Examination of Witnesses (Questions 60-68)
19 FEBRUARY 2007
Mr Damian Reid, Mr Simon Grossman and Mr Richard
Feasey
Q60 Lord St John of Bletso: We appreciate
that roaming is a less elastic service and also that Vodafone
have reduced their prices over the last year, but there have been
calls for more transparency on the pricing amongst operators.
How would you respond to calls for more transparency amongst the
operators, on the pricing?
Mr Feasey: In general, I have no difficulty
whatsoever with greater transparency. It is wholly desirable,
from our point of view, that customers feel confident and comfortable
about what it costs them when they are roaming. Indeed, as I tried
to indicate earlier, the whole concept behind the Passport tariff,
which says it is whatever you pay at home already plus 75p, that
is all you need to remember, is designed precisely to make our
customers feel that they understand pricing, that it is transparent
and easy and simple to use. What I would have more concern about
is the design of our tariffs by the European Commission, sitting
in one country, generally. We have 30 million roaming customers
across 14 different markets and the one thing we know is that
the needs of those customers and their interests are quite profoundly
different in different countries. Therefore, I have no difficulty,
in general, with measures to improve transparency; the industry
itself has taken measures in terms of making information available.
I have no particular difficulty with proposals that we send SMS
information to customers when they roam, providing it is done
in a sensible and cost-efficient manner. Transparency simply will
increase usage and encourage activity, which is all to the benefit
of us and our customers.
Q61 Lord St John of Bletso: Does
the cost of providing roaming services vary significantly between
the operators; really that is what I am trying to get at?
Mr Feasey: In our experience, it varies to some
degree. We operate across a number of European markets, with different
scale in different markets, so sometimes we are the biggest operator
and sometimes we are not. It varies to some degree but it does
not vary by the order of magnitude of double or half, things of
that kind. Inevitably, there is a difference in providing roaming
services in small countries with different landscape and geography.
It varies to some degree.
Q62 Lord Geddes: My Lord Chairman,
I wonder if we could switch the batting order and get Orange to
reply first on this one. If we were having this discussion in
Latin 2000 years ago, they were clever chaps, those Romans, and
they had three words when asking a question, nonne, num
and ne, of which num was expecting the answer "No."
My question is a num question. Do you think that the Commission's
proposals are proportionate?
Mr Reid: Clearly not. I believe that the segment
of the market that we have not served well is the small business
segment, which is businessmen from small organisations who travel
internationally a lot. They are the problem because they are not
like large or medium-size corporates who can come to us and ask
for a special tariff. They tend to take a tariff which looks like
a residential tariff, and probably they have the worst deal because
they are quite high users but they find it difficult to make themselves
felt against a biggish operator. It seems to me that because that
segment is not well served, and it is quite a noisy segment, we
find ourselves in a lot of difficulty now with this particular
issue and we find ourselves facing regulation, and the form of
regulation is, of itself, quite imposing. It is not simply wholesale
regulation, which is the sort of regulation our fixed-line brethren
are quite used to dealing with, but it is also retail regulation,
which in my view is very unusual in any competitive industry in
non-state-planned economies. I think what we are facing is disproportionate,
but you may feel that perhaps we deserve some disproportionate
regulation, but I do not believe that is a good reason for its
introduction.
Q63 Lord Geddes: Would you feel as
strongly on the German proposal?
Mr Reid: The German proposal includes retail
regulation. Personally, I am not a big believer in retail regulation.
Orange's position is that we are against regulation; if you must
have regulation, wholesale regulation is preferable to retail.
If you want us to comment on retail regulation, of course we will
comment on it but really we do not think it is a very good idea
and it depends a little bit what the detail of the retail regulation
is that the Germans have in mind. It is not 100 per cent clear
to me, but it does include some burdensome retail regulation.
Q64 Lord Geddes: You made some reference
earlier, Mr Reid, to innovation. The Commission's proposals, maybe
as amended by the German proposals, what are they going to do
to innovation?
Mr Reid: The Commission's proposals envisage
absolute price caps, which really puts us in the position where
we will offer "per minute" pricing. We will withdraw
all our bundles, we will withdraw our monthly subscriptions, because
all of those will be too risky in the event of a single, "per
minute" price cap. This is because in the event that people
do not use up all their bundles, and that does happen from time
to time, then our average price would exceed the retail cap. That
is an example of a problem we may have. Mr Feasey will give you
examples of problems he may have with his tariffs. It shows you
what we may have to withdraw. Like tax experts, I suspect we will
look at the legislation and see what innovation we can introduce
in the context of the rules that are there; but the introduction
of rules will mean that we do not have as much flexibility as
we would have without them.
