Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 69-79)

Mr Alex Blowers, Mr Jim Niblett and Dr Yih-Choung Teh

19 FEBRUARY 2007

  Q69Chairman:    Gentlemen, thank you very much indeed for coming. In theory, we have until six o'clock but we may have divisions, in which case we will suspend the Committee for 10 minutes, so if that is not going to inconvenience you perhaps you would bear with us; it will give you time to draw breath, I am sure. For the benefit of the shorthand-writer, could you introduce yourselves, just briefly?

  Mr Blowers: Thank you very much, My Lord Chairman. My name is Alex Blowers. I am the International Director at Ofcom and my responsibilities include the overall co-ordination of our EU and international activities.

  Dr Teh: My name is Yih-Choung Teh. I am Project Director for Ofcom's work on international roaming.

  Mr Niblett: I am Jim Niblett. I am International Policy Director at Ofcom.

  Q70  Chairman: Thank you. Could you comment on whether you think charges to the consumer, those who are roaming with their mobile 'phones, have moved significantly over the last few years?

  Mr Blowers: I think we would say that the general pattern has been one of consistently above-cost prices, and that problem of above-cost prices has persisted for a number of years, so this has not been a temporary phenomenon, it has not been a short-term phenomenon, there has been a long-term problem of consistently above-cost prices.

  Q71  Lord Mitchell: I am sorry. I do not understand what that means, "above-cost prices." It looks great. I thought all prices were above cost?

  Mr Blowers: Prices which are significantly above cost, I am choosing my words with care, prices which certainly do not reflect what you would expect to see happen in conditions of effective competition in the market; that is our general starting-point on this.

  Q72  Lord Geddes: I am sorry; on the same point. To stay in business, operators have got to make a profit?

  Mr Blowers: Absolutely.

  Q73  Lord Geddes: When you say "above cost," their charges have got to be above cost. Your complaint, if I can use that word, is that they are excessively above cost; is that right?

  Mr Blowers: Yes. I am trying to avoid using the words "excessively above cost", but when we take into account a reasonable return and the costs of the service, so building in a fair element of profit, what we have seen is prices that are consistently above cost, above a reasonable return on profit and which have stayed remarkably the same and remarkably high over a number of years. For that reason, our starting-point is that we agree with the need for some form of regulatory intervention. If you want us to comment specifically on the recent evolution of tariffs in the market, certainly we can cover that point. I know that you will have heard from the operators, first-hand, about their various changes.

  Q74  Lord Mitchell: They say, and they were here just before, that it is a highly competitive business, that they are out there in the forefront, in the high street, all the time competing, and you are saying that there is—you have not used the words, but—an excessive amount of profit that is being made on roaming. Why is not the natural market mechanism working? That is my first question. Secondly, we heard Vodafone say that roaming charges have reduced by 40 per cent over a period of time, and the question I did not ask and should have done perhaps is actually how many people are taking advantage of those 40 per cent reductions? I think an awful lot of people do not know about them or cannot get to them and I wonder if you could comment on that?

  Mr Blowers: Let me make a headline point and then I will ask Yih-Choung to comment specifically on the evolution of the prices. The mobile market in general, across the board, is highly competitive so, when you hear people say that the mobile market in general is not competitive, as the regulator in the UK we would disagree with that proposition. What we are talking about here is a highly specific market failure within the mobile market which relates to one part of that market, so our commentary that we believe there is a case for regulation should not be seen as a general commentary to the effect that we think that the mobile market is uncompetitive. We are talking about one specific problem, one market failure, which arises, effectively, as a consequence of the discontinuity between the operator that is levying the retail charges and the operator that is setting the actual cost, the cost base, by setting the wholesale rate for roaming in the destination country. It is that discontinuity, along with a vast amount of complexity around this market, which will be, I am sure, one of the things which the Committee is already seized of, which leads to the market failure which requires to be addressed. This is not a question of a generic market failure in the mobile market. On the specifics, Yih-Choung, I do not know whether you want to take that point.

  Dr Teh: Certainly. I can respond to the question about evolution of tariffs more recently. I think we would agree that we have seen some progress more recently in terms of the tariffs on offer to consumers; for example, Vodafone's Passport tariff or the bundles offered by Orange and T-Mobile, or O2's My Europe tariff, are significantly better than what has been available to consumers, especially some pre-paid consumers. However, those are some specific tariffs which are moving in the right direction and we note that those have been made available under the threat of a European Regulation, and we do not think it has gone far enough, in terms of some very much higher tariffs still being available. I think essentially that is where we see the tariffs at the moment.

