Why data roaming costs too much

ZDNet UK investigates the real cost of using the mobile internet while travelling abroad and explains why the price you pay is unnecessarily high
Written by David Meyer, Contributor

Using the mobile internet on your smartphone, tablet or laptop while travelling abroad is far too expensive, our readers say.

When ZDNet surveyed its readers around the world in March, 80 percent said they had received a data-roaming bill they thought was excessive — we heard tales of bills running into hundreds and thousands of pounds. Additionally, 20 percent of readers thought data-roaming charges in general were "too high", and 76 percent said they were "much too high".

But how high are data-roaming charges, and can the operators justify it? Figuring out the going rate for data roaming can in itself be a tricky business. Retail prices for data roaming vary between operators. For Europeans, the prices also differ depending on whether you are travelling inside or outside of the continent. The picture is muddled and answers hard to find: however, the end results are clear.

Operators have also started offering bolt-on bundles of roaming data that do make usage somewhat cheaper on a per-megabyte basis, particularly within Europe, but these bundles require the user to opt in. This means planning ahead rather than using the internet casually. Most users who do not plan ahead and who do not disable data roaming on their smartphones will find themselves paying the standard per-megabyte rate. Even for those buying bundles, people do not naturally tend to think in megabytes, and choosing the right package for your needs can be difficult.

UK operator
In-bundle European price (per MB)
In-bundle worldwide price (per MB) Out-of-bundle European price (per MB) Out-of-bundle worldwide price (per MB)
T-Mobile £0.20 - £0.33
n/a £1.50 £7.50
Orange £0.49 - £0.82
£0.49 - £0.82
£3.00 £8.00
Vodafone £0.08 - £0.20
£0.60 (on laptops or tablets only)
£1.00 £3.00
O2 £0.60 - £0.80
£0.60 - £0.80
3 n/a
£3.00 - £10.00

UK operators' standard rates for data-roaming vary between £1 and £3.07 per megabyte for data roaming within Europe, and between £3 and £10 per megabyte for the rest of the world. If you use 500MB on a two-week trip — this can easily be achieved when factoring in email, Twitter, Facebook, Google Maps, a few photo uploads and some light browsing — then, in the worst case, it would cost you £5,000. The best case would still be £500.

Compare that with the same operators' domestic data pricing, which usually works out at a penny or two per megabyte or less in some cases, when taken as part of a standard contract. Even with the lower intra-European data-roaming rates, this represents an overall mark-up in the thousands of percent — and elsewhere, 80,000 percent is easy to find. On the best-value tariff we could find, a Vodafone UK iPad user pays £15 for 2GB locally, but £29.99 for 50MB when roaming outside Europe. That's an increase of 79,000 percent.

This may be one of the highest differentials in the history of commerce — and it's between two different retail rates, not even wholesale to retail. By comparison, estimates for the mark-up for cocaine from grower to consumer range up to a maximum of 32,000 percent (PDF). How do operators justify charging close to four times the highest drug mark-up for carrying data which, to their systems, is the same as any other?

Operator logic

It is important to understand the basic mechanism for the formulation of data-roaming charges. Imagine that Operator A's customer travels abroad and uses their smartphone on Operator B's network. This can be done because of prior, secret negotiations between the two operators, in which a wholesale price was agreed. Operator A can then add whatever mark-up it likes to arrive at the retail price, which is where the big bills come from. The higher the secret wholesale price agreed, the more the consumers from both networks pay — at no cost to the operators.

Costs are way too high. It's the equivalent of walking into a bar in Germany and being told 'here's a glass of wine for €500 because you're a Brit or a Spaniard'.
– Hugh Davies, 3

Large operators tend to benefit most from this setup, because they are more likely to have other operators' customers stray onto their networks. They are also more likely to see their customers from one country use another of their networks in another country, in which case they are negotiating the wholesale price with themselves.

As the smallest UK mobile network operator, 3 has a different attitude to data-roaming charges than that of its larger rivals: Vodafone, O2 and Everything Everywhere (T-Mobile and Orange's merged operations). It is therefore unsurprising that 3 is willing to break the industry Omertà surrounding the actual costs involved. The company's regulatory chief, Hugh Davies, tells ZDNet UK that operators do need to incur some one-off costs when enabling data roaming, but these do not explain the charges being levied on consumers. In fact, he says, data-roaming retail prices bear no relation to the underlying costs of data transport — between 1p and 3p per megabyte, depending on the operator.

"It costs you [the operator] about the same as it costs you at home — plus a little bit extra for the cost of billing from someone else's systems and the integration and connection with someone else's systems, and the risk of countries where you don't have fully integrated systems — but essentially it's the same as what it costs you to sell it in your own market, plus a little bit more," Davies says. "And that little bit more is not the same as what consumers are paying. It's way too high. It's the equivalent of walking into a bar in Germany and being told 'here's a glass of wine for €500 (£439) because you're a Brit or a Spaniard'."

David Gannon is the senior expert for global products at T-Mobile, the eleventh-largest operator in the world. He tells it a different way.

