The profit margin for the telecom industry on mobile data roaming is in excess of one million per cent. On healthy and functioning markets, the profit margins typically range between five and ten percent. This is an in-your-face example of free market failure.
Following yesterday’s article about telco voice services being overpriced by five magnitudes – that is, a factor of 100,000 – according to a report published by the OECD, it is appropriate that we look at other services provided by that industry. Today, we look at data roaming.
The cost of providing one gigabyte of traffic over-the-air is just under one euro, according to several independent sources. However, the telco industry charges about 14 euros per megabyte when roaming in the state next door. That’s a 1,400,000% profit margin – and a complete failure of the free market to make the end price converge with the production costs, due to the oligopolistic nature of the industry.
On a functioning market, such as grocery retail, profit margins typically stabilize in the 5-10% range with competition. These numbers are an obvious sign that the telco market is severely dysfunctional.
But it’s worse from a public-interest standpoint than just being any random nonfunctioning market. The lack of roaming data inhibits Europe’s entrepreneurship and free movement of jobs, people, and business. If you can’t maintain connectivity, you can’t maintain productivity. Again, we see how the telco industry is actively inhibiting the overall economic growth of Europe’s industries in order to protect itself and its own interests.
That is not in the public interest.
(The obvious retort to these numbers would be that the one-euro-per-gigabyte number only would include the actual transmission, once the investments in radio towers and other infrastructure are made. That would be a false claim; those investments are included in the one-euro-per-gig number over-the-air. To compare, the cost of one gigabyte of traffic over the wire is much less than a cent – in most places in Europe, you can get two terabytes of traffic and a server for five euros, coming to a per-gigabyte cost of 0.25 cents over-the-wire – including a rented server with that price, so the traffic itself is actually much, much cheaper.)
The European Union has regulated data roaming within its member states to have a maximum price of 700 euros per gigabyte today, coming down to 200 euros per gig in mid-2014. Assuming the price of traffic to keep falling proportionately, the European Union regulation still allows for a 70,000% profit margin – which is exactly the level the wireless operators are now pricing at within the union, all while keeping their million-plus-percent profit margin to neighboring states like Switzerland and Norway.
This is a ridiculously nonfunctioning market that needs much tougher regulation, and/or competitive incentives for new and disruptive actors outside the telco industry. A suggested maximum profit margin for regulations would be 1,000% – if you can’t maintain a business at that profit level, you shouldn’t get to run a business. That would mean a price cap regulation of 10 euros per gigabyte today (instead of the current 700). But we’d far prefer a rollout of municipal free wi-fi to encourage European growth and innovation; after all, we take streetlighting completely for granted today, which is much more expensive than the equivalent wi-fi coverage.
Next in series: Telcos charge more for sending a text message next door than the cost of sending the same message from Mars.
Its easy to highlight on one quirky example, and state that this is a free market failure, but what about what this million % margin has to pay for due to the reams of regulations that the telco industry already suffers?
The cost of putting a mast up and maintaining it is not cost effective in many parts of Europe. Without the regulations you might not get mad roaming charges, but you also wouldn’t get much of a service outside the profitable geographical locations! What would you prefer?
A little knowledge is a dangerous thing – as your article demonstrates! 😉
Dear F0ul,
You are saying that the profit margin of one million per cent is necessary to maintain coverage, that it would be an either-or situation. This is a completely false premise – the one-euro-per-gig cost over-the-air already includes all such regulations, and the one-million-percent profit margin is on top of it.
This is also described in the article, comparing over-the-wire traffic costs to over-the-air traffic costs.
If you’d like to imply that my knowledge of information policy is lacking, as you did quite blatantly here, you’ll need to do so with data that is much less obviously discarded as deceptive and misleading.
Cheers,
Rick
take no notice, Rik. he is an obvious industry troll. all that has happened is the subject has changed from the entertainment industries to the telco industries, although the energy companies are equally as bad!
the problem is, like with so many things, those that make the rules get such a kick back from the industries they are supposed to be regulating, that we, the public, end up with useless regulating being put into place. the only way to stop this sort of practice is to make lobbying a criminal offense. as long as politicians can be bought and industries etc are prepared to pay, the public is going to continue to be ripped off. reducing the price of something so that 1000% profit is made is a piss take. imagine food producers and sellers doing the same. governments would be on their case like a wasp on jam!