Mr Grossman: I think, from our perspective,
one of the key concerns is, throughout, the Commission has not
justified why it has felt a need to impose retail regulation immediately,
rather than waiting to see whether wholesale regulation works.
If you simply imposed wholesale regulation, ie the amount which
the foreign network can charge to the home network when the customer
is using it, then you could wait a period of time, be it six months,
12 months, to see whether and how those reductions in wholesale
rates were passed on into reductions and through retail rates.
It would allow for the maximum total innovation. However, the
Commission took the stance, right at the outset, that they would
impose both wholesale and retail regulation. Retail regulation
would be delayed for six months but, subject to nothing, certainly
it would be imposed after six months. Therefore, by definition,
no innovation would be allowed. They simply have not justified
any point at all why they could not allow for that period to see
whether or not the wholesale regulation was transferred through
into low retail rates. If it was not, then by all means they could
come back, revisit and impose retail regulation subsequently.
Mr Feasey: Perhaps just to answer both of those
questions, briefly, I think this is extraordinary, the proposals,
in the sense that price control of retail prices is something
which generally you would associate with a former privatised state
monopoly. I do not think it is disputed that the mobile industry
in general, in terms of the structure of this industry, is probably
one of the most competitive and dynamic and innovative that we
have seen in Europe over the last 20 years or so. Nor do I think
it is disputed that those very competitive forces and incentives
to which we are subject day in and day out, in providing services
to our customers, also extend to the way in which we provide roaming
services to our customers. These are the same companies and the
same customers that we provide handsets and other tariffs to.
I think, to go straight to retail price regulation, in an industry
where there is plenty of evidence of competitive dynamism, there
may well be measures that can be taken to improve customer understanding
and transparency and things of that kind, is a pretty fast step,
and, in our experience, pretty unusual. Particularly in the context,
as we have here, where only a few years ago the European institutions
debated the overall regulatory framework for our industry and
concluded, very clearly and rightly in our view, that the basis
for regulating our industry would be if you could find market
failure, along the lines that we find under European Competition
Law, and at least 10 regulators in Europe have looked at precisely
this market of roaming and found none, thus far. I think, to depart
from and to cast out that framework, which was well thought out
and ought to serve Europe quite well in its telecommunications
industries generally over the next decade, on the basis that some
roaming prices appear rather high, politically, I think is a very
serious step which would need to be thought about rather more
carefully, frankly, than the Commission has done in its impact
assessment thus far.
Q65 Lord St John of Bletso: On that
point, the Commission's proposals rely on Article 95 of the Treaty,
and in your submission you said that you thought that was illegal,
or unlawful, I think. Perhaps you could elaborate on that?
Mr Feasey: This is a very important point, in
our view. As I am sure your Lordships know, really there are two
conditions which have to be met in order to legislate under Article
95 of the Treaty. The first is there would have to be a risk of
divergent, national legislation, producing a distortion within
the overall European market. There are no proposals, in any country,
that we are aware of, to legislate in relation to roaming, precisely
because this market, as with every other telecommunications market,
already falls within the ambit of the existing telecommunications
legislation which was adopted in the UK in 2003. We already have
a set of instruments which allows the regulation and addressing
of this market, but it contains an important condition, which
is that you have to find market failure, in a rigorous Competition
Law sense, not simply that prices are high but that there is actual
failure of the operation of the market, and no-one has done so.
The second condition is that then the proposals have to further
the operation of the internal market, and we remain at some loss
to understand, and the Commission have failed fully to explain,
how the proposals that they have put forward in a meaningful sense
further the operation of the internal market. There is no question
that they would protect some consumers from high roaming prices.
It seems to us, that is not the requisite test in order for the
Commission and the European institutions to adopt what is essentially
to remove the freedom of a set of private companies to set the
prices, companies which have not been found to be, in any sense,
abusing a market position, a set of companies which compete freely
in the market-place, to remove our ability to establish our prices
to our customers. Rightly, the Treaty has a strict test, and does
not allow the Commission to displace us and set whatever prices
it feels are appropriate for our customers and for the services.
Mr Reid: I am glad you raised the point. I came
here a little idealistically, hoping that we might get a chance
to talk about Article 95. It seems to us that basically we lost
the PR war on this issue very early in the game and that is why,
at Orange, we are resigned somewhat to regulation of some form.