"Operators buy [mobile spectrum] licences for a finite period, and then build the infrastructure and roll it out," he says. "That's a hell of a cost, and it drives economic growth across the globe. You've got to get a return on that investment."

Gannon gives the stock industry justification for high data-roaming prices: infrastructure and spectrum are expensive, and these costs need to be recouped somehow. Margins are very low on domestic data pricing because that is where the real competition takes place — in the words of Orange roaming chief Yves Martin: "Right now, the mobile operators are a bit stuck into low domestic data prices." So the money has to be clawed back from roaming customers instead.

The problem with the argument is operators don't build their networks for foreign visitors; they build them for their domestic customers. Most have already made their money back. "Roaming charges are prohibitive, very expensive if you compare them with local charges, and there's no reason why those prices should be that high," Charles Njoroge, the director-general of the Kenyan telecoms regulator CCK, tells ZDNet UK. "There's investment in infrastructure [but the operators] have recouped their money, and we need to be able to communicate without any barriers."

Dean Bubley, an analyst at Disruptive Analysis, also says the investment argument is completely unjustified. "I can't see why...

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...there should be a significant difference in the allocated costs of network or spectrum for domestic users versus visitors," he says. "Apart from things like [visitor location registers], there are no dedicated 'roaming network assets'." Bubley also notes that operators may be under pressure to maintain their margins, but they have "various ways to protect those" other than raising domestic prices.

A similar analysis comes from Steffen Hoernig, an associate economics professor at the Universidade Nova de Lisboa in Portugal. "If you talk to an economist, they say you should only take marginal costs into account, and that is certainly close to zero for all telecommunications services," he says. "If you just send an additional megabyte over an existing network, obviously that costs nothing."

"Economists would put the cost of constructing the network aside and just match demand and how people want to use the network — people in the business tend to think the other way round, saying: 'We have to spend money to build the network and therefore charge higher prices'," Hoernig added.

The problem with high prices, Hoernig says, is they "distort demand downwards". This is a problem acknowledged by Orange's Martin, who tells ZDNet UK that his company and its rivals recognise how previous bad experiences with 'bill shock' have scared many customers off ever leaving their smartphones turned on while travelling.

"We as operators and the whole industry recognise that the price points we started with are not acceptable anymore, and also not consistent with our policy of subsidising smartphones more and more," Martin says. "With smartphones, we are increasing the level of subsidy extremely high to afford to have so many iPhones, Android products, etc, and it would be stupid for us to frighten our customers and let them not use their mobile phone when roaming."

The European situation

Martin's main market is in Europe. Here, the European Commission, the hub of the continent's political power and a keen advocate of creating a truly single market, has displayed every sign of being fed up with roaming prices in general.

The Commission has already forced operators to drastically cut their retail prices for voice and text (SMS) roaming, and digital agenda commissioner Neelie Kroes has now turned her sights on data roaming. However, the only concrete measure so far has been a non-binding cap on wholesale prices. This means an operator in Greece, for example, will be unable to charge more than €0.80 per megabyte to an operator in the UK when the UK operator's customer visits the Greek operator's network. According to Bubley, there is no evidence that these falling prices for data roaming have led to higher domestic prices.

In June, that cap will fall to €0.50 per megabyte, and the Commission will make its proposals for what should happen next. Demonstrating the Commission's stated reluctance to impose harsh conditions unless it is proved absolutely necessary, even the €0.50 limit is already well above the wholesale prices charged by most operators. According to Hoernig, a recent contributor to a support document for the Commission's upcoming regulatory impact assessment, the average wholesale data-roaming charge is now around €0.30 per megabyte.

However, Kroes said in September that she wanted "the gap between roaming and domestic prices to approach zero", as "significant differences between roaming charges and national tariffs cannot be justified in a true single market".

Neelie Kroes data roaming

Digital agenda commissioner Neelie Kroes wants "the gap between roaming and domestic prices to approach zero".

According to Martin, there is no way operators will agree to data-roaming charges that are equivalent to domestic rates. "We have explained to Neelie Kroes that, if you do that, you open huge discrepancies and a huge risk of value destruction or prevention of investment in the European market, in the sense that the small operators — for example, Malta Telecom or Luxembourg Telecom — which have a very low cost of network coverage, could compete with T-Mobile in Germany or the UK by offering a national-level price to [their German or] UK customers," he says.

3's Hugh Davies, whose company is one of the smaller operators, says he cannot see prices falling significantly without wholesale regulation for everyone, including the biggest players. Arguing that small companies are unable to offer low prices without industry-wide momentum, he cites the example of 3 Like Home, an ill-fated 2007 attempt by the operator to eliminate roaming charges for those of its customers who were travelling between the relatively few countries where 3 has networks.

"Unfortunately it didn't work for customers because they didn't realise [they would only pay no roaming charges] if they were on our home network," Davies says, pointing out that it is difficult not to accidentally start using someone else's network and rack up a hefty bill. "We're doing what we can from our perspective. You need some sort of regulation or legislation at the wholesale level, because unless the big operators decide they want to bring their prices down, it's scale that counts."

