An Open Letter To Ofcom: Please Separate Handset Contracts From Phone Tariff Contracts

Ofcom logoA little off topic for this blog, but I think this should interest anyone with a mobile phone.

Here is an open letter to Ofcom in which I suggest some simple and easily implemented changes that would dramatically increase competition, and drive down consumer prices, in the mobile phone industry.

I don’t suppose it will gain traction, but if it does, it may be time to sell share in the big mobile operators!

I sent a slightly less polished version of this letter to Ofcom by email on 4th July 2011. Their response was impressive and is appenended, and I will add updates if things develop. Please add your comments too!

An Open Letter To Ofcom

Dear Ofcom,

I would like Ofcom to prohibit the practice of bundling a mobile handset with a mobile connection contract that can’t be terminated with less than 30 days notice. This is of course the dominant practice of all major mobile companies in the UK, and I assume throughout the EU, and yet it is massively anti-competitive and so against the interests of the market and consumers.

The practice is so anti-competitive that I am surprised it is legal at all. Assuming it is in fact legal, I think Ofcom should be seeking powers or legislation to outlaw practice in the UK and/or EU.

To understand why it is anti-competitive one has only to consider the impact of it being outlawed. The benefits to consumers would be enormous.

Breaking This Tie Creates Competition

If mobile operators had to offer two separate agreements, one for the handset and one for the mobile connection (i.e. the way landlines have operated since BT was privatised) there would be two effects:

1) Consumers could move tariff independent of the duration of any handset purchase agreement. This would promote competition between operators on tariffs, because companies would have to compete on a more like-for-like basis (i.e. without the complication of the handset element hiding the true cost). Consumer choice, and competition is currently inhibited by the difficulty consumers have comparing deals that include handsets, so this measure would remove a significant difficulty the consumer has in making such comparisons. Competition would also be enhanced if only certain tariff contract durations were permitted (up to a maximum of say 12 months).

More importantly though, once the phone purchase agreement was separated out:

2) Consumers would be able to see the true cost of their mobile handset. They would also automatically stop paying for it, once it was paid for, instead of continuing to pay the same monthly fee even after they’ve paid for the handset, as happens now. Consumers would then be able to make an informed choice about upgrading—and choosing to pay extra—for a new handset, or hanging onto their existing handset and saving money. They would save money by not paying for a “free” upgrade until they actually need it. This is not currently an option, which is ridiculous and should be outlawed. Consumers are instead deceived into entering into a new long duration tariff deal with the lure of a new phone they have no choice but to pay for, even if their existing phone is adequate. This is a waste of money and resources, and the only beneficiaries are the mobile operating companies.

If this was changed, consumers would automatically save money once the phone was paid for, and the handset payment contract came to an end. They would also be able to see the true cost of the hire purchase of a handset, and see how much money they would save by choosing instead to buy a phone up-front rather than on a hire purchase agreement.

Objections

The mobile operators would no doubt object vehemently to these changes because their profits would be reduced. By combining handset and tariff contracts in one deal they have first blindfolded the consumer (to the true costs), and second tied his hands (by making it harder to switch tariffs). This enables them to overcharge the consumer who doesn’t upgrade once the tie comes to an end, or to sell something that isn’t needed to the consumer who upgrades because, well, he has no choice but to pay for a new phone anyway.  Often, the consumer is so confused by this practice he thinks it is a good deal when its really a deception.

A further reason for objection would be the likely effect of separating out handset purchases. This would make it far easier for non-mobile operator companies to enter the market for handsets, and so further drive down handset prices.

Environmental Benefits

Giving consumers more choice over when they upgrade we would see a decrease in the number of handsets made redundant before they reach the end of their life. A benefit to the environment, in reduced disposals, and reduced consumption of raw materials and other resources.

I hope that you will take up my suggestions, and would appreciate your the views of the regulator on this point.

 

Yours sincerely,

 

MarkH

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Ofcom’s Response

I sent my email to Ofcom’s formal complaints address on 4th July—knowing I had not followed their detailed but rather onerous formal complaints procedure—and was pleasantly surprised by the rapidity and thoroughness of their response on 6th July.

Ofcom’s response is included below in full, with key sections highlighted in bold by myself.

Dear Mark

Thank you for your e-mail of 4 July.

This response provides you with more information on the legal framework and gives links to more detailed guidance published by the Office of Fair Trading (the “OFT”) and applied by Ofcom. Whether particular behaviour raises competition issues will depend on the precise facts surrounding any particular market and case and would be subject to extensive investigation and consultation with affected stakeholders before we conclude that particular conduct infringes the competition provisions.

