Response to public consultation on a proposal for an EC Regulation on mobile roaming charges in the Single Market. OnAir.

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1 1 Response to public consultation on a proposal for an EC Regulation on mobile roaming charges in the Single Market OnAir Executive Summary OnAir is developing a new generation of innovative and affordable communication services which will enable airline passengers to use their own mobile devices (phones, PDAs, etc) onboard aircraft. We intend to launch these services together with several major European airlines within the next few months. We currently intend to ensure that EU citizens and businesses are amongst the first to reap the benefits of new innovation and lower prices in the area of in-flight telephony and passenger communications. Market research confirms that mobile connectivity onboard short-haul European flights will principally be used by business travellers to extend their working day and increase productivity, by maintaining contact with customers, clients and the office. The launch of OnAir s network therefore represents a significant contribution in terms of European infrastructure investment, eeurope and the EU s Lisbon Agenda. OnAir will be obtaining authorisations in Member States across the EU, on the basis of which we will offer in-flight wholesale roaming services to terrestrial mobile operators. Once authorised, we assume that we will fall within the scope of existing EU regulatory requirements applicable to all EU electronic communication service providers. We are therefore concerned that these requirements could be extended by the forthcoming proposal for an EC Regulation on international roaming charges, so that our services might inadvertently also fall within the scope of the new Regulation. It is clear that the complex series of considerations that have apparently lead to the Commission s current view that the terrestrial mobile operators should be regulated have little relevance to the emerging in-flight telephony market. OnAir s business model and services should be distinguished from those of conventional terrestrial mobile operators in a number of important respects. Ultimately, OnAir is seeking to ensure that the viability of our plans to launch new in-flight mobile communication services in the EU is not put at risk as a result of new legislation designed to regulate the existing terrestrial mobile operators charges. The introduction of wholesale price regulation in the emerging market for in-flight telephony could clearly threaten our ability to roll out these new services within the EU and deter further innovation in the in-flight communication market. OnAir therefore urges the European Commission to explicitly exclude wholesale in-flight mobile communication services from the scope of the forthcoming EC legislative proposal, with a view to allowing market forces to determine optimal pricing levels for these nascent services.

2 2 A. Introduction 1. This paper sets out OnAir s response to the second phase public consultation on a proposal for an EC Regulation on mobile roaming services in the Single Market. It is intended to supplement the earlier, more detailed paper, which we submitted in March 2006 in response to the Commission s initial call for comments. 2. OnAir was incorporated in the Netherlands in February 2005 and is a joint venture between Airbus, the leading European aircraft manufacturer and SITA INC, the world s leading provider of air transport focused communications, applications and IT infrastructure OnAir is currently developing a new generation of innovative and affordable GSM communication services which will enable airline passengers to use their own mobile devices (phones, PDAs, etc) onboard aircraft. We intend to launch these services together with several major European airlines 2 within the next few months. 4. Whilst OnAir has global ambitions, we currently intend to ensure that EU citizens and businesses are amongst the first to reap the benefits of new innovation and lower prices in the area of in-flight telephony. The use of the customer s own mobile phone will clearly be a far more attractive alternative to the use of existing in-seat aircraft phones. We also anticipate that the introduction of OnAir s services will significantly reduce prices for in-flight telephony. 5. OnAir welcomes the opportunity to comment on the issue of international roaming charges. Our key concern in this respect is that our services might inadvertently fall within the scope of the forthcoming EC legislative proposal, as a result of a failure to properly consider the issues raised by in-flight mobile telephony. Ultimately, we are seeking to ensure that the viability of our plans to launch services in the EU is not put at risk as a result of new EU rules designed to regulate the existing terrestrial mobile operators charges. 6. The introduction of wholesale price regulation in the emerging market for in-flight mobile telephony could clearly threaten the viability of our services within the EU, as well as deterring further innovation in this nascent market. However, we see no reason to link in-flight wholesale roaming charges to the level of roaming rates charged by terrestrial mobile operators. We therefore submit that wholesale in-flight mobile telephony services should be explicitly excluded from the scope of any new EC legislative proposal to regulate international roaming rates, with a view to allowing market forces to determine optimal pricing levels for in-flight telephony services. 1 Further information can be found at: 2 OnAir has already announced that Air France, bmi and TAP Portugal will offer the services to passengers as part of a commercial trial in the first part of 2007.

