UK telecoms groups under fire for adding inflation ‘premium’ to bills

At BT’s general meeting last month, outgoing chief executive Philip Jansen told investors in Britain’s largest telecoms operator that its users were getting “terrific value for money” on mobile and broadband deals.

“Customers are definitely getting more for less, and prices here in the UK are among the lowest in Europe,” he said.

Jansen’s comments reflected efforts by his industry to capitalise on growing demand for its services. Telecoms companies say yearly bill increases are not only comparatively cheap but also help fund much-needed investment.

But as millions of billpayers contend with rises of up to 17.3 per cent this year, the biggest in Europe, on the back of record-high price growth, that argument is coming under greater scrutiny from consumer groups and regulators.

These annual increases typically add 3.9 per cent to the annualised rate of consumer or retail price inflation in December or January, and can take effect mid-contract.

Natalie Hitchins, head of home and products and services at Which?, the consumer rights group, said there was “little evidence to justify” the inflation plus 3.9 per cent model, criticising it as an “extra premium” that risked exacerbating the cost of living crisis.

Ernest Doku, head of commercial for broadband and mobiles at price-comparison company Uswitch, said it lacked “data-driven justification”.

And the Competition and Markets Authority, the UK watchdog, last year criticised the “anti-consumer” nature of in-contract price rises and said there was “unlikely to be a direct connection between RPI [retail price index] or CPI [consumer price index] and telecoms providers’ actual costs”.

Some analysts, though, point to the growth of in-contract price rises as evidence of companies seeking to sustain billions of pounds of investment in full-fibre and 5G networks at a time of weak revenue and earnings growth, which have led their shares to slide.

“During this period of tremendous cash investment, they’re trying to make as much extra money as possible from this situation and do their best for shareholders,” said Robert Grindle, analyst at Deutsche Bank Research. “Operators could have chosen not to apply [the inflation-plus price mechanism], and they didn’t.”

Telecoms operators have imposed unplanned and frequent price changes for many years. But in September 2020, when inflation was close to zero, BT announced a supplementary charge of 3.9 per cent on top of CPI from March 2021, citing higher costs and customers’ increasing use of data.

The UK CPI, which reached a 41-year-high of 11.1 per cent last October, stood at 10.1 per cent in January. It gradually subsided to reach 6.8 per cent in July, according to Office for National Statistics. RPI follows a similar trend but at a higher level, reaching 13.4 per cent in January and 9 per cent in July, it said.

Its move was quickly replicated by most competitors, including Vodafone, Virgin Media O2 and later Three, and some “virtual” mobile operators such as Talkmobile, which have wholesale agreements to use others’ infrastructure.

Research by Which? last month found that only one in 20 consumers was able to calculate changes to their monthly bill by estimating future CPI correctly.

The consumer group said last week it had asked Ofcom to “urgently investigate concerns” that Virgin Media was breaking the law by lifting broadband bills by “unlimited sums whenever it chooses”.

Customers are typically charged for ending their contract early, but Doku said they should “be able to leave without penalty, or be able to have contracts that are fixed for the duration”.

Ofcom, which regulates wholesale but not retail telecoms prices, in February began investigating whether companies have been transparent enough with customers about bill increases, noting that operators faced “a range of cost rises”.

In research released in February, it found that understanding of in-contract prices was low.

UK consumers are likely to face in-contract increases of about 8.2 per cent next spring, based on Bank of England estimates for CPI. That is because the probe and a subsequent public consultation will not conclude before operators fix their pricing for 2024-25.

However, in recent years, consumers have enjoyed an overall drop in monthly broadband and mobile prices due to discounts offered by companies to entice new customers.

In a report released in December, Ofcom noted that average mobile prices in 2022 were 34 per cent lower compared with 2016, and that the UK ranked bottom among six countries including the US, France and Italy for mobile costs.

According to a study by Assembly Research, a research company, commissioned by Virgin Media O2, average monthly household spending on telecoms services has fallen by almost one-fifth since 2017.

The report also found that the telecoms industry was investing up to £2.5bn a year in mobile networks, and about £3.8bn into fixed broadband. It estimated that combined capital expenditure accounted for nearly 70 per cent of total investment made by some of the largest industry players.

Karen Egan, analyst at research group Enders Analysis, said companies opting for identical price rises was “not an example of tacit collusion but rather the copying of a good idea” because none “wants to stand out as having higher increases, yet it is incredibly difficult to make slightly lower increases a point of differentiation”.

Still, the impact of the inflation plus 3.9 per cent model on operators’ performance is likely to remain marginal in the long term.

Enders Analysis forecasts that UK mobile operators’ revenue growth will slow from 7.5 per cent in the three months to June 2023 to 6 per cent over the full year and 3 per cent in 2024, with some customers set to re-sign at lower prices once contracts expire.

But analysts and consumer groups continue to question how fair mid-contract price rises are at a time when consumers are squeezed.

Usman Ghazi at Berenberg Bank said companies could take a more “discretionary” approach towards charging customers. He cited the example of Dutch telecoms operator KPN, which said that price increases applied from July would be 6.4 per cent, lower than the 2022 rate of CPI.

“When customers are really feeling the pinch, then it’s probably not justifiable. And the only justification would be that a policy has been put in place to deviate from that,” Ghazi said.

BT said its pricing strategy was key to absorbing rising costs, adding: “If we didn’t have the [pricing] mechanism, we’d potentially have to pause or delay ongoing investments.”

Virgin Media O2 said it applied increases only to data usage and that “an inflation-only metric would provide no additional headroom for . . . continued network investment”. The company added that it rejected Which?’s “baseless allegations” around price rises.

Three said its prices were among “the most competitive in the market” because its latest price increase applied only to a small proportion of customers who had joined since November 2022.

Vodafone was contacted for comment.