companies?
Mr Feasey: We started innovating in terms of
roaming tariffs, at least in my memory, in 2001 when we launched
a service called Vodafone Eurocall, which was intended to simplify,
it was a flat-rate tariff which meant that you paid the same irrespective
of which European country you were roaming in. As a company, we
launched, as I said, the Passport tariff, with which some of your
Lordships are familiar, which now has 12 million customers, in
2005, so nearly two years ago now. We have been doing that, as
a company, partly because roaming has become more important to
our customers over time and more people are travelling, and as
other prices which customers pay for mobile service continue to
fall customers, as my colleague Mr Reid suggested, change their
focus over time, and in competitive markets firms have to respond
to the changing signals and wishes of our customers. We think
we have been pretty focused on roaming as something we want to
address with our customers and improve the value that we provide.
Secondly, throughout the 1990s Vodafone went around building a
European footprint, a collection of European companies, and frankly
we are under pressure from our shareholders and others to demonstrate
the benefits of this in a very tangible way for customers, so
we are under competitive pressure to find competitive advantage
for our company in the roaming arena. If you own a large number
of companies, as Mr Reid suggested, around Europe then one of
the very tangible ways you can deliver benefit to customers of
Vodafone is by offering more attractive, we hope more attractive,
propositions in that area than some of our competitors. We have
been doing that certainly throughout the last five years. What
we have not done as well as we might is communicate, in very headline
terms, precisely where our business stands at any given point
in time in terms of lowering prices and, even further, what our
expectations are about price movements into the future. It is
not generally a very comfortable thing for a company to do to
make predictions publicly, which all our competitors can see,
about where we think our pricing will be in the future. We did
take the unusual step of doing that last May, when we said that
we expected our prices for roaming to be 40 per cent lower than
the previous year by this April. That was an unusual thing to
do as a company; we are not in the habit of giving forecasts to
our competitors about where we see pricing in the competitive
process to be going. I think the industry has been slow to communicate
what has been going on privately in an effective way in the public
and political areas.
Mr Reid: I would make the point that prior to
February of last year we did not have a big consumer issue on
roaming. We were not receiving lots of complaints from customers
who felt that the cost of roaming was that high, therefore we
did not perceive we had a big issue. The world changed for us
in February when the Commission made this a big issue, and as
such it became a consumer issue. I do not wish to sit here and
say that we have not responded to the Commission because we have.
We have taken action as a result of the situation we find ourselves
in. We do not expect to go back to the situation where this is
an issue which is not on the consumers' minds, but I do not wish
to sit here and say that we have not responded or that the Commission
has not changed the rules for us. They have changed the rules
and some of the things we did respond directly to the situation
we now find ourselves in. Prior to that, as I said before, we
treated this as a competitive market. By and large, roaming was
something that business people did far more than individuals;
they roam a lot and rather more than two weeks a year. We respond
to the businesses by having special tariffs, but they are able
to negotiate with us directly on tariffs which obviously individuals
do not get to do because they do not provide us with the volumes.
We manage the business very much on a corporate basis, we make
the tariffs available to retail as part of the overall bundle,
and, as I say, we were not experiencing huge complaints from our
domestic customers in this context.
Q58 Chairman: Does Mr Grossman want
to add anything to that?
Mr Grossman: I do not think that we feel, from
Orange's perspective, the fact that some of these price reductions
have been in response to the European Commission proposals somehow
undermines their legitimacy and validity. They are still price
reductions. They have delivered real benefits to customers. In
the UK, Orange made price reductions last summer, we introduced
a range of bundles; further reductions are due shortly, this year.
We think that the Commission should take that on board. By all
means congratulate itself for having prompted them but not thereby
to dismiss them as being irrelevant simply because they came partly
as a result of pressure; they are still reductions and it is still
what the Commission and others have been calling for.
Q59 Lord Fyfe of Fairfield: Presumably,
prior to the Commission's intervention, the companies were quite
happy about the tariffs they were charging, and could it be suggested
by an amateur, like myself, that perhaps it was a cosy little
cartel between the operators prior to the Commission becoming
involved?
Mr Reid: No, I do not believe so. The corporate
market is very aggressive, for those of you who know what it is
to deal with a large corporate or multinational; they expect tight
pricing and if they put something like roaming at the top of their
agenda then it is clear that is where they want us to be price-competitive,
and that is where we would choose to compete.
Mr Grossman: Prices have moved; do not get me
wrong. Obviously prices have reduced significantly since the Commission
came out with the proposals. As Mr Feasey said, prices did move
before then. Orange has made tariff changes before then. The mobile
market, probably like no other, is characterised by constantly-changing
tariff plans and prices and things never stay the same. Perhaps
roaming did not move as fast as some other areas but undoubtedly
roaming prices had moved before the Commission made its announcements.
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