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EuroCPR2009, Sevilla, March 29-31, 2009 Flat-rate Pricing for International Mobile Data Roaming Heikki Hämmäinen, Hannu Verkasalo, K.R. Renjish Kumar Helsinki University of Technology Department of Communications and Networking P.O. Box 3000 FIN-02015 TKK, FINLAND [email protected], [email protected], [email protected] Keywords: international mobile roaming, regulation, mobile Internet, data roaming tariff Abstract International mobile data roaming is still in its infancy although the domestic mobile access to Internet is increasing rapidly. This paper argues that the pricing structure rather than the price level is the main bottleneck of data roaming. Evidence to support this argument is presented based on consumer’s flat-rate preference (prospect theory) and on empirical usage measurements of Finnish mobile subscribers. Finally a proposal is presented on how to implement the regulation for daily flat-rate data roaming within Europe. 1. Introduction The European Commission (EC) has already concluded that market-based mechanisms are unable to create sufficient competition in voice roaming prices. Recently, the Commission went a step further and suggested that roaming regulation will be extended to cover also data services, i.e. mobile access to Internet. The proposal suggests imposing a volume-based price cap of 1EUR per megabyte (MB) for the wholesale inter-operator tariffs (IOT). The underlying concern of this paper is that a volume-based price cap will not be sufficient to promote the roaming access to Internet. Instead, our hypothesis in this paper is that a price cap based on a flat-rate pricing model is needed. The paper first describes the regulatory situation of roaming in Europe and then moves to analyze the market situation in Europe and elsewhere. Next the concept of flat-rate preference and its implications are explained. The existence of flat-rate preference in mobile data services is then assessed based on empirical data from the Finnish market. Finally the obstacles of flat-rate pricing are discussed before presenting a proposal for the European solution of flat-rate data roaming regulation. 2. Regulatory Situation In the EU area, both wholesale and retail price caps, also called Eurotariffs, for voice service roaming apply for the period of 1.7.2007-30.6.2010 (EC, 2007). The European Commission has proposed to amend this roaming regulation for the period of 1.7.2009-30.6.2013 including wholesale price caps for data roaming (EC,2008). The proposal has set the initial ceiling at 1 EUR/MB for the wholesale price, to be reduced annually in the following years. The Commission’s main concern is the persistent lack of competitive pressures in the market of international roaming leading to very high retail data roaming prices compared to the cost incurred or the domestic retail

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Page 1: Flat-rate Pricing for International Mobile Data Roamingblogs.helsinki.fi/ilkkakiema/files/2005/10/EuroCPR2009.pdf · Finally a proposal is presented on ... Market Situation Flat-rate

EuroCPR2009, Sevilla, March 29-31, 2009 

Flat-rate Pricing for International Mobile Data Roaming

Heikki Hämmäinen, Hannu Verkasalo, K.R. Renjish Kumar

Helsinki University of Technology

Department of Communications and Networking

P.O. Box 3000 FIN-02015 TKK, FINLAND

[email protected], [email protected], [email protected]

Keywords: international mobile roaming, regulation, mobile Internet, data roaming tariff

Abstract

International mobile data roaming is still in its infancy although the domestic mobile access to Internet is increasing rapidly. This paper argues that the pricing structure rather than the price level is the main bottleneck of data roaming. Evidence to support this argument is presented based on consumer’s flat-rate preference (prospect theory) and on empirical usage measurements of Finnish mobile subscribers. Finally a proposal is presented on how to implement the regulation for daily flat-rate data roaming within Europe.

1. Introduction

The European Commission (EC) has already concluded that market-based mechanisms are unable to create sufficient competition in voice roaming prices. Recently, the Commission went a step further and suggested that roaming regulation will be extended to cover also data services, i.e. mobile access to Internet. The proposal suggests imposing a volume-based price cap of 1EUR per megabyte (MB) for the wholesale inter-operator tariffs (IOT). The underlying concern of this paper is that a volume-based price cap will not be sufficient to promote the roaming access to Internet. Instead, our hypothesis in this paper is that a price cap based on a flat-rate pricing model is needed.