This is total bullshit. If there’s demand for Wireless data in a rural area, and people are willing to pay for it and the market mechanisms are intact, then wireless data will be available in rural areas. It may be a bit more expensive than in urban areas, but if we get the market fixed, it would propably be cheaper than now anyway.
@Falkvinge great article thanks
@F0ul you make a good point on empty zones, however this was already heavily subsidised when traditional operator installed the antennas. Also, if you check the conditions to which the last french operator “Free” had to apply, these where quite strict.
But technology is changing fast, now you have fast and slow zones, which is also problematic.
One way to solve this could be to copy the electicity market which is split into 2 parts: the regulated grid (meaning transportation) market and the free “service” market (meaning production and resell of power)? This could allow more actors to participate to the market. What do you think Rick?
Regulating the roaming to 700 €/GB has the side effect that some might think the problem is now solved. That is not clearly the case.
So, my question is, which is better broken regulation or no regulation at all?
Don’t take me wrong, in general I am for regulation when necessary. This just remind me about the problems of extrinsic motivations. When you take care of the symptom, the problem usually does not go away.
Thus, where do we go from here?
that’s why I like the provider “3”
it has no roaming in the countries it is in, I can use my free minutes and data volume in Italy, UK or Austria, or even in Hong Kong, depending where I currently am
sadly, that option is not available in all european countries, since “3” isn’t in all countries yet and other multi-national providers like T-Mobile continue to overcharge their customers and even charge for accepting calls
If you think European telcos have ridiculous profit margins, come live in Canada. Out of all developed nations, we pay the most for the least service with astronomical roaming and data charges. 3GB for a phone with like $10 GB over /in country/. I don’t even want to think what Bell’s roaming data rates are, they must be horrible.
That’s a 1,400,000% profit margin – and a complete failure of the free market
This is not in any way a failure of the free market. Mobile phone data services do not exist in a free market anywhere in the EU; they are all heavily regulated with huge barriers to entry erected by the State.
This is a ridiculously nonfunctioning market that needs much tougher regulation, and/or competitive incentives for new and disruptive actors outside the telco industry
What? First of all you assert that this is a failure of the free market, and then assert that it is a non functioning market. A free market by definition is well ordered and well functioning.
Its obvious that you mean well representative Falkvinge, but your understanding of Economics and even the terms used to describe markets shows that you have some reading to do.
If you want to understand free markets, you can start at no better place than the Ludwig Von Mises institute, where they have many books on free market economics for you to read. Moreover, these books are all free to download; these people actually understand the market, and are taking advantage of the internet in a way that puts them and you in the same camp somewhat.
I would very much like to read your take on this subject again, once you have familiarized yourself with what free market economics actually means.
Wow. It’s obvious that your definition of “a free market” is different from that of the mainstream.
It’s not just that there isn’t a free market by your definition in the telco industry – there’s not a free market anywhere in the entire Europe, and possibly the entire world. As soon as you open a business, any business, there are rules and regulations that apply to you – from bookkeeping requirements, to product safety standards, to limits on how you are allowed to market your products and services.
Saying “this doesn’t apply because the market isn’t free” kind of misses the point, because no market is free to the extent you describe. Every single market and every single business is regulated by rules and laws.
The telco industry is no exception, and perfectly fit for being held to standards on an apples-to-apples level.
If you compare the market in Email service providers to the market in cellphone services, you begin to get an idea of what a free market looks like compared to one that is heavily regulated.
Email providers are plentiful, the barriers to entry are very low, and entrepreneurs are free to design whatever deals and services they want to divide up the bandwidth they use to supply access to customers. This is the optimal solution to providing services to everyone, and there is no reason why it cannot work in every field of life, not just provision of email.
Compare this to cellular telephone operators, who have to deal with stifling regulation, absurd licensing costs, irrational spectrum allocations and every other anti business nonsense imaginable, making it almost impossible for them to make a profit, let alone get started.
Then, after all the struggles of getting into business, because they are pushing hard to exist with new ways of charging for their scarce resources, a legislator comes along and declares that more regulation is needed to fix the ‘problem’ that the legislators created in the first place. It simply does not make any sense, and must be absolutely infuriating and perplexing for entrepreneurs in equal measure.