3 3 B. OnAir a wholesale roaming service provider 7. As illustrated in more detail in Annex One, OnAir s network will be comprised of a ground segment, an air-to-ground link and airborne systems providing GSM/GPRS connectivity services onboard aircraft. The OnAir network will provide connectivity to passengers own onboard mobile devices (phones, PDAs, Blackberries, etc). However, OnAir will have no retail subscribers of its own - our customers will be the terrestrial mobile network operators. 8. OnAir will therefore offer wholesale roaming services to terrestrial mobile network operators. We will not control the level of retail charges to airline passengers for the use of our network. These will be set by passengers home terrestrial mobile service providers, who will also be responsible for billing their customers for use of our network. 9. The terrestrial mobile network operators will be charged a wholesale roaming rate by OnAir (i.e. Inter-Operator Tariffs (IOTs) pursuant to standard international roaming agreements). We will encourage all terrestrial mobile operators to conclude roaming agreements with us, with a view to ensuring access to our network for all airline passengers. 10. OnAir will, of course, be subject to the various national authorisation and licensing requirements across the EU (as discussed in more detail below). Nevertheless, we are committed to offering a genuinely pan-european service, insofar as this is possible under existing European regulatory rules. 11. We therefore intend to offer flat-rate wholesale IOTs to the terrestrial mobile operators, which will apply regardless of the location of the plane on which services are being used. Thus, for example, a Swedish passenger with a Swedish mobile subscription should pay the same rate to use his Blackberry device on a flight from Portugal to Italy as on an internal flight from Stockholm to Malmö We do, of course, hope that our flat-rate IOTs will encourage transparent and consumer-friendly tariff plans at retail level. We believe it will be important that clear information on retail tariffs is readily available, so that airline passengers are easily able to check how much they will be charged for use of the OnAir network by their retail operator. 13. We must underline, however, that OnAir will not control the level of the terrestrial mobile operators retail mark-ups and these are likely to vary between the terrestrial operators. OnAir would of course have serious concerns if retail markups were ultimately excessive. This would clearly reduce demand on the part of passengers for our in-flight mobile services, as well as the willingness of the airlines to equip their aircraft with our system. 3 Assuming retail mark-ups are uniform.

4 4 OnAir s network will provide GSM and GPRS connectivity to passengers own mobile phones. We will offer wholesale roaming services to terrestrial network operators - we will not have retail subscribers of our own. We are committed to providing a genuinely pan-european service and therefore intend to offer flat-rate wholesale IOTs to the terrestrial mobile operators which will apply regardless of the location of the plane on which services are being used. C. The European Regulatory Framework 14. OnAir notes that the provision of GSM mobile services in the EU is subject to authorisation by Member States to provide electronic communication services within their national territory. We assume that these requirements apply whether the services are provided onboard aircraft or on the ground. OnAir will therefore be approaching relevant EU national authorities, with a view to obtaining all necessary authorisations and licences. 15. Once OnAir is authorised as an electronic communication service provider, we will fall within the scope of any relevant existing EU regulatory requirements. We are concerned that the requirements applicable to all EU electronic communication service providers could be extended by the forthcoming EC Regulation, thus imposing a duty on the EU Member States in which we are authorised, to apply the Regulation to us. OnAir will be approaching relevant EU national authorities to obtain all necessary authorisations and licences. Once OnAir is authorised, we will fall within the scope of any relevant existing EU regulatory requirements. We are concerned that the requirements applicable to all EU electronic communication service providers could be extended by the forthcoming EC Regulation. D. Grounds for exclusion of in-flight services from the EC Regulation 16. OnAir notes the Commission s commitment to proposing an EC Regulation on international roaming charges before Summer We must point out, however, that the complex series of factors which appear to have lead to the Commission s current view that the terrestrial mobile operators should be regulated have little relevance to the emerging in-flight telephony market. 17. OnAir s business model and services should be distinguished from those of conventional terrestrial mobile operators in a number of important respects. In