According to Davies, the €0.50-per-megabyte wholesale cap will still be far too high. "We believe it has to come down at least 10 times that," he says. "It's choking off the market and the growth of the mobile internet."

I can't see how the global prices would come down, but the EU prices are coming down quite quickly. I don't see where the driver is to bring [global prices] down currently because there's no global regulator.
– David Gannon, T-Mobile

No global regulator

Given the historical successes of Kroes and her predecessor, Viviane Reding, there is every chance the Commission will get its way on data-roaming charges. Outside Europe, though, the situation is very different.

There is no global regulator to stop operators charging what they feel like, and T-Mobile's David Gannon says that means no change. "I can't see how the global prices would come down, but the EU prices are coming down quite quickly," he says. "There are bilateral roaming agreements that go in place and deals are there to be done between the different operators, but that's their commercial nature, so I don't see where the driver is to bring [global prices] down currently because there's no global regulator."

Hoernig agrees the lack of a global regulator would make it impossible to control wholesale charges from abroad, but he thinks...

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...it may be possible for national or regional regulators to control the margin charged by operators at the retail level, within those regulators' jurisdictions. For example, a European visitor to South Africa may incur a certain wholesale charge from the local operator there, but their European operator back home may only be allowed to include a limited mark-up when formulating the final retail price.

"In principle, that could be possible," Hoernig says.

According to Dean Bubley, alternative means of connectivity such as Wi-Fi may "slowly and patchily" put pressure on operators to cut their prices. However, Gannon thinks Wi-Fi will not be a serious rival because it lacks mobility. "People seem to think that mobile is some sort of necessity that has to be provided at flat rate," he says. "There are alternative solutions — people use different telephony services — but if you want mobility, you have to pay the premium."

Whoever the head of data roaming is for some operators must have to go to work every morning knowing his customers hate him.
– Dean Bubley, Disruptive Analysis

Could it be in operators' own interests to lower their prices? Bubley says there is not yet enough data to suggest lower prices would necessarily lead to greater revenues, but he reckons the real benefits would come in the form of customer loyalty — the ultimate prize in an industry where most providers offer the same thing in a fairly undistinguishable way.

"It's very difficult to generate real loyalty if half your customers hate you for egregious pricing — customer loyalty is earned and you don't earn it by showing contempt for your customers," Bubley says. "Whoever the head of data roaming is for some operators must have to go to work every morning knowing his customers hate him."

Creating competition

We're looking at a market where wholesale prices are negotiated in secret, and retail prices are unregulated anywhere. The big operators are benefiting most, and smaller operators feel unable to make a difference. Prices have fallen to some degree, but not yet to the levels one might expect from typical competitive forces. These may appear to be symptoms of a cartel, but Hoernig dismisses this analysis. "I don't think this is a cartel problem," he says. "We don't need the explanation that it might be a cartel to arrive at high prices."

The one thing that would really change this would be to move the competition from competition for domestic subscribers to competition over roaming tariffs.
– Steffen Hoernig, Universidade Nova de Lisboa

High data-roaming charges may largely stem from a lack of effective competition, Hoernig suggests, but he has another simple explanation. Most people choose their operator because of the prices they will pay at home. Only a few businesses select mobile contracts because of the data-roaming charges on offer. Once the majority of people sign up with their operator, they are absolutely at the mercy of that provider when it comes to leaving the country and wanting to stay connected.

"Once you go abroad, you're captured, locked in, and your home operator can charge you what they think best," Hoernig explains. "And 'thinking best' here is quite often to charge you the price that gives [the operator] the highest profit."

Hoernig is sceptical about the idea of people deciding en masse to choose their operators on the basis of data-roaming rates, but he does mention an interesting proposition. Radically, it would involve separating data-roaming from domestic data use — someone arriving in a foreign country would be able to select their roaming operator, not just for coverage, but because they know they will be charged less for using that network.

"The one thing that would really change this would be to move the competition from competition for domestic subscribers to competition over roaming tariffs," Hoernig says. "You need to decouple, in some sense, the domestic subscriptions from the roaming subscriptions. Companies may give you a menu of roaming tariffs, for a day or a week. That may improve things a bit."

Working around the problem

For now, however, no such system is in place. Data-roaming charges remain unregulated, and they remain high. In the absence of regulation, people are left with few alternatives. One popular workaround is the purchase of local SIM cards — this means changing numbers, though, and is therefore not practical for business travellers. Another is the use of Wi-Fi, but that lacks the convenience of mobile broadband.

In Europe, data-roaming charges have fallen considerably, but more needs to be done. Everywhere, people are increasingly carrying around small computers that constantly need to connect to the internet, but they are still too scared to turn on those devices.

These smartphones, tablets and laptops offer alternative means of communication to the basic voice and text services offered by the operators, and perhaps that is why the providers seem resistant to change. Developers may be queuing up to offer people clever new location-based services that are tailored to the traveller, but that is of little concern to an operator trying to preserve old business models.

Whatever the reason for the inertia, you, our readers, have clearly said it is unacceptable. Maybe things will only move on when those paying the bills become sufficiently angry.

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