Why is international roaming so bloody expensive?

I’ve asked this question of people who know lots more than me about telecommunications economics. And they say ‘double marginalisation’. Anyway, David Levine is a clever fellow and he’s had a crack at answering this. It’s an outrage of course. And is so egregious the Gupment should do something about it. A rule that you couldn’t charge more than – say – three times cost would undo most of the damage. And how about a bit of corporate social responsibility? If rich business people are paying these fees and don’t care to buy themselves a local SIM card that’s one thing. But Levine suggests a lot of the explanation lies in the capacity to trick people into paying $1,000 or so when they leave their data roaming on and then have to cough up when they get back. So large companies with reputations to maintain are tricking their customers out of a thousand dollars or so every chance they get. Not a good look.

David’s blog post is here on his own blog and also reproduced below the fold (It’s OK, as you’ll notice from the title of his blog he’s against IP).

Why are international data roaming rates so high? There does not seem to be a lot of careful analysis. I have found one EU study – in which I have been unable to find one interesting or relevant fact or analysis. So here are my own back of the envelope calculations.How high are international data roaming rates? I have direct evidence from two providers: an Italian provider TIM charges about $10 per megabyte; a U.S. provider T-mobile charges $15 per megabyte. The typical business user uses receives about 15 megabytes per day of email. My smartphone uses about four times this. By way of contrast, you can buy a SIM from Vodafone UK with 30 megabytes of data for about $30. Wifi at the airport or a hotel runs about $10-$60 per day. Over-the-air prices charged to local customers is much lower: TIM charges $25 per month for 5 gigabytes of data, of which probably about 2 gigs is actually used, so the effective rate is about $0.0125 per megabyte. T-mobile in the US charges a similar amount for similar service.,

We can summarize the data this way: for a five day trip the typical smartphone user will pay about $1000 for international roaming or about $100 for wifi. The local user pays about $4 for the same service. In other words, the markup over the competitive cost is about 250, and the markup over close substitutes is about 10.

No doubt some small number of customers are very wealthy and happy to pay several hundred dollars a day for the convenience of keeping the same phone number, not buying a new SIM, not having to locate wifi and so forth – despite the tenfold cost reduction by doing so. Surprisingly only 40% of international roamers turn off their data roaming. In the end it seems reasonable to conclude most people use data roaming not on purpose, but by mistake. Notice that TIM advertises their price as 0.8 cents per kilobyte – which doesn’t sound like much, and has meaning only if you have some idea how much data you use. When I was lost in Paris, knowing the high cost of roaming, I turned on the data service to locate myself on the map. I expected it would be expensive. What I did not expect is that a single viewing of the map would cost 100 euros – cleaning out my account and making my phone unusable in the process.

No doubt telephone companies are good at setting prices to maximize their profits. Apparently such a large number of people accidentally turn on their data services that it is profitable to charge them 250 times marginal cost rather than charge a much lower fee to the much larger group of people who would be willing to pay for the service. Such a business strategy is possible only with substantial monopoly power and illustrates well of the problem of monopoly. Each international roamer pays a thousand dollars once for which they receive practically no value. After that they know to keep the data service turned off.

How can such a business strategy be profitable? The answer lies in the phenomenal growth rate of smart phones. Smart phone sales are growing at about 50% per year. If the stock is growing at a constant rate, it must also be growing at 50% per year. Suppose the typical international roamer spends one month per year roaming, and pays $1000 for one week before shutting off the service forever. If they were willing to pay $50 per week, then charging that would bring in $200 for each member of the entire stock of roamers. Since the stock of roamers is two and a half times the number of new roamers charging $50 per week would bring in $500 rather than $1000.

The international roaming market, lacking competition, is dysfunctional: rather than providing a useful service it taxes consumers one-time lack of awareness of prices. Eventually this will sort itself out: the market for smartphones is not likely to grow at 50% a year forever. Once smartphones start to satiate the market and growth drops to more modest levels – by the calculation above, about 25% per year – it will be profitable to start charging for services received rather than for consumer errors. A similar transition took place in the within U.S. market for voice roaming years ago; originally roaming outside the local area code was extremely expensive; now all providers offer national coverage.