If the telecoms industry was unregulated, and companies were left to provide the services that were profitable for them, we would see cellphone roaming rates drop dramatically. The only way to do this is to remove the legislation, regulation, restrictions and other unneeded and irrational barriers to competition and entry. This is what needs to be done to solve the problem of high charges; remove all regulation and let the market take effect.
Sadly, making this sort of argument is very difficult when the people who are at the levers cannot distinguish between free markets and regulated markets. There is nothing wrong with not knowing something per se, but when you claim the power to regulate other people and have no idea how markets work or how business operates, this is a real problem. Not only do you hurt businesses and distort the market for services, but you hurt the citizen and individual by crippling the long term innovation and investment needed to roll out new and useful services.
Profit margins are always good when you can use government thugs with guns to shut down your competitors.
“This is the optimal solution to providing services to everyone, and there is no reason why it cannot work in every field of life, not just provision of email.”
Not so fast Mr Invisible Hand. A basic understanding of economics should allow you to realise how economies of scale dictate that in anything physical, competition creates duplicity (e.g. competitors’ trucks driving down the same roads to deliver similar products to different stores within the same town, only to end up wasting not just fuel and drivers’ time but unsold products too) that increases waste of time & resources the more competition exists. In fact, forget just ‘anything physical’ because in software too, competition wastes people’s time as competing software firms have people coding similar software packages that do similar jobs and are inherently more inferior and bug-prone than a worldwide open-source project would be if those programmers had cooperated and shared their time & skills.
Now back to physical production, we might not have a truly ‘free market’ significantly anywhere on this planet, but you must recognise that some regions have less restrictions than others, and those regions that lack labour and environmental regulations are the very places that corporations out-source their dirty work to, destroying lives and ecosystems in the process. They don’t do this just because they are ‘big bad corporations’, but because a competitive market system gives anyone an incentive to do horrible stuff (like polluting people’s water table and employing kids to make trainers so that they can buy bottled water or filters) when it brings them a greater profit.
There is no “THE optimal solution” yet within our knowledge, for our economics depends upon our state of technology, and is ever-changing as new efficiencies are realised, but I can say with some certainty that a 100% free market would not magically flip away from the marked trend towards the kind of stuff that is called ‘black market’ in developed countries as soon as that last little regulation is removed, and an optimal solution for resource use, public health and happiness in our time most probably exists in the use of voluntary collectives/cooperatives/charities/organisations to provide those big things for all our human family. Open Source projects provide more evidence for this every day.
Rick,
Given your familiarity with the monopoly that is Intellectual Property, I find it interesting you can’t see the same issue at work in the telcom industry. Even you yourself used the term “oligopolistic” in this very article.
The telecom industry is one of the most heavily regulated and monopolized (by law). I’m not entirely familiar with the details of European setups, but in the US I would venture to say only banking/finance is more regulated and monopolized.
When you have laws granting specific companies control over a market region, and so much regulation and barriers to entry that amount to essential bans on competition, that is in no way a “free market”, even in the loose sense of the term you describe.
Monopoly style margins in de jure monopoly industry is not a “free market failure”, any more than a premature death on a racetrack is a “failure of traffic laws”.
For more info, see here:
“The only reason AT&T (formerly SBC), BellSouth, Cox Communications, and other incumbents have the large user bases they currently do is because they were granted geographic monopolies for communications.[5] [6] They were legally insulated from outside competition for much of the past century. And, by and large, this protected status still continues unabated, shielded by the current FCC regulatory regime.[7]”
http://mises.org/daily/2139/who-owns-the-internet
http://mises.org/daily/3581/How-Not-to-Bring-Broadband-to-All
“A free market by definition is well ordered and well functioning.”
No it does not have to be “well ordered”. Freedom of competition is most important part of a free market. Well orderedness has nothing at all to do with it.
You are just trying to waste our time.
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And what about frequency limits?
[…] The profit margin for the telecom industry on mobile data roaming is in excess of one million per cent. On healthy and functioning markets, the profit margins typically range between five and ten percent. This is an in-your-face example of free market failure. […]
If anybody else desires to point out that the telco market isn’t “free” according to utopian ideals of completely lawless and unregulated societies, let me point out that by “free market”, I am not referring to a society where there are no product safety requirements and no regulations of product or service quality whatsoever.
