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Vodafone, BT may see profit boost from return of roaming fees

U.K. mobile operators, struggling for growth at home, will likely generate high-margin revenue from the post-Brexit reintroduction of European roaming charges.

CK Hutchison Holdings Ltd.'s Three will start the trend in October, followed by Vodafone Group PLC and BT Group's EE in January 2022. They will charge customers an extra £2 per day for mobile data usage elsewhere in Europe.

The reintroduction of charges banned under EU rules in 2017 is a potential windfall for U.K. operators, as they will take in extra revenue while only paying limited costs for offering European services. That is particularly welcome for an industry contending with saturated markets, costly 5G rollouts and a lack of consolidation.

"Roaming revenue matters greatly to operators in today's growth constrained environment," said Kevin Restivo, an analyst at IDC. "We're in a deflationary pricing environment and with significant regulatory barriers … facing the operators as they look to grow."

Telefónica SA's O2 is the only one of the U.K.'s four mobile network operators yet to reintroduce European roaming charges. It will likely do so eventually, analysts said. The company did not respond to a request for comment.

Mobile virtual network operators, such as Tesco Mobile, who rent telcos' networks, may hold off as a way of differentiating themselves, said Kester Mann, an analyst at CCS Insight.

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All profit

Operators that are introducing charges will likely be able to keep their own costs well below £2 per day by using partnerships or their own operations in Europe, said Siyi He, an analyst at Citi.

Vodafone has operating companies or joint ventures in 11 European countries aside from the U.K., while Telefónica has a significant presence in Spain and Germany. CK Hutchison-unit CK Hutchison Group Telecom Holdings Ltd. operates under the Three brand in Italy, Sweden, Denmark, Austria and Ireland.

"Vodafone keeps saying that they have to put these charges [in] because the costs are higher, but actually, I don't buy that at all," He said. "So, all of those revenues would be a direct 100% margin."

A Vodafone spokesperson said in a statement that roaming is "a service that costs us money to provide." They did not respond to a request for comment regarding margins. Three attributed its decision to reintroduce roaming charges in part to "variations in the underlying cost of roaming." BT declined to comment.

Wholesale data costs have also consistently dropped over the last few years, according to data from the Body of European Regulators for Electronic Communications. Wholesale data cost on average €1.60 per gigabyte as of the third quarter of 2020, compared to €10.16 in the second quarter of 2016, the data shows.

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Revenue impact

Operators will likely have to wait a couple of years to see the full impact of the new tariffs, as the charges will only apply to new contracts, according to He.

As travel picks up again, the fees will become a significant source of revenue, Restivo said. The operators did not break out roaming charges in their financial statements prior to the EU regulation.

"When anything is mentioned during quarterly earnings calls as much as roaming revenue — or the absence thereof — you begin to understand how important this revenue is," said Restivo.

Dutch incumbent KPN NV said in an earnings call for full year 2015 that the ban on roaming fees would hit its revenue by 1% to 2%. U.K. operators would have seen a similar impact, said He.

Forecasts are further complicated by the likelihood that roaming demand will drop due to the increased availability of public Wi-Fi in Europe and the potential for a prolonged drop-off in business travel due to COVID-19 and Brexit. The new £2 charges are also much lower than those travelers had to pay before the EU ban.

The relatively low fees may eventually persuade travelers to switch on roaming, as charges are much lower than they were previously, Mann said.

"Roaming is a poisonous term for consumers after travelers were hit by exorbitant prices for years," he said. Still, the new regime is "a far cry from the bad old days," Mann said.

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