This has taken me longer than I said it would to write and post. My mind has been on issues of terrorism rather than telephones. Plus I have had endless blogger/blogspot problems which means I seem to have typed most of this several times. Perhaps I should move this blog somewhere else. Anyway, apologies.

Last week, I was sitting on a wharf beside the River Elbe in the Blankanese district of Hamburg. It's a mighty river. Large container ships go past to the Port of Hamburg. A college friend of mine who lives in South Africa happens to have been born in Hamburg, so I sent him an SMS text message from my GSM cellphone. I also sent a message to my sister in Austalia. This cellphone is registered with a British network (Orange, which actually now owned by France Telecom, although is was owned by Mannesman of Germany and before that Hutchison of Hong Kong). It is on the simplest prepay tariff, which I use because I do not know how long I am going to be in the UK and I do not wish to commit myself to a fixed term contract. However, there is still enough interoperability and roaming in place that I can sit beside a river in Germany and send text messages to people in South Africa, and receive replies a few minutes later. I was impressed. It is possible to buy a wireless communications device for 50 pounds that will allow me to send messages to another one of these wireless devices over much of the world.

Roaming and interoperability is of course what GSM got right. The GSM standard, with its system of portable SIMs and phones that could be easily moved from network to network and which could be used with different numbers and network accounts was a nice, elegant piece of work. However, the creators of this system didn't just get it right technically, they go it right logistically as well. Right from day one there was a central clearing house set up to make roaming from one network to another and the associated billing as easy as possible.

The downside of this is that my little exercise in which I sent and received a few text messages while sitting next to the Elbe cost me several times as much money than it would have if I had been sitting next to the Thames. My phone was not in its home country, and I was therefore being charged "roaming rates". If I was actually using the phone for voice calls, I would again be charged very much more than would be the case at home, and (horror of horrors) I would be being charged for incoming as well as outgoing calls.

As to why charges are so high, the telcos have a number of justifications.These come down to the fact that when you are roaming, the infrastructure of two different networks is being used, this is tricky and so it should be expensive.

In actual fact, the key issue is simply that the charges for roaming are largely decided by the company that owns the network you are roaming to. They pass the charges on to your home network, which adds a markup and passes the charge on to you. As you are not a regular customer of the network you are roaming on, this operator generally feels it can rip you off beyond words without being terribly concerned about the loss of future business. Those customers who do regularly visit the same countries are normally business customers who do not pay for their calls themselves and therefore are not very price sensitive anyway.

As to whether this makes sense, we need to look at what is going on. There are two kinds of roaming call:

1. Outgoing calls. You are in a foreign country and are making a call (to anywhere). The foreign network picks up the call and then passes it on to the destination. At the end of the call, it passes billing information on to your home network, and the cost of the call appears on your next bill. Your home network is involved only in terms of billing. From the point of view of the network, there is little difference between this and handling a call from one of its loval customers and an international customer who is roaming, except that billing informaiton needs to be sent to the right place at the end of the call.

2. Incoming calls. In this case, my phone's home network is in country X, and I am roaming in country Y. When someone wants to call me, they call the phone's number in country X. The network has to figure out that the phone is roaming in Y. It then has to open a line to country Y, and the network in country Y connects the call to the phone. This is more complex than an outgoing call situation, as the call has to be routed via country X regardless of the location of the caller. (In addition, the network in country X has to keep track of the fact that the phone is in country Y in order that the connection be possible). Even if the caller is in country Y, the call has to go via country X and back, because the phone's number is native to that country. Plus of course billing information needs to be kept track of.

Incoming calls are certainly more complex than outgoing calls, and both networks are involved in the call rather than just in billing, If you are going to charge a premium for roaming based on actual costs, you would therfore expect incoming calls to be more expensive than outgoing calls. Right?

In practice, quite the opposite is the case. The cost of outgoing calls when roaming is horrific. The cost of incoming calls is more reasonable. The reson for this is simply that prices for outgoing calls are generally set by the network you are roaming to, whereas those for incoming calls are set largely by the country you are roaming from. The charge for an incoming call has generally been negotiated by your home network, and is generally based on the cost of calling any other mobile in country Y from country X. Your home network is less likely to rip you off, and so this works out cheaper, even though it is more complex.

The deal with international roaming is simple. Telcos are charging what they can get away with. European mobile companies make more than ten percent of their revenues from roaming, whereas it makes up a much smaller fraction of total minutes. They charge what they can because they can get away with it. (To really see this in action at its worst, one only needs to take one's phone to a third world country. The rates one is charged in, say, Indonesia, make the European rates look reasonable).

I was arguing the other day that the benefits of the EU's single market are very large, and should not be forgotten by people who are going to (generally quite justifiably) criticise the EU. Telecommunications, however, is an area in which the single market is not working very well. (At least, not yet, as Obi Wan might say).

Superficially, telecoms and international aviation have certain similarities between them. Traditionally, the international forms of both industries have been regulated by bilateral treaties between nations, and traditionally the international business has been dominated by often state owned monopolies and duopolies. One effect of the single market should be to transform the international aspects of these businesses into essentially domestic businesses. In the case of aviation, this has happened, but not through the traditional companies. What you have had is the traditional businesses attempting to keep operating by their old business models. When they have tried to operate by the new ones, it hasn't worked. (British Airways have attempted to operate domestic airlines in France and Germany, and to set up a London Stansted based discount airline, but the culture of the company has not been to get them to work). However, the barriers to entry aren't large, and new companies have come into being to take the slack.