I am referring to a much more common sense of the expression, where “free market” means a nondiscriminatory market with optimally low barriers to entry for new competition.
Just to clarify that point.
Take it easy. Economics aren’t a real science, anyway. That’s probably the reason why it’s believers tend to be self-important and to argue ad-hominem. I haven’t seen more evidence than name-dropping and aggressive but empty arguments from the “experts” in this thread.
“No, *I am* right! I know the name of a bigger institute than you…” Tsss
P.S. I can’t be wrong. I am writing this looking at the Alexander von Humboldt University right out of my window.
Even by your definition, the telco market isn’t even remotely free. It has absurdly high barriers to entry.
Let’s say I want to become a mobile phone operator in my country, the UK. Can I just start building towers and selling handsets? No. I need a license to some spectrum. Why is that? Technologies such as CDMA, which allow spectrum-sharing, have been around for decades. And I can’t get one, at least not until the Government decides to auction some, and then I have to pay a ton of money in a hidden tax on my customers (because for my business to work, I have to pass that cost on). Once I’ve expended the tens or hundreds of millions of pounds on spectrum, then I can start offering service. Except that the masts I try and put up are subject to loads of planning regulations which makes it very hard to give good coverage (and the problem is exacerbated by scaremongering about the danger of electromagnetic emissions). Even the incumbents struggle with this one.
Mobile phone service is by no definition a free market.
And you and the Pirate Party should be in favour of spectrum deregulation with many, many more unregulated bands like that used for WiFi (a massive success).
So the pirate party guy is asking some government regulation over mobile phone taxes?
Why dont you ask your friends founders of pirate bay website to invest some of the profit they make from the porn banner ads on pirate bay website to provide some free wifi over eorupe?
I am not against regulation, I just would like that you pirate guys make some fucking sense, so free fucking fast internet is your interest so you ask government to regulate that for you, but paying for record campanys work is not your interest , so any government regulation on that you say it is fucking freedom violation.
Wanna hear my opinion? Download or streaming is the fucking same thing, so ISP should pay for the producers some % of their profit, just like youtube pay to the artista, since music are one of the main reasons people access internet
Congratulation, you just managed to make absolutely no sense.
Maybe you should return to the YouTube comments section where incoherent language is not a barrier for participation.
do you have any proof of those profits?
running such a big website is not cheap, especially if it has to be redundant because it can be shut down without warning or due process
the record companies are being paid: when they sell something
and if they fail to sell something they should improve their offer, just like any other company has to do as well.
does Mercedes blame Toyota when they sell less cars (because people buy Toyotas, random example) and ask the government for a handout, or are they trying to improve their own offerings? why can’t the record companies do the same?
So, instead of attacking an argument present you are attacking the messenger. Totally not troll.
“I am referring to a much more common sense of the expression, where “free market” means a nondiscriminatory market with optimally low barriers to entry for new competition.”
This statement is laughable. You cannot refer “to a much more common sense of of the expression.” Not only does that not make grammatical sense, but the idea that an incorrect conception of an expression can be legitimized by popular misunderstanding is a logical fallacy. A large number of people holding a belief does not verify its accuracy. This article simply contributes to the ignorant and popular misunderstanding of free markets. This excessive pricing results from excessive regulation and deterrence to new entries into the market by the government. The rhetoric in this article leads one to assume there must be little to no regulation on data roaming since associating something with the free market necessarily suggests that.
You can’t seriously be suggesting (with passion, to boot) that the most-commonly used sense of an expression isn’t linguistically valid?
you can found your own telco tomorrow, if you have the cash (granted, large amounts of cash)
that’s a free market
it wouldn’t be a free market if you couldn’t do that
now, since there aren’t enough telcos they can organize and price gauge, that’s the failure of free market in this case, and that needs to be fixed by the politic
[…] Margin On Data Roaming Exceeds One Million Per Cent Posted on 2012/11/27 by NotSoCrazyNews Original post on falkvinge.net → Comments on reddit.com […]
My point is, the pirate party claims are no better than the other fucked up claims we already have from other polical point of view.
You are a freaking fucking crypto anarquist or you are not.