However, notwithstanding that, we would like somebody, although
to date we have gained very little traction, to look at whether
they think Article 95 is the correct legal tool. I think there
is a constitutional issue. We agree fully with Mr Feasey's analysis;
like Vodafone, we have had legal opinions on the issue and we
find it a rather unsatisfactory outcome. It is a point where we
have got very little traction, perhaps because we do not have
what you might call a good public relations stance on this, but
it does not mean to say that it should be ignored.
Q66 Chairman: If we end up with a
situation of absolute caps, specific caps, for wholesale and retail,
does that leave you any room to compete? The second question is,
as a fallback, would the industry be able to calculate its own
average so that you would average out the different tariffs you
charged to come up with a target price? Would you like to comment
on both those issues?
Mr Reid: Clearly, the degree of competition
depends on where you set the cap, and if you set a very high cap
there is some room, even with an absolute cap, to compete under
it. However, it does limit perhaps the flexibility of the tariff
plan, as I mentioned earlier, bundles and things become more difficult,
but that does not mean to say you cannot get strict price-for-price
comparison beneath that cap level.
Q67 Chairman: Let us take the European
Commission's proposal, 35 euro cents per minute for calls made
from abroad to the country of origin or another Member State;
do you think that would give you room to compete below that?
Mr Reid: Obviously it depends on where the wholesale
level is set, because we do not have networks in all countries,
but if the wholesale level is sufficiently beneath that level
then there is the opportunity for some competition. The question
then will be is the wholesale level set at beneath cost; something
on which you would have to form a view. I think it depends, as
I say, where those two levels are set and where the wholesale
level is set in relation to cost. Turning to the "average"
question, clearly if we are allowed to achieve an average retail
price then it does allow us more tariff flexibility. As I said
earlier, I am not terribly keen on retail regulation but if retail
regulation is what we must have then an average cap is infinitely
preferable to an absolute cap. However, it will not assure a customer
of a particular price level, because we may still choose to charge
one customer twice what we charge another customer, and that is
what you will find in terms of range of prices in the domestic
market. It is not unusual to have a range of 100 per cent between
the lowest domestic price and the highest domestic price.
Mr Feasey: I think the Commission's proposals,
in terms of absolute caps, are about the most damaging to competition
it is possible to conceive, in two respects: one, because it puts
a straightjacket on the structure of prices, as Mr Reid indicated.
Just to crystallise this, we would have to withdraw our Passport
tariff to all our customers under the Commission's proposals,
so we would write to 12 million customers explaining to them that
the tariff they chose, which we suggested was very attractive
and they have found so in many cases, was illegal under the proposals.
The reason for that is that some very short-duration calls, occasionally
which customers make, would break the cap. I think it is much
more desirable, although I share the caution about any form of
retail regulation, to provide an average; it is the way that price
caps generally in industries are operated. Regulators generally
in other sectors and in the telecom sector set an average target
and allow the industry to structure their prices within that,
and to their customers, in a way that meets the average. It has
been suggested it is very hard to measure averages in our industry;
that is not the case. We report already, both as an industry and
as Vodafone. I mentioned earlier our commitment that the average
price would have fallen by 40 per cent; that is a public commitment.
We are a company that is required to produce robust, auditable
figures and it is perfectly straightforward for regulators in
our industry to do that, and that would be a less damaging way
forward, if we were to have any form of retail regulation.
Q68 Lord St John of Bletso: The Commission,
in its Regulatory Impact Assessment, estimated that 147 million
EU citizens would be affected by excessive roaming charges. Do
you have any other statistics which can counter this Impact Assessment
study?
Mr Feasey: The 147 million number, as I understand
it, is the Commission's view of the number of Europeans who roam
in a year, and that feels, to us, like a reasonable number, but
clearly I would take issue with a number of aspects of the Impact
Assessment, and perhaps just one point to illustrate this. The
Commission says, in its Impact Assessment "We assume that,
in the absence of regulation, prices would fall by perhaps 18
per cent." They said that in the face of a public commitment
by Vodafone, by our Chief Executive, that our prices alone, and
we are the biggest operator, we represent perhaps a quarter of
the entire market, would have fallen by 40 per cent during the
period that the Impact Assessment was looking at. Notwithstanding
questions about how much of that is driven by Commission pressure
and how much is driven by competitive forces, we do not think
the Commission is entitled simply to set that commitment by a
public company, a very serious commitment that we have made to
our customers, to one side in then looking at the impact of its
regulation. It is not entitled to downplay competition to that
extent in the face of clear evidence to the contrary.
Chairman: Thank you very
much. We are at the end now. May I compliment you on no waffle,
very clear evidence and you have educated us greatly. Thank you
very much indeed.
19 FEBRUARY 2007
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