The devil is in the ARPUs for Vodafone, O2

Business Opinion: It's that time of year again. The end of winter is coming into sight and the mobile phone operators are insulting our intelligence. Last week both Vodafone and O2 unveiled their "Key Performance Indicators" for the three months to the end of December.

It was the usual stuff. Both are squeezing more and more money out of more and more customers. Vodafone added 39,000 new customers, while O2 "acquired" 91,000.

Average revenues per user (ARPU) for Vodafone rose from €596 to €602 on a rolling 12-month basis. O2's ARPU rose from €556 to €564 on the same basis.

Once again, the Irish market provided the highest ARPU's across both groups and once again both companies maintained it was not because of high prices, but because the Irish talk so much.

"We continue to see our customers using their phones more and more," declared Mr Paul Whelan, the chief finance officer of O2 Ireland, while Mr Gerry Fahy, the director of strategy for Vodafone in Ireland declared that "Ireland continues to have the highest levels of outgoing voice usage per customer in the group's controlled mobile business".

The truth, as the Commission For Communications Regulation (ComReg) sees things, is not quite so simple.

In their opinion, the two companies are tacitly colluding to keep up prices in Ireland. The way they do so is quite ingenious, argue ComReg. Because both companies are so similar they can use one another's published tariffs to establish if their rival is actively trying to win business from them or just maintaining the lucrative status quo.

ComReg even go so far as to suggest that the various "price cuts" that have been announced by the two companies over the past four years are not aimed at winning customers from each other, but actually more about squeezing more money out of existing customers by getting them to use services more often because they perceive them to be cheaper.

"Price changes by O2 and Vodafone occurring over the period 2001-04 have not been aimed at acquiring significant customers from rivals," according to ComReg's analysis which was published last December.

This analysis, which has been accepted by the European Commission, is the basis of ComReg's decision to start regulating the market on the premise that Vodafone and O2 are tacitly colluding to keep up prices. It plans to force both companies to open their networks up to other operators.

The proof that Vodafone and O2 are tacitly colluding is in part the very high ARPUs which are such a feature of the Irish market. According to ComReg's analysis, Irish mobile operator's ARPUs are the highest in Europe.

ComReg quotes figures for the second quarter of 2004 which found the average monthly figure was €47 per month, compared to the EU average of €34.

Breaking this down into pre-paid and post-paid customers, ComReg's study found that ARPU's in the pre-paid sector of the market were quite competitive, the 4th lowest in Europe, but the post pay tariffs were above the average.

This does not contradict their argument about collusion, claim ComReg, because it is in the pre-paid sector that Vodafone and O2 face competition, from Meteor. They argue that the two companies may even be using excessive profits from the post-pay segment to subsidise their pre-paid offering and squeeze Meteor.

"It is the post-pay segment of the market which is almost completely dominated by Vodafone and O2 where the lack of price competition is most apparent," conclude ComReg.

The mobile phone companies were given an opportunity to comment on ComReg's analysis and their views were included in the report. They advanced several reasons for high ARPUs, the most significant of which was that they were driven by high minutes of use.

They also cited a number of other factors such as growing per capita income; the introduction of full number portability; the number of young people and the poor status of the fixed network. All that seemed to be missing was a dog eating their homework and a reference to 9/11 and Osama bin Laden.

In its analysis ComReg recognised that minutes of use are a factor in high Irish ARPUs, but it concluded