There is an irony in all this. The market for selling smartphones is relatively competitive, and likely the international roaming “profit” is largely given back to consumers in the form of lower prices for contract smart-phones. Relatively rich international roamers subsidize smartphones for their less wealthy and well-travelled brethren.

There is a case for government price regulation here. Of course as smartphone sales diminish, government price regulation will enhance rather than reduce collusion. Ironically the lack of competition in the mobile phone market is largely due to government policy. Governments – wishing to control the flow of information – tightly control bandwidth. Some of this is done through monopolies given or sold to television stations, usually with a quid pro quo in the form of free or subsidized political advertising as well as restrictions on content.  As another example, free wifi is not an option in Germany as the government insists on knowing exactly who is logged on to the internet. Copyright law also plays a role here, as the copyright oligarchs are eager also that nobody access the internet anonymously.

A sharper analysis should probe the source of the monopoly power in roaming. Why cannot different mobile providers in the country you are visiting compete to offer you lower data rates? Unregulated countries like Panama greet visitors with giant signs promising lower long-distant rates if you roam with them. The reason this kind of competition is not more broadly possible is because SIM cards are tied to your home provider. Other mobile providers can bill you only through that same home provider. In other words: what your home provider has is a monopoly over your good credit record and means of payment. On the face of it this sounds absurd, and it is a wonderful illustration of the fact that not all property rights are created equal. Some property rights (copyright anyone?) serve to foster monopoly, while other property rights foster competition. This has been recognized in most countries to a limited extent: you now own the property rights in your phone number. But your phone company still owns the rights to your reputation.

There many organizations who compete for the rights to your reputation: Amazon, Google Checkout, PayPal, credit card companies, mobile phone companies, and banks all compete to provide you with direct online payment. The problem is that the SIM card technology prevents mobile providers from billing any organization other than your phone company. Here is a modest proposal. The SIM card standard was imposed (as part of the GSM standard) by European governments. So let them modify the standard to require that the user be allowed to provide alternative means of billing to over-the-air telecommunications providers: the small eagerly wishing to sell providers should be able to recognize my Google Checkout to bill me for cheap data service while I keep my usual phone number. The problem of roaming costs should quickly vanish in the dust of competition.

[I am grateful to a conversation with Philippe Jehiel of the UCL although he is in no way responsible for this. After going through numerous alternatives, we agreed that the most likely explanation for high data roaming rates is exploitation of consumer error in the face of a rapid influx of new consumers. The data on growth in the smartphone market seems to bear this out.]

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TerjeP
TerjeP
10 years ago

I presume most people don’t go abroad often enough to feel justified in changing carrier after a bad roaming experience. However some people travel a lot and you would think somebody would target this niche. If you can hook them on the basis of cheap roaming they are likely to be high end spenders and worth the trouble.

Craig
Craig
10 years ago

I got stung with a huge roaming charge by Vodafone after returning from a recent trip to the USA. I new the charges were a little expensive, but I needed to switch on Google maps after getting lost somewhere in rural Illinois. Anyway, I disputed the resulting $3,000 charge with the Telecommunications Ombudsmen who simply issued me with a receipt number and a special Australia-based Vodafone telephone number I could call. Lovely people. I simply explained that although I had not specifically checked the price when I switched on roaming in the US, a reasonable person could not expect such a price, given my normal charges amount to $50 a month. I explained via a hypothetical story about being charged $30,000 to fix a flat tyre – “Well, you didn’t ask how much it would be, now pay up!” I ended up paying what I thought a reasonable person could expect – about $150.

Patrick
Patrick
10 years ago

A little while ago some American provider (T-Mobile perhaps) offered a blackberry plan for a hundred a month or so (I think) with unlimited international roaming.

Very soon there were a lot of Singaporeans with T-Mobile blackberries and they canned the plan.

So at least one attempt to catch that niche backfired! (No there is not really any way you can stop this sort of rort, nearly everyone knows someone in the US who can provide a billing name and address).

fxh
fxh
10 years ago

The only people I know who use international roaming are those who don’t pay their own bills, usually the employer pays it and doesn’t complain.

Most people I know buy a sim card although it would still be cheaper too buya phone and a prepaid yearly plan in most places.

fxh
fxh
10 years ago

My old Nokia maps could be downloaded and used offline, my new ones seemed to blown away the old ones and are only available online or whilst connected. I couldn’t figure it out so I’ve gone back to old ones.