5 5 particular, the terrestrial operators offer their international roaming services in separate terrestrial markets where different considerations apply. 18. For instance, OnAir s cost structure will inevitably differ significantly from that of a conventional terrestrial mobile operator. In addition to the need to recover our fixed investments, our wholesale IOTs must also reflect a number of high underlying operational costs, including payments to our satellite and ground infrastructure partners 4. We may also be required to enter into revenue sharing agreements, involving payments to the airlines on whose planes our network is installed. 19. In addition, the underlying economics of OnAir s proposed service are fundamentally different from those of the terrestrial mobile operators. The terrestrial operators offer their customers a bundle of services, of which international roaming is just one element. Revenue from international roaming has traditionally been used to subsidize other more price sensitive services within the bundle or as a source of funds for further investment. If international roaming charges are cut through regulatory intervention, terrestrial operators are likely to look to other existing or future services, with a view to compensating for the fall in roaming revenue. They may even consider rebalancing their overall tariff plans. 20. The fact that terrestrial mobile operators offer a wide (and steadily expanding) range of services particularly at retail level represents a key difference to the business model for in-flight mobile connectivity. It must be underlined that OnAir only intends to offer in-flight wholesale roaming services. It should be noted, therefore, that it would not be possible for OnAir to compensate cuts in our projected revenues by rebalancing our charges across a range of services, or through the launch of new services or adjustments to retail margins. 21. It must also be emphasized that the Commission s concern that terrestrial operators international roaming rates represent a barrier to the EU will not be a relevant consideration in the context of OnAir s services. As explained above, we intend to offer a genuinely pan-european tariff structure with no price discrimination on a cross-border basis. 22. OnAir understands that the Commission intends to propose the new rules on wholesale roaming charges as a common market measure based on Article 95 EC Treaty. It would of course be wholly inappropriate and indeed, a clear breach of the rule of law, if OnAir s pan-european flat-rate wholesale tariff were to be regulated through a legislative measure adopted on the basis of the EC Treaty s internal market provisions. 4 See Annex One for further details of OnAir s technical solution.

6 6 The underlying economics of OnAir s proposed service are fundamentally different from those of the terrestrial mobile operators. In addition to the need to recover our fixed investments, our wholesale IOTs must also reflect a number of high underlying operational costs, including payments to our satellite and ground infrastructure partners. Unlike the terrestrial operators, it would not be possible for OnAir to compensate cuts in our projected revenues by rebalancing our charges across a range of services, or through the launch of new services or adjustments to retail margins. OnAir intends to offer a genuinely pan-european tariff structure with no price discrimination on a cross-border basis. The concern that terrestrial operators international roaming rates may be a barrier to the EU s internal market will not therefore be relevant to our services. Moreover, it would be a clear breach of the rule of law if OnAir s pan-european flat-rate wholesale tariff were to be regulated through measures adopted on the basis of the EC Treaty s internal market provisions. E. Further pricing considerations for in-flight mobile services 23. As underlined above, OnAir expects to offer wholesale IOTs which are significantly lower than the rates currently charged for competing in-seat inflight telephony services. Even with the addition of a reasonable retail mark-up by the customer s terrestrial mobile network operator, we are therefore confident that OnAir s services will introduce significantly lower retail prices for in-flight telephony. 24. We are of course keen to ensure the affordability of our services, in order to encourage usage of our network and a reasonable return on our capital employed. However, as explained above, it should be underlined that our cost structure differs significantly from that of a conventional terrestrial mobile operator. 25. It should also be recognised that we are seeking to offer new, cutting-edge technology and innovative services in an emerging market where previous service propositions have already failed. Any investment therefore necessarily involves a degree of risk and it is essential for us to be able to guarantee to our investors that returns on capital employed will be determined by the market. 26. Finally, whilst we hope to influence retail pricing by offering reasonable wholesale IOTs, it must also be emphasised that OnAir will have no control over terrestrial operators retail mark-ups and thus the final charges billed to their customers.