The paper first describes the regulatory situation of roaming in Europe and then moves to analyze the market situation in Europe and elsewhere. Next the concept of flat-rate preference and its implications are explained. The existence of flat-rate preference in mobile data services is then assessed based on empirical data from the Finnish market. Finally the obstacles of flat-rate pricing are discussed before presenting a proposal for the European solution of flat-rate data roaming regulation.

2. Regulatory Situation

In the EU area, both wholesale and retail price caps, also called Eurotariffs, for voice service roaming apply for the period of 1.7.2007-30.6.2010 (EC, 2007). The European Commission has proposed to amend this roaming regulation for the period of 1.7.2009-30.6.2013 including wholesale price caps for data roaming (EC,2008). The proposal has set the initial ceiling at 1 EUR/MB for the wholesale price, to be reduced annually in the following years. The Commission’s main concern is the persistent lack of competitive pressures in the market of international roaming leading to very high retail data roaming prices compared to the cost incurred or the domestic retail

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prices of similar services. Limited transparency in retail data roaming prices is considered as another problem. An indication of these problems is the large number of unexpectedly high data roaming bills, or “bill shocks” that have caught attention of consumer authorities. To increase price awareness the Commission proposes a maximum financial limit for consumer’s outstanding charges for data roaming services, with an appropriate warning message when this limit is approached.

In Finland, the Ministry of Transport and Communications (MINTC, 2008a) requested comments from national stakeholders on the Commission’s data roaming proposal during autumn 2008 (MINTC, 2008). Interestingly, all three main mobile operators, Elisa, TeliaSonera, and DNA, supported the Commission’s wholesale price caps, but opposed retail price caps as well as the technical triggers for limiting consumer’s outstanding charges. The support for wholesale price caps was explained by pointing out that it would allow small independent mobile operators to provide competitive roaming services across Europe. One operator even suggested that the 1EUR/MB price cap is too high and should be set lower. The opposition of retail price caps was defended by observing that the retail price cap of voice service has cemented both the pricing structure and the price level in Europe thus preventing the emergence of competition. One operator also argued that the price caps of regulated services have pushed up the wholesale prices of non-regulated roaming services including data roaming. MINTC released a positive statement on wholesale price caps but also suggested that retail price caps for data roaming may be necessary to secure that consumers will eventually benefit of the wholesale price caps (MINTC, 2008b).

3. Market Situation

Flat-rate pricing for domestic mobile Internet access is rapidly gaining ground in many advanced markets. This evolution significantly resembles that of fixed broadband Internet access ten years ago. Some mobile operators have also launched limited flat-rate data roaming services for business travelers. For instance since 2007 Vodafone has a Euro flat-rate roaming service for laptop equiped business travelers on daily basis: 15EUR per day up to 50MB (Vodafone, 2007). Notably Vodafone also offer a wholesale price of 0.50EUR/MB reciprocally for its roaming partners. In May 2008 also Orange launched a daily Euro flat-rate of 12-15EUR per day up to max 50MB. Likewise, some Asia-Pacific operators have initiated collaborative actions for flat-rate data roaming. For instance, in November 2007 Bridge Alliance (11 Asian operators) launched a monthly flat-rate of 30-40USD for 15MB and 60-80USD for 40MB (Bridge, 2007). Notably this monthly flat-rate offer has a lower maximum traffic volume than the corresponding daily offer by Vodafone. Also Conexus Mobile Alliance (7 Asian mobile operators) has launched a daily flat-rate varying in the range of 10-25USD also including unlimited daily flat-rate offers (Conexus, 2009). For more details on data roaming markets, see (Vroljik et al., 2008).

Based on these recent market observations it seems that the international alliances of mobile operators currently use data roaming flat-rates to compete against each other mainly in the business customer segment. In Europe the operators may also want to demonstrate to the Commission that the European roaming market can generate innovative pricing structures without regulator’s intervention. This alliance-driven competition is in line with the assumption that the international mobile service market is moving from the bilateral phase to the international clusters phase as suggested by Kumar et al (2007). However, it seems that the alternative Internet-based wireless

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access services such as wireless local area network (WLAN) hotspots have so far not been able to create a significant threat to the data roaming service of incumbent mobile operators as anticipated by Kumar et al. On the contrary, the new 3G HSDPA/HSPA data service has turned out to be useful for most laptop users and has even become a substitute of fixed broadband access for a special small segment of consumers. This success of domestic 3G data service is rapidly turning data roaming into a major European regulatory challenge.