In telecommunications this hasn't happened nearly as much. Yes, the cost of international calls has come down for fixed phones, but even with the cheapest carriers , it still costs significantly more to dial Paris from London than it does to dial Glasgow. Still, it's possible to call Paris for 4 pence a minute, which isn't much, so plenty has been achieved. Part of the problem is that we still have a numbering system in which dialing a different country requires dialing a different kind of number to dialing a domestic one. It feels you are doing something different, so it is possible to get away with charging something different.

However, with mobile networks the situation is far worse, and this comes from the fact that networks were explicitely licensed on national grounds. Steven Den Beste was the other day discussing the fact that in the US, a vast number of small cellular companies have basically now evolved into four national networks (AT&T, Sprint, Verizon and Cingular). This process hasn't happened nearly as effectively in the US. This seems to be due to the fact that, counterintuitively, licences in Europe were issued to cover larger areas. Whereas in the US cellular licences were originally sold on a market by market basis, and there were a huge number of smaller markets to merge together, in Europe licences were generally sold on a national basis. Most nations have three or four GSM networks. (The EU has required each country to have at least three). Typically, one or two licences were issued for analogue services in the 1980s, one of which was given to the incumbent government telecommunications monopoly. In the early 1990s these operators were given GSM licences and a couple of new operators were licenced for GSM. For instance, in Britain, there were two analogue operators. (Britain is quite typical. There were two analogue operators (BT Cellnet and Vodafone) who later upgraded to GSM and were joined by two new entrants (Orange and One2One). In any event, networks were national, marketing was national, a roaming structure came into being that was based on the idea that roaming calls were an ultra-expensive luxury.

Over the years, these operators became successful, and tried to expand. European law (at least from 1993) allowed these operators to buy one another without restriction, but in a market where lots of companies were state owned and national governments wanted to protect them, this was hard. Lots of companies bought minority stakes in other companies, but full mergers were relatively slow in happening. They did eventually happen, but still, nobody has what could be described as a comprehensive European network. The closest we have is Vodafone, which has networks in Germany, Greece, Ireland, Britain, Italy, The Netherlands, Portugal, Spain and Sweden (only listing EU countries) and a variety of minority stakes. Vodafone is presently trying to take control of the SFR network in France, which has come on the market due to the collapse of the Vivendi Universal conglomerate, and it looks likely to do this. Other operators are rather less advanced. O2 (the former BT Cellnet) has networks in Britain, Germany, Ireland and the Netherlands. Orange (which belongs to France Telecom) has networks in Britain, France, and Denmark. T-Mobile (formerly Deutsche Telecom) has networks in Britain, Germany, The Netherlands, and Austria . None of these networks are complete, and roaming to networks owned by other people is therefore still important if you are going to offer a complete service to your customers.

Ideally, what we would like is for these companies to more or less complete their European networks, and then offer customers tariff plans in which the rates paid when the phone is outside their own country are the same as for calls made inside it. Ideally, there should be no charges for incoming calls in either case. It may be that call charges on such a plan would be slightly more than on a conventional domestic plan, and it may be that to call such a phone, people would have to dial a non-gegraphic number that cost slightly more to call than a domestic number. The main issue is that call charges when roaming should resemble a domestic tariff. Given that when a company such as Vodafone builds a pan-European network it should be able to do such things as integrate their billing system, this would be a much better reflection of costs than the present roaming system anyway. In a competitive market, economic theory would tell us that this is how tariffs would end up anyway, but sadly we do not have a competitive market. You would expect the first company to adopt such a model to gain a lot of market share, but the longer term result would be an erosion of margins. As it is, we have a set of sick, overindebted companies that lack the flexibility or desire to change their business models.

In the aviation market, barriers to entry turned out to be fairly low, so although the existing carriers weren't flexible enough to change, new carriers arose to take advantage of the new market. In mobile phones, barriers to entry are total. There are no new GSM licences being issued, and the only new mobile licences are for 3G licences for a technology that doesn't work. Therefore, the existing carriers oligopoly isn't threatened.

In defence of the EU here, the competition authorities of the European Commission are aware of this, and an antitrust investigation is ongoing into the high cost of roaming charges on mobile networks in Europe. Investigators have been arriving at telcos at seven in the morning and demanding access to documents and computers. I don't think it is so much the EU as the national governments who are the obstacle here. The trouble is that the forcing roaming charges to be closer to costs would weaken the financial position of Europe's telcos considerably. Given that their financial position is already generally dreadful due to the huge costs of 3G licences and equpment, most EU governments would prefer that this not happen. Given that in a lot of cases they seem determined to bail out their (in some cases still partly state owned) telcos, and this would make the job harder, there is ultimately likely to be a lot of political resistance to this. However, bailouts are a bad idea. They just prevent innovation, and if Europe had a lead in mobiles, they are going to allow it to become further eroded.

Thus we have a situation where consumers are being ripped off , the market is completely scherotic, and there are huge political obstacles to any reform. Once again, the circumstances of the European mobile market appear pretty dreadful.