  Q75  Lord Dykes: Do you think the market, in its recent development, in the companies in Britain, particularly, and elsewhere as well, has relied really too much on pretty good deals, sometimes individualised deals, with particularly large corporations but perhaps less than large as well? Also on making sure that the corporate customer is satisfied and the tariffs are not too high, and they have not bothered really about the individual customer because of the inevitable high price and elasticity of demand for the service, the lack of knowledge of that customer of how it works, the complexities of it, trying to work out the charges, and anyway being in a hurry when you are going abroad, which may be less often than the corporate customer? Has not there been a lot of that, those disutilities and rigidities, which are part of the market failure you were referring to?

  Mr Blowers: I think undoubtedly it is the case that some groups of consumers are much more sensitive to the issue of roaming charges, as part of the array of choices and decisions that they make at the point of purchase. We know that the market which has evolved for mobile services in the UK is driven very largely by choices around handsets, and probably there are some eye-catching elements in the tariff which, for the average residential consumer—somebody like me—are much more important to them at the point of purchase than the roaming charge. It is a rational business decision under those circumstances, given those price elasticities, to set the charges so that perhaps you recover more of the costs from the roaming element than from the other elements of the package. Some groups of consumers undoubtedly will benefit more from existing competition and existing offers because they are more sensitised to these kinds of considerations. Where rational decision-making ends and market failure begins is quite an interesting question and it is a question that Ofcom wrestled with over a number of years around these issues. Is it the case that it would be rational to set charges in this way, necessarily a reason not to intervene, and I think the conclusion that we have reached is that the size of the consumer detriment was growing because actually the market was becoming more sensitised to these issues, and that discontinuity which I described between retail and wholesale makes it difficult for the market to react in a timely fashion to those changes. That is why I think proportionate regulation, but I emphasise the word `proportionate' regulation, could be justified in this case, and then the debate turns on what would be proportionate regulation in these circumstances.

  Q76  Lord Dykes: Some of the national regulators, like yourself, and in other countries as well, were arguing that the Commission should take collective action on behalf of everybody, because it is very difficult to do it for a national regulator, for obvious reasons, with roaming charges, although there could be some interface. Nonetheless, should not the Commission have waited maybe just a bit longer for those initial, developmental market rigidities to go out because of the competition, in wholesale prices but mainly in retail, and then maybe take more regulatory action later on; or was it right that the Commission decided to take action in the summer of last year?

  Mr Blowers: I think, on balance, we would say that probably it was right. Certainly we were amongst the doves, if I may put it in those terms, who were arguing for the industry to be given time to respond to the political lead that Commissioner Reding had made, but I do think that, looking at the system in aggregate and looking at the behaviour of the operators in aggregate, probably last summer was the right time to act. Of course, the debate has been then whether the form of the proposal, the form of intervention, was actually the right form of intervention, and that is a separate issue, which no doubt we will come on to.

  Q77  Baroness Eccles of Moulton: Mr Blowers, it is very nice to be taking evidence from you again. You were very helpful to us on a previous subject. I think we are aware that Ofcom is not keen on regulation for the sake of it. You were homing in on a particular market failure. Would you consider that to be really the major one, to be the heart of the matter?

  Mr Blowers: That is an interesting question, an interesting philosophical question. I think when we look at our overall responsibilities in telecoms, it is clear that the market failures which we confront in the fixed telecom market are significantly greater than those which we encounter in the mobile market. As I said at the outset, when we look at the mobile market in aggregate we think actually it performs pretty well and we are reluctant to get dragged into large-scale regulation in the mobile market. I think the problem here is that there is a significant detriment for a significant and growing group of consumers around the roaming issue, and I think it is incumbent on us therefore to act to fix that particular problem. How we would weight that in the mix with other interventions I think is a difficult question to answer, but certainly it seems to us that a proportionate regulatory response could be justified in this case.

  Q78  Baroness Eccles of Moulton: Would you say then that the industry itself could not deal with the discontinuity between the wholesale and retail, really that is beyond anything you could expect an industry to do for itself therefore it needs intervention; or could they do it?

  Mr Blowers: Given the current market structure. I will explain what I mean by that it seems to me that if you had a market where it was more frequently the case that the purchaser of wholesale was also the seller of the retail services, so that they were at both ends of the transaction, if you like, actually that market structure might mean that the problem was self-correcting, but we are a long way away from that market structure today, there are companies who are in that position, but overall the market structure is highly fragmented. There are many different actors, there are 27 Member States, each with a minimum of two mobile companies, so that is a lot of transactions, a lot of individual negotiations to get through. It seems to me that even if you took the view that the market would be self-correcting it would take a long time to get there. Whereas an early and decisive regulatory intervention (whilst you are absolutely right that we try to be the non-interventionist regulator, we have this famous expression of our bias against intervention), it does seem to me that if you believe that the consumer detriment exists and you want to fix that consumer detriment, in short time rather than geological time, then actually this is probably the best way to do it.

  Q79  Baroness Eccles of Moulton: Every operator is both wholesaler and retailer but there are just too many of them for it to sort itself out?

  Mr Blowers: Exactly.

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