4. Impact of Flat-rate Preference

The success of flat-rate pricing in the residential fixed broadband Internet access has triggered research on the relative properties of flat-rate and measured rate. Train et al (1987) found empirical evidence of “flat-rate bias”, or bias of subscribers to prefer flat-rate over measured rate when both generate a phone bill of the same size. Recently Mitomo et al (2007) successfully demonstrated the existence of flat-rate preference in mobile services by using an on-line survey, non-parametric statistical tests, and psychological interpretations from behavioral economics. Their study focused on factors such as loss aversion, reference dependence, mental accounting, ambiguity aversion, cognitive dissonance, and the shape of probability weighting function. Out of these possible factors, loss aversion and reference dependence, both part of the prospect theory (Kahneman and Tversky, 1979), turned out to explain the existence of flat-rate preference. Loss aversion means that if a monthly payment is larger than the reference point (i.e. the average monthly bill payment), users tend to overestimate the loss. To avoid such losses, they prefer flat rates. Reference dependence, on the other hand, means that the payment level affects the subjective evaluation of the shift to a flat rate. Thus, user preferences for flat rates do not depend on the absolute level of payment but on the digression from the reference point. These initial results of Mitomo et al. give an idea on how users think about flat-rates, but more results can be expected from behavioral economics.

One factor that Mitomo et al. did not assess is the value of experimentation (Gaynor, 2003). The rapid evolution of various Internet-based services is visible to users as personal uncertainty about the value of current and future services. Flat-rate facilitates personal experimentation and innovation without the risk of “bill shocks”, thus maximizing the value of experimentation and justifying some premium in price level.

In Finland, the rapid growth of wireline Internet access coincided with the introduction of ADSL and flat-rate pricing in 1999. Correspondingly, the rapid growth of mobile Internet access started with the introduction of unlimited 3G flat-rates in 2007. This growth is dominated by consumer and business laptop usage but mobile handset usage is also growing rapidly (Kivi, 2008). Notably many other European markets offer only flat-rates with maximum monthly blocks, but in Finland unlimited flat-rates drive the market. Other aspects such as technological maturity also explain the timing of these growth events, but flat-rate seems to play an important role. In the case of ADSL the flat-rate-based consumer experimentation triggered the demand for next access speed levels which seems to continue up to the physical limits of copper wire, and then further toward optical cable speeds. It is tempting to predict that the same need for speed has now been triggered by the mobile data flat-rate. Notably, although the operators had early concerns about flat-rate, they seem to have turned it into profitable business. The concept of flat-rate preference seems to nicely explain the success of both cases, ADSL and 3G.

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If the flat-rate preference exists in domestic mobile Internet access, it is logical to assume that it works the same way also when roaming. Other criteria such as technical maturity remain unchanged in the roaming context as well.

5. Empirical Observations

Objective data can be collected on the usage of smartphones in domestic and international roaming contexts using a handset-based research method (see Verkasalo et al, 2007). In the research process a coordinated panel study is arranged, in which the recruited panelists install a research client software on their Nokia S60 smartphones and continue their normal usage habits for a period of time. During this period accurate logging of usage is automatically performed by the research client, uploading the collected data frequently to servers for the purposes of analysis. The main shortcoming of the method is the adverse selection of panelists, mostly early-adopter smartphone users. The main advantage is the accurate, objective approach to measure real usage in all contexts.

For this paper, the data set was collected in fall 2007, including 579 active consumer panelists, with 79% being male and 71% being less than 40 years old. The panel study lasted for 1-2 months between November 2007 and January 2008. Three web-based survey studies were deployed during the study (in the beginning, middle and end). From the whole data set of usage and survey data, only certain data points are used in this paper.

The analysis, as reported in this section, focuses on the comparison of domestic and international roaming usage patterns of packet data, communication services, and smartphone applications. A separate roaming mapping file is generated from the usage log files collected. This mapping file is constructed based on an accurate network technical log, which enables the identification of the current country code per every usage action. By comparing these country codes to the dominating country of each panelist (which is assumed to be the home country, i.e. mostly Finland in this panel), all usage actions can be categorized either into home or international roaming contexts. Note that roaming from Finland to other EU counties covers 59% of the roaming usage in our panel. After merging the contextual information, the aggregate usage (i.e. number of actions, usage duration, or data volume) is summed up for both contexts, and these sums are divided by the number of days spent in the respective contexts in order to define the daily intensity figures.

