Ofcom CEO Sees Danger in UK Telecoms Consolidation and Rising Prices

Sharon White, the CEO of Ofcom, told an event at the LSE’s Hong Kong Theatre last night that she wants to drive more “competition” into the market and rejects greater “consolidation“. White also raised concern about rising prices and said that too many people still suffer “poor or no access” to modern mobile and broadband.

The telecom regulator’s new boss has only been in her job for 6 months and already she has had to launch a major new Strategic Review of Digital Communications, which among other things is considering whether or not to completely separate BT from its network access division, Openreach (here).

On top of that she enters a market that is rapidly becoming increasingly converged, not least with BT’s £12.5bn move to merge with mobile giant EE and Telefonica UK’s attempt to sell O2 to Three UK’s parent. At one point Vodafone and Virgin Media also looked set to agree a deal, but that idea appears to have been put on ice (here).

Meanwhile Ofcom has already signalled that the BT + EE deal could be handled within existing regulation (here) and thus they seem more concerned about the tie up between O2 + Three UK, which could reduce the number of primary mobile operators from four to three.

Sharon White, Ofcom’s CEO, said:

“Companies here and abroad are racing to provide landline, mobile, broadband and TV products in a single package, over converging fixed and wireless networks. This can bring convenience and lower prices for consumers, who can get everything they want in one bundle without having to take out different contracts with different providers.

But we are seeing evidence that customers are less likely to switch providers, which could dampen competitive pressure. I am not going to get into the specifics of individual cases, though I note EU Competition Commissioner Margrethe Vestager’s remarks in New York last week.

The Commissioner pointed to research suggesting that a reduction in the number of players from four-to-three in a national mobile market in the EU can lead to higher prices for consumers, but not more investment per subscriber.”

White also noted the example of how the recently proposed deal between Telenor and TeliaSonera in Denmark, which is similar to the proposed Three UK acquisition of O2, fell through when the European Commission looked set to reject the companies’ proposed pro-competition remedies.

Ofcom’s “experience is that competition, not consolidation, drives investment and delivers low prices,” said White and by contrast the regulator fears that more concentrated markets will produce the opposite. In keeping with that the Competition and Markets Authority (CMA) last week preliminarily found that the O2 + Three UK deal “threatens to significantly [affect] competition” (here).

Sharon White added:

“Only when companies cannot make an adequate return – because competitive pressure is so intense – might we expect investment to suffer. The evidence suggests this is not the situation in the UK mobile market, which last year generated £15 billion of revenue.

Even at a time when UK operators are investing billions to roll-out 4G, they are maintaining a healthy average cashflow margin of more than 12 per cent.”

Unfortunately anybody who might be scouring Sharon’s speech for hints of the regulator’s direction in regards to BT and the Strategic Review will be left disappointed. Sharon in fact spent quite a lot of time praising the current market and noting how BT now “has the lowest broadband share of any incumbent operator among major European countries.”

White said “there is no doubt that the communications market has delivered significant gains for consumers,” but she also warned that several areas of concern continued to remain.

Sharon White said:

“First, there are hundreds of thousands of people and businesses who have poor or no access to services for reasons of geography or affordability. This is clearly unacceptable when communications are essential to how we live and work. Making services universal is a key priority for Ofcom and we are working closely with the Government and industry to make this happen.

Second, there are signs in recent months of rising prices for landline and broadband customers, without the apparent justification of higher costs or improved service. BT, Sky, TalkTalk and Virgin Media have all raised line rental prices this year.

This might be a temporary blip in the market, and there are still good offers out there for people who shop around. But customers who worry about the hassle of leaving their current provider, especially older people, can face higher bills. We are concerned about this, and we are watching these developments in the market closely.”

At this point we find it slightly curious that Ofcom’s boss seems to only now be expressing a concern about recent rises in the pricing of broadband and phone services, particularly since they’ve been a regular occurrence for the past decade or so (almost always shooting well above the level of inflation).

Mind you this year inflation has been stuck at around 0% and yet the overall cost of broadband and phone services, particularly among the largest providers, appears to have risen more than in previous periods (e.g. TalkTalk’s SimplyBroadband service cost £2.50 per month last year and it recently hit £7.50, which is before we even consider the line rental hikes).

Admittedly Government’s and regulation are actually partly to blame for this by forcing new requirements on to ISPs. Meanwhile the providers themselves need to make a profit, have to invest in new infrastructure and must also cover the costs of catering for consumers that gobble more and more data every year. But such challenges are hardly new to this industry.

A counter argument can easily be made that says the infrastructure in this country suffers precisely because prices are so comparatively low, which leaves precious little money left over in the kitty to build new and better networks.

Mind you such generalisations are all too easy for ISPs to make and provide for a useful excuse when raising prices, but Ofcom will want to see the practical basis for such figures and that’s something that the humble consumer is never told (e.g. what % of the increases for specific services actually get spent on new infrastructure).