Mobile Regulation: The EU Gets It Wrong

The plan to cut the cost of data-roaming services looks like a triumph for European consumers. In fact, it's the operators that should be celebrating

Lots has been written about the campaign by European Commissioner Viviane Reding to force cell-phone operators to lower the prices they charge for data roaming. In a widely publicized February announcement at the big annual mobile-industry expo in Barcelona, she threatened carriers with new regulation by July 1 unless they slash the prices customers pay to have access to wireless-data services, including text messaging, when traveling in countries other than their own.

Score a victory for consumers—but only in the short term. In a classic example of the law of unintended consequences, Reding's politically popular action could result in less competition, reduced choice, and eventually even higher prices for European mobile users. Indeed, while carriers and industry analysts have moaned about potentially billions of euros in lost revenues from mobile-roaming fees, I think Reding's arm-twisting could be the best thing that has happened to operators in years. Shareholders can rejoice.

Let me explain. Fact is, it has always been expensive to call across borders. But the liberalization of the telecommunications market made it possible for rival providers to offer cheap international calls, circumventing the old monopolies. With the rise of alternative carriers and Internet calling services such as Skype (EBAY), new ways of communication have suddenly arisen, and prices on international traffic have fallen dramatically.

So Long, Startups

Simply put, the high fees charged by the old monopolies gave rise to a sub-industry of startups that thrived under their price umbrella. Now, with the mandated drop in roaming charges, this new crop of players will have a much harder time making a living. Venture capitalists will see the sector as less interesting—and less worthy of their investment. And consumers will have trouble seeing any benefit from using alternative providers for cross-border calls.

Meanwhile, lower prices could be a boon to incumbents. Although they'll earn less revenue from each cross-border text message or wireless-data transaction, that loss should be compensated for by increased traffic as consumers warm up to using their phones more when abroad. This is exactly what we saw in Denmark, Sweden, and Norway when greatly increased traffic and revenues quickly made up for falling prices.

What the EU has done is a prime example of how tinkering with competition can be dangerous. The intention may have been noble, but it will drive the natural forces of the market out of balance. By pushing down incumbent roaming rates, regulators could kill off innovation, strengthen the hand of incumbents, and buttress their monopoly status. That's not good public policy.

No doubt, Reding's campaign is earning lots of public recognition. (She's behaving like a politician, though she's actually a civil servant.) But without understanding the implications of her actions, she may be doing European consumers far more harm than good over the long term.

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