Changes in the air for mobile market

Date: 09/01/1997

By Chris Johnstone

THE European Commission is expected to propose new rules in the first half of this year to prepare the mobile phone market for an environment where more sophisticated equipment will become a mainstream communications tool for every household.

A communication on the mobile market will follow on from two separate studies on the current state of the industry and its likely development over the next ten years, and internal work within the Directorate-General for telecoms (DGXIII).

The danger posed by the dominant position of national phone companies in the mobile market, particularly when dictating interconnection charges to market new-comers, has been highlighted in the mobile market review undertaken by international accountancy and consultancy firm KPMG.

Commission telecoms officials say action to tackle high interconnection charges and force large national phone companies and their mobile subsidiaries to keep separate accounts will probably feature in the communication.

“There is not enough transparency in the industry at the moment,” said one.

However, officials from the Commission's Directorate-General for competition (DGIV) say the legislative framework for mobile phones was completed last year with the Mobile Directive and it has been unable to act on problems because companies are afraid of complaining.

Many new private mobile firms are wary of offending the national phone companies who supply them with many essential services, in spite of their high cost and suspicions of discrimination, say sources. “We need complaints to prompt action,” added one official.

The KPMG study identifies a “golden opportunity” for mobile phones to become mainstream equipment for the majority, and not just niche equipment for an élite, within ten years.

The industry's most optimistic predictions suggest mobile phones could be used by 35&percent; of the population in most European countries by 2006, compared with a current 7&percent; across the EU.

The Commission itself forecasts a penetration of 25&percent;, or around 80 million users, by 2010.

Such a scenario is partly based on the expectation that mobile phone tariffs will fall to match those of the public telephone network and that handsets will become cheaper in spite of continuous improvements.

The equipment costs of mobile phone networks are expected to decline by around 5&percent; a year as they are spread across more users and as less expensive land-based transmitting stations are established to take the place of wireless radio connections.

However, a dramatic rise in ownership to equal the current levels of ordinary telephone use can only happen with the right rules in place to encourage the mobile industry.

The KPMG study outlines a series of problems currently facing the mobile industry which could, if they continue, cramp its meteoric expansion.

Most of these are linked to the domination of giant phone companies and their new mobile subsidiaries. These can share costs and valuable marketing and customer information with mobile units, cross-subsidising them, says the report.

Other forms of favouritism could include higher discounts for use of airtime or longer repayment periods.

“There is still a potential for significant and non-transparent transfers between fixed public telephone operators and their affiliated mobile operators,” adds the report.

Mobile phone operators within the same country may not start on an equal footing some might already have a head start with the allocation of more favourable frequencies. Established phone monopolies in the Union, for example, tend to operate on much better analogue frequencies than the digital ones often allocated to their rivals.

Payments by mobile operators to established phone companies on fixed networks are often excessive at the moment, sometimes amounting to up to 30&percent; of the operator's costs.

The KPMG report says interconnection charges between fixed and mobile networks are widely believed within the industry to be well in excess of costs in many EU countries.

“The monopoly public telephone operators providing these services are believed to be making abnormal profits. High inter-connection costs invariably lead to higher mobile call charges. In effect, users of mobile services are cross-subsidising users of fixed services,” it adds.

In theory, this should diminish as mobile companies reduce their dependence on the established giants and develop their own networks.

Airtime re-sellers, who provide telecoms packages mostly to business customers by combining different services such as mobile, fixed-line and satellite, are also currently in a weak bargaining position compared with established phone companies, says KPMG.

Furthermore, the current habit among national governments of auctioning mobile phone licences to the highest bidder is damaging the industry. Most European countries have held auctions to allocate their second mobile licence, with questions now being posed about procedures for the third and fourth.

Auctions often result in companies imposing high charges to recoup the auction costs, and opting for the fastest on-the-ground technology when more advanced, but slower, start-up equipment might be a better long-term choice, says the study.