Smoke without fire?

I recently alluded to Vodafone’s claims that, in the midst of global recession, regulators’ continued emphasis on short term consumer benefits runs the risk of squeezing out the revenues needed for investment and growth – specifically in next-generation networks.  At this week’s Mobile World Congress in Barcelona, Vodafone CEO, Vittorio Colao reiterated that argument, (this time with particular reference to forced cuts in mobile roaming charges).  In his own words: “we should stop having this continuous intervention on prices and let the industry reinvest the money”.  Colao called for a moratorium on price regulation, arguing that successive cuts imposed by European authorities were endangering mobile operators' ability to invest in upgrading their networks for 4G capability.

Perhaps less predictably, the latter point was echoed in a keynote speech at the same event by Eric Schmidt, Chairman of Google, who claimed that mobile operators are being ‘regulated to death’, especially in relation to 4G investment.

None of this went down well with Neelie Kroes, vice president of the European commission responsible for the digital agenda.  She quickly hit back at Colao via Twitter, writing:

“Message to Vittorio and Vodafone: I call your bluff, and indeed do not respond well to threats. I take the side of the Vodafone customer. And I remind everyone that we want to get the mobile sector more spectrum and a bigger market. A fair competition in roaming is a good exchange for those opportunities. Remember, if consumers lose their fear of using their smartphones and tablets when travelling across Europe, operators will benefit as well."

OK then, rhetoric aside, who’s right in this debate?  Well, it’s pretty easy to side with the regulatory view taken by Kroes: if charges for call termination and roaming are way above cost, this looks like a straightforward case of the mobile operators abusing their market power, and needs to be corrected.  And, adding to the suspicion, these operators have ‘form’ in developing suspect economic arguments to defend their pricing behaviour – who can forget the legendary ‘waterbed’ defence for excessive termination rates?

And yet, and yet, to return to the thesis of that original Vodafone paper, its central point, put simply, is that times change.  In traditional (stable) voice markets, all the above regulatory logic holds good but we are now at a time of unprecedented demand for new and advanced services, This demand can only be satisfied through massive investment in new infrastructure and yet, in the midst of a recession, market conditions are highly unfavourable towards such investment.  Bearing down on retail charges, as the EC insists, can therefore create the double whammy of cutting off scarce investment funds and putting further pressure on existing infrastructure.  For instance, large cuts in roaming charges will both deprive the operators of much-needed revenues and, through increased usage, risk further network congestion.  At the same time, 4G investment struggles to keep pace with customer expectations while regulators ponder new ways of maximising the prices operators pay for the new spectrum. 

There is therefore some merit on both sides of the argument, and the regulators need to recognise that.  In other words, Ms Kroes et al have to give greater thought to the consequences of aggressive price regulation.  Without that, their incessant calls for major new investment may be unrealistic