Do you want government regulation over mobile internet taxes? You are not a pirate. I am, ok, lets do it. But also, lets regulate everything, lets be ethical. Wanna download all the music a lot of record companys put theyer time an effort to? Ok, torrent-it! But there will be a goverment tax over the Internet Provider Bills and this taxes goes to the record companies (with some clever algorythms to indentify who owns what).
I mean, me personaly I want people to communicate trought telepathy, no fucking internet necessary anymore. But you know, people are still fighting for they own bellybuttons, and not thinking globally.
It is a free market? So fucke it, no more regulations.
I saw Iceland (?) goverment wll be giving 100mbps adsl for free to all homes. Now thats something nice and good and clever that a goverment should but theier efforts too, and the telcos can cry, but it is evolution baby. Internets basics now.
And no regulations, free torrents, free ass, mind is following,
One caveat: “Free market” should be in scare quotes. Real free markets don’t have “intellectual property” monopolies, corporate welfare and state-enforced regulatory cartels. Our global corporate economy is about as much of a “free market” as Hjalmar Schacht’s Germany.
The problem is that telcos use scarce public resources – land to lay cables and electromagnetic spectrum. They are given a monopoly of it. There can never be a mythical “free market” while there is this monopoly. The only way to have real competition is to make the public resources publically owned and have the competition in the space above.
In Australia the government is providing the infrastructure via the NBN and competition is over that. Australia is too large and sparsely populated for it to be viable to cable, in fact most telecoms started as government owned to actually put in the landline cables. At one point we had competition for landline pay TV cables which resulted in some densely populated parts of cities having two sets of cables and everyone else getting nothing. And those who did get a cable were locked to one set of content or the other.
You have to separate the physical infrastructure from the content. I don’t know how exactly but say we made wifi ubiquitous and open and free.
That figure is a markup on cost, not a profit margin.
I scrolled down to see how far I would need to go to see this.
A 5% profit margin means making 5 cents per $1 of sales.
A 1,000,000% profit margin would be making $10,000 (roughly) of profit per $1 sold.
In this case, the profit margin was north of 99% for this particular subsegment of business.
If you can find such a business, let me know because it’ll be a SUATMM sort of situation.
Just to be clear… that’s a markup on cost being described, not a profit margin.
Rick, as much as your commitment to leaving dialog open (to the point of even letting even industry trolls divulge their marketing, as long as it is masked as contesting your facts), I think it would be good if, by default, your blog template hid comments behind a “(read 14 comments on this post)” or similar, to only unfold comments and comment form upon clicking it.
Screen real estate wise, your sane and well researched post up top is a drowned very meagre fraction, easily dwarfed by trollese by sheer volume, which plays mind tricks on people. You know how this industry (and all the other industries you fight) operates.
[…] observed yesterday that wireline traffic costs at most 0.25 cents per gigabyte to the end-user. Fitting 6.71 million […]
I haven’t read all the comments, so this is probably already covered, but here are several points:
1) example: the biggest (and most expensive) mobile operator in Latvia wants to have 2.8Eur per Gb (there are differences on plans, but it is on average).
2) the same operator will charge 0.83Eur per MB(!) when in roaming, difference is >30k%
There are 2 potential outcomes:
1) either the regular price is way Way WAY too low and the operator basically tries to scrape along while providing the services to the customers out of sheer philantrophy, which I don’t believe, or
2) roaming prices are way Way WAY too high.
Could someone from the industry enlighten me why the price per Mb has to be >30k% higher, if the device is registered in the network that is not its home network? Please, save the “we need to build towers this and datacenters that”; of course, it is necessary, but it is paid by the home network users, because they are the majority.
what is the justification of the price, besides “well, they still pay, so why bother, it’s free money..”?
How painful it is to read comments by economic analphabets playing aroudn with words such as “free” market etc in order to divulge their ideology. Painful. Never mind. Rick, rest assured that your definition of “free” does not matter at all, since market failure it is for sure.
With some economic training, anyone knows that in a non-faling market price equals the marginal costs. This is quite clearly not the case as pointed out by the OECD article. For sure operators are charging too much, not only for roaming, but also at home (as you pointed out yesterday).
How can this be? Easy answer: they hold monopolies that are, despite the arguments by many commentors, largely unregulated. Operators are granted a single exlusive licence (monopoly) over a specific frequency spectrum (or cable in the road for landline connections). With this frequency / line, they can do what they want and offer any service.