At one stage there were phones that would take two sim cards / two numbers – are they still around?

JC
JC
10 years ago

Sykpe has a smart phone icon that pretty much kills all the roaming charges I would have thought.

fxh
fxh
10 years ago

jc – but you have to connect to net to use Skype

Tel
Tel
10 years ago

Google is reaching for the niche (but not quite in the way you expect)… with “Google Voice” you have a virtual phone number that lives inside google (and never changes). It is configurable with answering machines, screening and forwarding. Once it forwards, you can have a VoIP desk phone in the office and whatever variety of local SIMs you need for on the road — the same number just forwards to where you are.

So I’m told, google uses various tricks to get competitive prices on calls (e.g. if you have a local SIM in one country, google probably also have point-of-presence in the same country with a strong peering agreement to whatever, and if they don’t then they will tomorrow). And the really clever thing is that google can sell a minimalist service, that allows them to make small money on a regular basis, while also putting them in a position that everyone routes through them, and turning every other communications company into a dependent and commoditized subsidiary, unable to achieve high profit leverage.

One ring to rule them all,
One ring to find them.

On the other hand, google provide that really weird thing that is mysterious and hard to find, oh you probably might have heard of it on occasion… service, that’s it!

Bfa
Bfa
10 years ago

Isn’t the reason roaming charges are so high because of interconnect fees that telephone network operators charge each other? That is, the reason we pay Telstra so much for roaming isn’t due to Telstra’s monopoly but due to the market power of whoever they are interconnecting with in the foreign country?

MikeM
MikeM
10 years ago

Americans abroad can also be subject to extortionate roaming charges. You’d think that an American soldier in Afghanistan would have some reasonably priced means to call his wife back in the US, but you’d be wrong:

U.S. soldier in Afghanistan gets $16,000 AT&T bill

I cannot imagine too many U.S. soldiers in Afghanistan are currently having a great time.

However, Pfc Jose Rivera has additional troubles with which he has to deal. His wife has just given birth. She is being treated for heart trouble. And AT&T claims he owes $16,000 for his cell phone bill.

His commanding officer at Forward Operating Base Shindand, Afghanistan, Capt. Evan Brainerd, is deeply frustrated by what he describes as AT&T’s “unethical, unprofessional and inflexible” attitude.

He took up Rivera’s case because that’s what commanding officers should do and because English is not Rivera’s first language. He says all he is asking AT&T to do is to see a little reason.

The large bill seems to have come about because of a considerable misunderstanding. Before he was posted to Afghanistan in July, Rivera spoke with AT&T, who, he says, told him that for an additional $4.95 a month he could make international calls to his wife.

What Rivera was not told, he says, is that AT&T would charge him $5 a minute for every call and around 50 cents for every text.

Brainerd agrees that Rivera was naive. “While he should have realized that $4.95 a month was probably too good to be true, he is a young soldier with minimal experience with phone plans or overseas travel,” Brainerd said.

However, as the phone bill grew, no one at AT&T allegedly contacted Rivera to advise him of the vastly escalating charges.

This seems to mirror a story from Massachusetts earlier this year in which an $18,000 bill was rung up when a Verizon promotional period expired and the customers were allegedly not informed.

In Rivera’s case, the minute he and his wife received a bill for $9,000, they canceled their AT&T plan.

However, as Brainerd relates it: “Despite being put on hold for sometimes two hours at a time, they were unable to get any kind of explanation or answers from AT&T. At one point, AT&T’s automated customer service sent a vague e-mail that said ‘the problem had been resolved.'”

Resolution has many definitions. For, by the end of September, the bill had risen to $16,000, and it’s mounting. An additional $200-300 a month is being added in interest charges.

Sgt. Malcolm McCallum, Rivera’s immediate supervisor, has also attempted to intercede with AT&T. He says he has spent hours on the phone with them, mostly, he says, on hold.

Brainerd said: “We have initiated multiple formal complaints with AT&T, none of which have gotten any attention. One request to lower the bill to $9,000, still a huge sum for a young PFC in the Army, was denied without any response or explanation.”[…]

Finally, after cnet.com publicised the story, AT&T agreed to credit the entire amount. It seems that in mobile phone land, the law of the jungle prevails.