UK telecoms companies under fire for adding inflation “premium” to bills

At BT’s general meeting held last month, Philip Jansen, the outgoing chief executive of Britain’s largest telecoms company, told investors that its customers were receiving “terrific values for money” with mobile and broadband plans.

He said that customers are getting more value for their money in the UK, where prices are among the lowest of all Europe.

Jansen’s comments reflect efforts made by his industry in order to capitalize on the growing demand for their services. Telecoms firms say that yearly increases in bills are not only relatively cheap, but also fund much needed investment.

Consumer groups and regulators are now taking a closer look at this argument, as they face the fact that millions of consumers will be facing price increases of up to 17.3 percent, the highest in Europe, due to record-high inflation.

These increases can be implemented mid-contract and typically add 3.9% to the annualised consumer price inflation rate in December or Janaury.

Natalie Hitchins of Which?, a consumer rights organization, stated that there is “little evidence” to support the inflation plus 3,9% model. She criticized it as a “surcharge” which risks exacerbating cost of living crises.

Ernest Doku said that the “data-driven” justification was lacking.

The Competition and Markets Authority (UK watchdog) criticised in-contract price increases as “anti-consumer”. It also said that there is “unlikely” to be a “direct connection between RPI or CPI, [retail prices index] and the actual costs of telecoms providers.

Analysts point out that the rise in in-contract prices is evidence of companies trying to maintain billions of pounds in investment in 5G and full-fibre networks, despite a weakening of revenue and earnings, which has led to a slide in their shares.

Robert Grindle is an analyst at Deutsche Bank Research. He said that during this period of massive cash investments, companies are trying to maximize profits and make the best decisions for their shareholders. “Operators had the option to not apply [the inflation plus price mechanism], but they did.”

Since many years, telecom operators have made frequent and unplanned price changes. In September 2020, inflation was near zero. BT announced a 3.9 percent supplementary charge on top of CPI starting in March 2021. They cited higher costs and the increasing usage of data by customers.

In January, the UK CPI was at 10.1%, down from a high of 11.1% in October last year, which had been a record for 41 years. According to the Office for National Statistics, it gradually decreased to 6.8 percent in July. RPI follows the same trend, but at a slightly higher level. It reached 13.4% in January and 9.0% in July.

Most competitors quickly followed suit, including Vodafone and Virgin Media O2, and then Three. Some “virtual mobile operators” such as Talkmobile also have wholesale agreements with others to use their infrastructure.

Researchby which? Last month, Which? found that only 1 in 20 customers could calculate the changes to their monthly bills by accurately estimating future CPI.

Last week, the consumer group asked Ofcom to investigate “urgently” concerns that Virgin Media is breaking the law when it increases broadband bills “unlimited amounts whenever it chooses”.

Doku says that customers are usually charged for terminating their contracts early. However, Doku believes they should be “able to leave with no penalty or have contracts which are fixed in duration”.

, the regulator of wholesale telecoms but not retail prices, began an investigation in February to determine whether companies were transparent enough about their bill increases with customers.

A study released in February found that the understanding of contract prices is low.

According to Bank of England CPI estimates, UK consumers will likely face contract increases of around 8.2 percent next spring. This is because the investigation and subsequent public consultation won’t be completed before operators set their prices for 2024-25.

In recent years, however, the monthly price of mobile and broadband has dropped significantly due to companies offering discounts to attract new customers.

Ofcom released a report in December that noted that mobile prices were 34% lower in 2022 than in 2016, and that the UK was ranked last among six countries, including the US and France, for mobile costs.

According to Assembly Research, an independent research firm, the average monthly household expenditure on telecoms has dropped by nearly one fifth since 2017.

The report found that the telecoms sector invested up to £2.5bn per year in mobile networks and around £3.8bn for fixed broadband. The report estimated that capital expenditures accounted for 70 percent of all investment by the biggest industry players.

Karen Egan, an analyst with research group Enders Analysis said that companies choosing to raise prices at the same rate was not “an example of tacit collaboration but rather a copying of a great idea”, because “no one wants to be known for having higher increases yet it is extremely difficult to make slightly smaller increases a point to differentiate”.

The impact of inflation plus 3,9% on operator performance will likely be marginal over the long-term.

Enders Analysis predicts that UK mobile operator’s revenue growth will slow down from 7.5% in the three-month period to June 2023, to 6.0% for the entire year and 3.0% in 2024. Some customers are expected to resign at lower rates once their contracts expire.

Analysts and consumer groups are still questioning the fairness of mid-contract price increases at a time where consumers are under pressure.

Usman Ghazi, Berenberg Bank, said that companies could charge customers in a “discretionary manner”. He gave the example of Dutch Telecoms Operator KPN which stated that the price increases from July will be 6.4%, which is lower than the CPI rate for 2022.

When customers feel the pinch, it is probably not justified. Ghazi explained that the only way to justify a deviation from this policy would be if a new policy was implemented.

BT’s pricing strategy is key to absorbing costs. “Without the [pricing] mechanisms, we would have to pause, or even delay, ongoing investments.”

Virgin Media O2 stated that it only applied increases to data usage, and that “an inflation only metric would not provide additional headroom for. . . continued network investment”. The company also said that it rejects Which?’s “baseless accusations” about price increases.

Three claimed that its prices are among the “most competitive on the market”, because it only applied to a small percentage of its customers who joined after November 2022.

Vodafone was contacted to comment.