In Figure 1, users with different cellular data pricing plans are compared by averaging the usage over all days. Domestic cellular data usage of flat-rate users is more than ten times higher than that of usage-based (i.e. measured rate) users, which is in line with the theory of flat-rate preference. Data usage drops radically in both data pricing plan categories when roaming, which shows the impact of price sensitivity and high roaming prices. However, the averaged usage observations should be considered with caution because of the high variation between active and passive users especially in the flat-rate category.

In Figure 2, the overall data usage intensity of cellular and WLAN bearers is compared. This result again indicates that panelists are price-sensitive to cellular roaming prices. Also WLAN usage drops 47%, probably due to the problem of finding accessible hotspots abroad. Back home, panelists have the freedom of using familiar office and home hotspots, which may explain the difference. However, cellular data usage drops almost twice as much as WLAN data usage.

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Figure 1. Usage-based and flat-rate cellular data usage (Finnish smartphone study 2007)

Figure 2. Domestic and roaming data usage volumes (Finnish smartphone study 2007)

In Figure 3, the distribution of the number of data sessions is compared. Interestingly the dominating application in home country, the web browser, is being replaced by the device

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messaging client (MMS, email) abroad. Panelists clearly drop browsing abroad, probably knowing that it is more data-intensive by nature. Interestingly, different kinds of Internet calls (e.g. VoIP client and Fring) represent 11% of all data sessions abroad, in comparison to 3%-4% at home. This may be a weak signal of substituting expensive traditional roaming voice calls with cheaper Internet calls especially over WLAN. It is also clear that at home the data service usage is distributed among a much higher number of different applications than when roaming. This indicates that (high) measured rate data tariffs inhibit panelists’ Internet experimentation while abroad.

Figure 3. Distribution of the number of data sessions (Finnish smartphone study 2007)

In Figure 4, the usage of applications in terms of average daily usage time (i.e. sum of session durations) is compared. As expected, browsing time decreases significantly. Also gaming usage decreases when abroad. On the other hand, panelists spend more absolute time with messaging (because of SMS and MMS) and map applications (for positioning, map viewing, navigation etc.) abroad. In music consumption there is no observed change between home and abroad, but camera (a more hedonic, travel-oriented application once again) and clock usage (alarm clock configuration and the alarm itself, and setting the local time) clearly increase.

It would be valuable to understand the natural, i.e. price independent, time usage profile of domestic and roaming context. Having the real price and price elasticity of each application usage category would theoretically enable the necessary normalization of the measured usage time profiles. That exercise is left for further study.

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Figure 4. Application usage based on duration of sessions (Finnish smartphone study 2007)

In Figure 5, the traditional communication services are compared in home and roaming contexts. The voice call usage drops remarkably while abroad, but interestingly SMS and MMS usage both increase. Panelists probably substitute voice with SMS abroad, because of the better cost control. Note that, during our panel study, voice call prices in Europe were already capped but SMS prices were uncapped and high. This might indicate that a predictable but high data flat-rate is more desirable to consumers than an unpredictable but low measured rate, thus confirming the flat-rate preference. MMS, being a holiday and travel oriented service, shows also significant increase abroad. Average daily outbound MMS messages increase by 89%, and also inbound messages show increase (mainly because many people respond to incoming MMS messages with a reply-MMS).

The empirical observations suggest that the current pricing of international data roaming significantly inhibits the usage of Internet services in the consumer segment, based on the large difference between domestic and roaming usage. The relatively high domestic usage on the other hand proves the high demand of mobile access to Internet.

Unfortunately our data set does not enable comparison of the natural usage difference between domestic and roaming contexts. The pricing difference distorts the usage behavior and hides the natural contextual impact to a large extent. Only the increased usage of maps, MMS, and camera can be considered as clear indications of the natural contextual impact of being abroad. A company-paid subscription is likely to reduce the distortive impact on roaming behavior, but the low number of company-paid subscriptions in our data set did not allow statistical comparison. More solid

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statistics on natural behavior will be possible with usage data from consumers having unlimited data roaming flat-rates such as Conexus (2009).