7 7 OnAir expects to offer wholesale IOTs which are significantly lower than the rates currently charged for competing in-seat in-flight telephony services. Any investment in this emerging market necessarily involves a degree of risk and it is essential for us to be able to guarantee to our investors that returns on capital employed will be determined by the market. OnAir will not control the level of the terrestrial mobile operators retail mark-ups and these are likely to vary between the terrestrial operators. F. The in-flight telephony market 27. OnAir is committed to providing services which meet market demand and has carried out considerable market research with a view to understanding the competitive environment, customer requirements, market segmentation and pricing sensitivities in the in-flight telephony market. 28. Our findings confirm that among European short-haul passengers, frequent business travellers will be the most likely users of OnAir s services - particularly the voice service. They will of course also have access to a full range of GSM and GPRS services - including more sophisticated mobile and data services - in addition to basic voice and SMS. 29. Mobile connectivity onboard aircraft will be regarded as a premium service by business travellers, who will use our network to extend their working day and increase their productivity, by maintaining contact with customers, clients and the office. The launch of our network will therefore represent a significant contribution in terms of European infrastructure investment and the attainment of the goals of the EU s Lisbon Agenda. 30. Alongside this business use, we anticipate that text messaging will be the leisure traveller s favourite means of in-flight communication. 31. For the first time, therefore, European airline passengers will benefit from being able to use their own mobile devices to receive and make calls, in addition to accessing data services. The use of the passenger s own mobile phone will clearly be a far more attractive alternative to the use of existing in-seat aircraft phones (which can only make outgoing voice calls).

8 8 OnAir is committed to providing services which meet market demand and has carried out considerable market research. Our findings confirm that among European short-haul passengers, frequent business travellers will be the most likely users of OnAir s services. They will use our network to extend their working day and increase their productivity. Alongside this business use, we anticipate that text messaging will be the leisure traveller s favourite means of in-flight communication. G. The impact of price regulation 32. It must be underlined that the introduction of price regulation for in-flight mobile telephony would seriously threaten the viability of OnAir s business model for in-flight mobile services within the EU. We would almost certainly be forced to refocus our activities in other less regulated regions of the world. This would clearly be regrettable from the EU s perspective, particularly given that the launch of in-flight mobile networks in other regions would represent a competitive advantage to them. 33. In this context, the Commission should also be aware that even the threat of EU regulatory intervention in the in-flight telephony market is likely to have serious consequences for OnAir s ability to secure further investment. This, in turn, would unfortunately be likely to impact on our commitment to prioritise the roll out of services in the EU. 34. The need to avoid regulatory intervention will also be an important issue going forward in the medium to longer term, with a view to enabling us to attract new investment in further innovation and network upgrades (e.g. the potential introduction of UMTS networks onboard aircraft). The introduction of price regulation for in-flight telephony would seriously threaten the viability of OnAir s business model for in-flight services within the EU. We would almost certainly be forced to refocus our activities in other less regulated regions of the world. This would deprive business travellers within the EU of access to innovative new services which have the potential to increase productivity and thus contribute to the EU economy in line with the EU s Lisbon Agenda. Even the threat of EU regulatory intervention is likely to have serious consequences for OnAir s ability to secure further investment.

9 9 H. Conclusions 35. OnAir believes there can be little doubt that the Commission must avoid including inflight wholesale IOTs within the scope of any new EU regulation of the wholesale roaming rates charged by terrestrial mobile operators. Nevertheless we are concerned that our services could inadvertently fall within the scope of the forthcoming legislative proposal, as a result of a failure to properly consider the issues raised by in-flight mobile telephony. 36. We therefore believe it will be important that our interests are properly understood and taken into account by the Commission. In this context, we wish to underline our commitment to engaging fully with the Commission with a view to identifying appropriate solutions. 37. Ultimately, we believe that wholesale in-flight mobile telephony services should be explicitly excluded from the scope of the forthcoming EC legislative proposal, with a view to allowing market forces to determine optimal pricing levels for these nascent services For further information concerning the views expressed in this paper please contact: Sonia Hilton OnAir Regulatory Affairs tel sonia.hilton@onair.aero

10 10 ANNEX ONE How OnAir s system works The OnAir network architecture is an adaptation of a standard GSM mobile operator network to the aeronautical environment. The key difference is that the base transmitter stations which provide radio coverage to end user mobile phones are located onboard aircraft and are linked to the base station controllers located on the ground via a satellite link. The following figure depicts the architecture, which is based on three essential components: the ground segment, the air-ground link and the airborne segment. Air-ground link: communications between aircraft and ground infrastructure Public network Ground segment: interconnection with ground public networks and home operators Home operator Figure: Network Architecture.