In the case of landlines, they have to give competitors access, since the natural monopoly of laying cables would otherwise be totally in the hands of former government “companies” such as Telia/Telekom/BT etc. which stiffles competition and also because of the (social) costs of having many companies laying a cable to every house.
Over the air, competition is actually easier extablished by deviding up the frequency spectrum into more slices and sell them to more than one company. This is and was done by most European/US/Asian countries. Still, given this spectrum, the services (apart from some coverage requirements) remains unregulated.
Consider a situation in which I can subscribe to Telia for calling, to Comviq for cheap SMS, to 3 for data and to Viasat for TV. Apply your local companies as fits (e.g. o2 for calls, vodafone for SMS, Sky for TV and T-Mobile for data in the UK / Germany). Technically this would be easily possible with 4G since everything is IP packets there. WIth some adjustements, also 2/3G would be able to offer this and for landlines anyway (VoIP, IPTV etc). Then we have some competition and only then would the current account bundling (euphemistically called triple play or quadruple play) lead to some actually interesting offers.
There are some interesting advantages to bundling, but they are not played out right now, because there is simply no need at all, since operators hold their monopoly on bundled accounts and in some countries they even only allow certain handsets on their holy frequencies (USA). An anology (with restrictions) would be to see a highway company allow you only to use certain cars on their roads, which provide one radio station with music they like and only the type of fuel that they like to sell.
Ridiculous? Not in the mobile phone industry and no better in landlines. Companies are largely unregulated and for the typical 24 month contract duration, there is no real competition in services. You are stuck with what you have and that gives operators a certain peace of mind and lack of innovation. If competition in individual services existed, we would long have much lower costs as subscibers.
The EU has recognised that for roaming (because of and regulates and regulators in countries have started tackling the overpricing, but none of them tackle the large monololy that they grant companies on bundling their account. To my knowledge, in Germany, the UK, France and NL, you cannot buy an unbundled landline internet package without having to buy a phone account, too (few exceptions for local fibre offers maybe). But these phone accounts incurr additional costs that many people may not like. Trouble is: if that landline is the only line you have to your house/flat (not that cable operators are any better…), you are stuck with a (temporary) line monopolist and a bundled account.
Furthermore, this lack of regulation is the reason we have to have a discussion about net neutrality at all. Since without operators trying to block certain services that compete with their own (Skype on mobile networks anybody?), net neutrality would be a de facto necessity as the pipes need to be open to let any service flow. There was a short moment, when things moved that way, but noe net neutrality is something that operators are too keen to reverse. They feel a decrease of importance because they only provide the pipes. So, I understand their feedlings, but if they want to feel more important, how about they offer better services!?
I would like to see some of these clever economic analphabets but idiologists from above comment on this point of a natural and largely unregulated monopoly on account bundling. I don’t expect any sensible reply, but I shall remain open for being proven wrong.
Thanks for the article, Rick!
Cheers,
Joe
Whoa, I don’t have enough time (or even expertise) to start really writing a proper reply for this just now, but this comment somehow really reminded me about this: http://squid314.livejournal.com/347454.html
People disagree and we’re not idiots and you’re probably not either. So can’t we just sort of stop with the demeaning sneering and trying to make the other side look and feel bad?
Dear Rick Falkvinge,
Just a question; Is it possible that the absurd number of regulations and legislation regarding the telco industry is due to national security issues? As in hardening lines of communications against a foreign invasion/attack?
[…] EU pratar hela tiden om hur viktigt det är att vi får en snabb utbyggnad av snabbt internet i hela Europa, men i verkligheten har de gamla nationella telemonopolen fått ta kontrollen över utbyggnaden av bredband, och utnyttjar det till att fördröja bredbandsutbyggnaden och överdebitera på absurda nivåer. […]
It’s not a market falture. It’s a government regulation falture. Government makes communication very hard to enter for new companies and there you see a very small competition.
[…] […]
[…] Telco Profit Margin On Data Roaming Exceeds One Million Per Cent […]
[…] Telco Profit Margin On Data Roaming Exceeds One Million Per Cent […]
can anyone tell me the factors and issues on why this happened based on the article? thanks!