Viviane Reding, Europe’s info-media commissioner, has skillfully staked out her position as champion of consumers who want it cheap and now (rather than better, if later).
Her Europe-wide caps on roaming charges for mobile voice services are popular, and now Reding wants the same relief for consumers downloading data and text-messaging across the borders of EU member states. She also seems disposed to cap call-termination fees — charges from one cell-service provider for ending a call from another provider’s network.
Just like last year, these wonderful “consumer benefits” were heavily advertised in time for summer holidays. Mysterious charges for cross-border calls while traveling through Unified Europe are annoying, but it’s no coincidence that the most blatant beneficiaries of “harmonization-by-price-control” are the perpetually border-crossing Members of the European Parliament.
Harmony By Force
Preaching harmony sounds fine, but the time-tested device of price controls to impose harmony-by-decree is the oldest trick in the regulatory book. Unfortunately price controls have never not failed. In this case, the greater profits forfeited in the business of trans-national calls are made up in gross charges to stationary, domestic consumers who unwittingly subsidize the travel costs of the mobile “others.” Vodafone is having to boost local call-charges to make up the difference.
Defying the historical inevitability of price-control failure, Brussels quickly declared victory with price-controlled roaming, announcing last October that average wholesale and retail roaming charges declined immediately after Reding’s price-cap regulation.
Great news for cross-border roamers! But short-term savings for one batch of consumers can’t overcome economic truth: Prices are fixed too low to generate a reasonable profit, prevent the investment and innovation essential to bringing future services to the next level of consumer demand (and technological leadership). On that score, Reding’s record is decidedly mixed.
Where’s the Demand?
According to A.T. Kearney, management consultants, the return-on-capital for Europe’s mobile phone service industry was 9 percent in 2006, well below the 20 percent scored by software and pharmaceuticals. Kearney, factoring in the EU’s price caps and other factors, projects 2007 return-on-capital to be even lower. (With healthy competition, the margin could be just as low without the extra cost of regulation, with savings passed on to the consumer.)
Kearney finds the rise in demand for mobile services predicted by EU bureaucrats (the natural response to lower prices) never materialized: By July 2008, mobile operators’ revenues dropped 26 percent, but roaming volumes only rose 11 percent. Some would call that the worst of both worlds.
But don’t tell Viviane Reding, who thinks she is riding a wave of consumer euphoria.
On the issue of capping call-termination rates, industry players who stand to gain if those rates are capped are cheering her on. That includes 3 UK, for whom termination rates are a significant cost. Naturally, the more regulated any market is, the more the regulators get to decide who the winners and losers are.
The problem, not just in Europe, is that the markets for mobile telecom services of all types (voice, data, text, video) have evolved as spinoffs from traditional services like landline phones, television and computers. Thus, each component of a successful telecom experience (i.e., call initiation, call completion) gets regulatory scrutiny and, in some cases, its own fee structure. All fees passed on to the consumer, of course.
That’s the opposite of “what works” in telecommunications generally, with bundling the norm and (until the market says otherwise) the way to supply the best services at the lowest price. Those services may not be just what Brussels ordered, and their prices not exactly what Reding contemplates over morning coffee. That’s why regulators should always defer to markets, the reverse-relationship being a blatant political accommodation.
The contrary view is nicely put by a British Telecom spokesperson: “There is a need for more effective implementation and consistency of regulation. Competition is ideal but it is often not economically feasible, so regulation is needed.”
A rather convoluted statement. “Not economically feasible?” In the olden days, robust harvests were not “feasible” in the Soviet Union year after year, because the agricultural economy was dictated from Moscow for political reasons. Regulation didn’t enable what was left of the miserable harvest, it caused the plight.
Today, Europe’s problem is not what is economically feasible, but what is politically feasible. While the stakes now are penny-profits, not longer human lives, the principle is much the same. Nostalgia for the faded virtues of socialist economics will never make the 21st century the Age of Europe.
George A. Pieler is Senior Fellow with the Institute for Policy Innovation. Jens F. Laurson is Editor-in-Chief of the International Affairs Forum.