Figure 5. Communication usage (Finnish smartphone study 2007)

Due to the relatively small size and early-adopter bias in the data set this smartphone study cannot be directly generalized for predicting the behavior of average consumers. It is also important to note that laptop computers generate the vast and increasing majority of cellular data traffic, for instance in Finland 92% in 2007 (Kivi, 2007). This trend has a fundamental impact on operators’ data tariff planning.

6. Obstacles of Flat-rate Data Roaming

The main obstacles of flat-rate data roaming originate from different parts of the value network but cumulate clearly to the business decisions of mobile operators. These main obstacles are:

structure of the mobile services industry: the roaming agreements create a web of dependencies between mobile operators that slows down both technical and business innovations. No single operator can proceed unilaterally. For instance, the wholesale pricing structure and price level offered by other operators leaves little room for the retail roaming pricing of a single operator. This is where regulation can has a role.

Internet: since competition is not working in roaming, the operators have little incentive to promote the Internet model that is likely to reduce their traditional circuit-switched voice roaming revenues and to open up the service space to Internet players. Small operators in the

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small markets and the weakest operators in the larger markets seem to be more willing to experiment with the Internet model than the biggest operators, as suggested by Kumar et al (2007). The increasing Internet customer pressure is likely to solve this issue gradually.

radio access: cellular networks are limited in radio capacity. This bottleneck is likely to persist although the new radio interface standards, the replacement of copper with fiber in transmission links, and the lower cost site configurations are improving the situation. Mobile operators continue having the incentive of selling the scarce capacity to the more competitive domestic subscribers compared to non-competitive (although more profitable) roamers. This is where regulation again has a role.

GRX transport: the GRX-based inter-operator transport network architecture may drive up transit costs as the volume of roaming data traffic routed through the GRX increases many fold due to flat-rate pricing. GRX-based networks may also form a less competitive service market compared to the normal Internet backbone services market with the mobile operators paying some premium to GRX operators due to the private nature of the networks owned by a select few when compared to the number of public Internet backbone providers. This issue must be tackled by the mobile industry.

traffic segmentation: laptops generate significantly more cellular data traffic than handsets as already pointed out. Therefore operators are more capable and willing to offer flat-rates for handsets than laptops. Due to technical reasons, however, operators have not been able to differentiate these traffic types, which has slowed down the introduction of domestic flat-rates. Nevertheless, mobile operators for instance in Finland have successfully started offering cellular flat-rates to consumers independent of device type. This indicates that the same is possible for roaming customers.

None of the listed obstacles seems to be hard enough to prevent the introduction of flat-rate. The technical problems, i.e. radio access and traffic segmentation, are the same in domestic and roaming situation. Taking into account the small portion of roaming traffic, typically less than 5% of all mobile traffic, the mobile operators should not have significant technical concerns with respect to flat-rate data roaming. The obvious conclusion is that data roaming is ready for taking off. For more information on bottleneck issues, see (Vroljik et al., 2008).

7. European Solution

Europe has a competitive disadvantage internally in mobile roaming services due to the high number of roaming agreements needed between the many European mobile operators. A market-based process would probably eventually, but very late, lead into flat-rate data roaming within Europe because of the increasing customer pressure. Europe, however, has a centralized mechanism for regulation, which could turn mobile roaming into a competitive advantage by exploiting the flat-rate preference in full. What kind of flat-rate data roaming regulation would be achievable?

A Europe-wide domestic mobile flat-rate, i.e. data roaming within Europe fully embedded in the domestic monthly unlimited flat-rate, would maximize the consumer benefits of flat-rate preference and create a single European market. This is however too radical for operators in the short term because it distorts the geographical boundaries of spectrum licenses. A per day roaming flat-rate seems more promising because of the available early market experience, technically easy deployment, understandability to consumers, differentiation between domestic and roaming service, and significant profit opportunity to operators. The profit opportunity assumption relies on the

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observation that the daily roaming flat-rate can be set radically higher than the domestic monthly flat-rate divided by 30. Consumers’ willingness to pay is likely to be higher while roaming because the additional Internet access cost is probably minor compared to the additional costs of traveling. If a daily data roaming flat-rate is the basis of regulation, how could the detailed regulation attributes be defined in an acceptable way? The following solution is proposed as input to regulatory negotiations:

• an IOT wholesale price cap of 5EUR per day per flat-rate user with a maximum of 384kbit/s 3G data rate: the regulation can be limited to the basic 3G data rates already available in almost all European markets. Most benefits of the flat-rate preference can be achieved already on basic data rates, although Internet voice calls are not very feasible. This approach leaves space for the mobile operators to innovate with the offering of higher data rates. The price cap is high compared to current domestic flat-rates and could be attractive to mobile operators, since it should clearly cover the extra costs of roaming as well as the statistical traffic risk of unlimited flat-rate. The level of this initial price cap should be reviewed annually with respect to a basket of European domestic flat-rate tariffs. This might not be possible soon since the early domestic flat-rates cannot not be easily compared and probably do not sufficiently reflect the future price levels as suggested by Vroljik et al. (2008).

• a retail price cap of twice the wholesale price cap, only for the basic 3G data rates of up to 384kb/s: This retail price cap secures that consumers benefit and that the flat-rate tariffs will be deployed rapidly. A wholesale only price cap might also benefit the home operator unduly compared to the visited operator.

• quota-based data rate restriction, only for the basic 3G data rates of up to 384kb/s: to limit excessive usage the visited operator is allowed to restrict the data rate of visiting users exceeding a certain quota, initially e.g. 100MB/day. A similar quota rule, 3GB/month, is applied for mobile domestic traffic by at least one Finnish operator. This restriction allows mobile operators to manage the bottleneck radio resource in an optimal way. The risk of the visited operator misusing this restriction rule is low because both the home and visited operator start losing profitable business if users are not taken good care of.

The key of this proposal is that the pricing structure is more important than the price level as suggested earlier. It is likely that, as soon as the users have adopted flat-rate roaming tariffs, the flat-rate preference starts producing a positive spiral toward higher data rates on commercial basis. Optimistically, this might facilitate terminating the regulation in due time. Several more details certainly need to be elaborated between the stakeholders if this general approach is taken on the negotiation table.

The 5EUR per day price level should be highly profitable because it is radically above domestic flat-rates and well in balance with the current commercial flat-rate offerings for business users. The latter argument is based on the observation that a mobile handset generates a minor fragment of traffic compared that of a laptop (Kivi, 2008) and that traveling consumers rarely carry laptops.

Mobile operators have different cost structures, inbound and outbound traffic profiles, partnership positions, and natural growth opportunities in the mobile roaming market. We argue that an

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approach proposed above, which is limited to basic data rates and seeks for a profitable balance between home and visited operators, can sufficiently solve the fairness issue.

8. Conclusions

Based on the theoretical and empirical observations it seems obvious that consumers have a need and desire for unlimited flat-rate access to Internet while roaming. The flat-rate preference also suggests that consumers might be willing to pay some premium. It is likely that flat-rate would unleash significant new handset-based service experimentation and usage among consumers.

The economic benefits of mobile roaming access to Internet are also obvious to the society. Further, successful roaming is fully in line with the mobility objectives and single market of the EU, which suggests that the Commission and the member states are willing to promote the roaming usage of Internet. However, the Commission may not have the legal power to burden the mobile operators with a statistically profitable unlimited flat-rate that unavoidably forces an operator to sell capacity below cost to a statistical fraction of subscribers.

This paper suggests that the 1EUR/MB wholesale price cap proposal of the Commission is not sufficient and cannot bring Europe to the international lead of mobile Internet services. Based on the concept of flat-rate preference and the empirical observations from the Finnish market, a stronger and faster regulatory promotion of flat-rate pricing for data roaming is proposed. The roaming use of Internet can be considered to work properly when the average daily handset-based data usage of a roaming consumer is on the same order of magnitude as that of a domestic consumer.

Acknowledgements

This research is conducted in the national MoMI project (Modeling of Mobile Internet Usage and Business) in Finland during 2008-2009 funded by Finnish Funding Agency for Technology and Innovation (TEKES), Nokia, Elisa, DNA Finland, AinaCom, Finnish Broadcasting Company, Accenture, and the Ministry of Transport and Communication (MINTC). In addition, this work takes place in the context of Econ@Tel (A Telecommunications Economics COST Network, COST605) which is a European research network consisting of research units in 20 countries.

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