What is roaming and why should you care

Read my editorial on roaming in US News & World Report.

Roaming is a way for a wireless subscriber to keep a connection going even when one travels outside the network area.  Ideally operators can build networks as large as possible so that they can provide their subscribers a seamless experience.  However there are necessities to share traffic from one network to another, whether within a country or between different countries. Operators may attempt to make agreements about how to share the costs of traffic and spectrum, but such arrangements are generally subject to regulation.

Most Americans don’t think much about roaming when they are in the US, but this is a lucky accident of history.  Without a national market for telecommunications, subscribers would be subject to the individual rules and regulations of each state.

At times it is important for the federal government to assert national authority over the states.  The 1993 Omnibus Budget Reconciliation Act, in addition to introducing the legislation that allowed competitive bidding for spectrum, reinforced the role of the federal government to ensure a national telecommunications market.  Mobile operators were able to take advantage of one set of systems and processes to serve the entire country, rather than having to roll out state by state. Had the states taken the lead, it is likely that there would have been 50 different, potentially conflicting, sets of regulatory obligations.  The US would probably be in the situation where the European Union is today, with a fragmented market, limited scale, and few global internet companies.  The EU with 28 nations, 17 languages and 11 currencies, is hardly a physical single market, let alone a digital one.

There is a brouhaha in the EU today about lowering the cost of roaming. Europeans find that when they travel from one country to another that their mobile rates can vary widely.  The results are the outcome of lack of a single market for telecommunications as well as the fact that each of the EU’s 28 telecom regulators asserts its own rules about traffic in its country. So while there are real cost differentials between European countries, such as spectrum, network deployment, taxes and so on, there are also rules regulating prices.

Each of the EU’s 28 national regulators takes a different approach to how it regulates the market, creating for good or ill, different parameters on which operators may compete. In some countries operators compete on per minute cost; in other countries, the amount of  data is in the package.  In other places it the price of SMS.  In yet another, it may be the price of the phone. No two markets are the same. Different operators compete on different things.  Thus there are many little markets, but no pan European market which would allow economies of scale to provide advantages when rolling out technology and networks to large populations.

European operators have been subject to heavy regulation on the prices within country, generally efforts to keep some prices artificially low.  Operators are allowed some leeway to recover costs when subscribers leave their network.  However the tangled mess in the EU today is the result of so much regulatory distortion that operators have perverse incentives of where to make profits.

In any case, the EU Parliament has voted to harmonize the roaming prices across the 28 member nations, regardless of the underlying costs.  While it  might sound like a good idea on the surface, it is a bad idea for operators and consumers.  For operators, they have to deliver the traffic regardless of the costs.  So they will likely experience losses.  Consider that a British family will travel from the UK to Southern Europe and bring all their devices along. They will likely consume proportionally even more data on vacation then when at home. So Southern European operator has to manage the swell in its network without any recourse to cover overages.

To be sure, consumers enjoy lower prices.  But in Europe, low prices have come at a high cost. Because operators have not been able to recover costs, they have lowered their investments in next generation networks. The EU policy is shortchanging Europeans in the future because they won’t be able to get next generation networks.  Only a quarter of Europeans can get 4G/LTE while 97% of Americans have this service.  My paper on the EU Broadband Challenge explains why network investing in the EU has plummeted. Ten years ago the EU accounted for more than a third of the world’s investment in communication networks. That amount has plummeted to less than one-fifth today.

The European approach tends to tilt the balance in favor to virtual providers or resellers, which have regulatory leeway to piggyback on incumbents networks. They don’t have to invest in networks themselves.  It is more economical to be MVNO than to build and operate mobile networks. The proposed EU telecom package will likely further reduce operators’ ability and willingness to invest in infrastructure.

The better solution is to focus on lowering the underlying costs.  This can be managed by making a single tax regime across the region (taxes for telecom can vary); creating a single market for spectrum; and allowing operators to merge and consolidate to lower transactions costs.