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EU´s roaming regulation is a form of zero rating and probably violates net neutrality

One of the European Commission’s regulatory campaigns is to end mobile roaming charges. Every year just before Europe’s summer vacation, the Commission reminds people that they should be able to enjoy voice, SMS or data on their phones when they travel at little to no additional charge. Already the EU’s mobile roaming regulation caps the price that operators can charge when users travel outside their home country. These rules are in place to “ensure that mobile phone users do not pay excessive prices” and to “boost competition”. A video cartoon on the Commission’s website explains the EU policy and describes the benefits. As it turns out, these are exactly the same benefits users receive from zero rating, a practice of exempting charges from a user’s mobile subscription.

Zero rating is a practice by mobile operators in which traffic is not charged on a mobile subscription. About half of all mobile operators worldwide for the better part of the last decade have used it. In the same way as millions of companies offer 800 and toll-free telephone numbers, customers expect that they need not use valuable minutes to call their mobile provider’s customer service department or to access their providers’ website when they top up their account balance. The practice is also used as a way for mobile operators to compete and lower costs to end users, just as the the EU roaming regulation purports to do.

In fact zero rating was practiced in the Netherlands and Slovenia before those countries made net neutrality rules, and the practice wasn’t mentioned as a violation. But suddenly, the regulators of these countries and in Norway (see Strand Consult’s response here and here) have pronounced zero rating a net neutrality violation. It is curious why the some EU officials would support roaming regulation while banning zero rating, a market-based solution that achieves the EU Commission’s very stated goals: to lower prices and boost competition by exempting charges to mobile subscriptions.

This is not the first occasion that Strand Consult has observed the inconsistences in EU telecom policy. Two years ago Strand Consult observed that the EU’s “roam like home” policy created perilous opportunities for fiscal arbitrage, incentivizing the purchase of traffic in countries where it is cheap (e.g. Lithuania) to be used in countries where it is dear (e.g. Germany), effectively circumventing local taxation and other costs. The problem with government-imposed price controls is that they don’t account for the underlying costs.

On the surface, harmonizing mobile prices has a certain consumer appeal. To be sure, consumers would like a lot of goods and services to have the same price, regardless of the underlying value. Imagine the Mercedes that could be sold at the price of a Skoda. Or the 120 square meter apartment in London having the same price for the same size as one in Londonderry. It doesn’t take long to realize that such a system would cause competition and differentiation to collapse. In fact it’s what centrally planned economies tried and failed to do--miserably.

The fact of the matter is that each European country has a unique mobile industry owning to its geography, population, market structure, regulation, taxation, technologies, and spectrum regime. The cost to deliver a minute of voice, a text message, or a megabit of data can vary significantly from country to country. Consider just the difference between mobile infrastructure needed in Luxembourg versus Norway, 150 times as large. Roaming charges evolved as a way for operators to exchange traffic on each other’s networks and reflects the underlying costs to deliver that traffic on the given network.

The EU Commission’s "roam like home" plan attempted to divorce prices from their underlying costs. If they had gotten away with it, consumers should have demanded that that the tax free car bought in Malta could be brought to Denmark without paying the prevailing 180% local tax.

To be sure, the idea of a digital single market is that prices will be lower because firms can get economies of scale and produce goods and services more efficiently. But with 28 nations and regulatory regimes, 17 official languages and 11 currencies, the EU is hardly a digital single market let alone a physical one. There is a lot of work to do to remove national barriers so that firms could be truly pan-European.

In any event, there are legitimate reasons why telecom policy differs from each European state to another. One reason is political: Brussels and the member states attempt to strike a balance on legislative control. Another is fiscal; member states rely on the taxation of telecommunications as a key source of revenue. Consider the action by Hungary which imposed a tax of 27% on mobile prices to make up for lost revenue from the financial sector after the 2008 crisis.

Indeed European government seems to be the art of the impossible. To be sure, the Commission is moving in the right direction with its Connected Continent package, but roaming regulation is its misguided way to compensate for its failure to make comprehensive spectrum policy and regulatory reform in telecommunications that would enable the economies of scale for operators to have more efficient networks, obviating the need for roaming charges in the first place.

Rather than promote a misguided roaming regulation, the EU could allow the market to work. There are already business models that allow Europeans to enjoy mobile communications on vacation. For one, travelers can buy pre-paid local SIM cards. Another is to allow operators to compete by offering zero rated travel plans. Operators could offer plans for zero rated Facebook, maps, and local content tailored to the specific location.

To learn more about zero rating and net neutrality, order Strand Consult’s Understanding Net Neutrality and Stakeholders’ Arguments. It reviews how governments and activists have created net neutrality rules in 20 countries and the challenges that arise as a result of these rules.tweets.jpg