Ofcom has powers to enforce European and UK competition law alongside the OFT. Competition law includes a prohibition against anti-competitive agreements (Chapter I of the Competition Act 1998 and Article 101 of the Treaty on the Functioning of the European Union) and against the abuse of a dominant position (Chapter II of the Competition Act and Article 102 of TFEU). I would refer you to the series of guidance papers published by the OFT on competition law for further details on the Competition framework applied by the OFT, Ofcom and the other regulators: http://www.oft.gov.uk/advice_and_resources/publications/guidance/competition-act/.

The practice you refer to in your email is commonly known as bundling and occurs where a firm sells two or more products or services together. Ofcom has not, and is not currently, investigating this issue. There is no general prohibition against bundling under either European or UK competition law. In general terms, bundling only raises competition law issues if a firm is dominant in the supply of one product and sells that product in combination with another product with the result that consumers cannot purchase them separately (or could only do so on materially worse terms). We note that UK consumers are able to purchase handsets and connection to mobile networks separately (via the purchase of “SIM only” services). Provided that consumers have this choice, we do not think that the supply of handsets and connection as a package is problematic.

You can find more information on the options for purchasing mobile phone services on our website at http://consumers.ofcom.org.uk/2010/05/how-to-get-the-best-mobile-phone-deal/.

However, we have not conducted an investigation into this matter and this response should not be regarded as us commenting on the merits of your correspondence. It remains open for you to provide any evidence of a possible competition law infringement directly to Ofcom and if you would like to make a formal complaint to us about this conduct then details of how to do so can be found in our Draft Enforcement Guidelines: Ofcom’s draft guidelines for the handling of competition complaints, and complaints and disputes concerning regulatory rules (http://stakeholders.ofcom.org.uk/binaries/consultations/enforcement/summary/enforcement.pdf).  In reaching any view on the specific behaviour that you describe we would need to conduct a full investigation (either in response to an evidenced based complaint or on our own initiative) into an alleged infringement of EC or UK competition law.

We understand that for an individual putting together a Competition Act complaint may not be easy. You might wish to consider contacting the Competition Pro Bono scheme which offers free independent legal advice to individuals or businesses who believe that their rights under competition law have been infringed or who are concerned that they may be infringing. Further details on the scheme are available at: http://www.probonogroup.org.uk/competition/

Regards

Keith

Keith Loader
Programme Manager
Competition Investigations Team
Ofcom
Tel: [REDACTED]
Fax: [REDACTED]
Email: [REDACTED]
Ofcom
Riverside House
2A Southwark Bridge Road
London
SE1 9HA
020 7981 3000
www.ofcom.org.uk

I have yet to reply but having dealt with many organisations over my fifty years on this planet I am taken aback to receive such a quality response. My initial reaction is that Keith has a point, and that it may be that I am (as I often am) atypical, and that consumers do have adequate choice on this issue. Perhaps the truth is that most people prefer a no-pain-gain such as an updated phone than to save money by dropping to a lower tariff? On the other hand, it is in the interests of operators (and the oik-farms who constantly call my mobile to offer me an upgraded phone), to make the former easy and the latter hard. (Oh, and of course I get these calls from UK based sales outfits regularly despite my being listed with the telephone preference service).

I certainly am atypical. Aren’t we all? Anyway, years ago I found a deal that allowed me to pay monthly by direct debit only for what I used, without any rental, prepayment or top-up. It is like a normal landline but with a mobile phone, and I can buy a new phone when I want from wherever I want. So when I do, I spend £20 on a reconditioned one (currently an Alcatel) that is way behind the bleeding edge of the technology, and fits easily in my pocket. In spite of its evident uncoolness people often remark that it “looks cool” because it is like those old Star Trek communicators.

Being atypical (I think) I don’t make many calls, my bill is mainly texts and a couple of calls. It runs at between £5 and £10 most months and I can’t imagine ever paying £20 or £30 per month for my mobile as so many people do, partly because they make more calls than me (well they’re bundled aren’t they, which gives the feel of ‘free’), and partly because they like to get a present of a new phone every year or so—their reward for playing the phone operator’s game. If people realised they were paying for calls when they are making them, I can’t believe they would spend so much. This is part of the deception, and the anti-competitive nature of this market, in which it suits all these operators not to compete on value, but instead to compete for maximum revenue. This is not in the interests of consumers, is anti-competitive, and appears to be an issue that is overlooked in law and regulation. I think Ofcom would serve consumers if they look into how law and regulation can be used to address this, and ensure all consumers a fair deal once a market stagnates into revenue maximisation.

When I tell others about my phone deal, it is apparent that some of them have tired of spending hundreds of pounds a year on calls they realise they don’t need. They’ve seen through the deception and want to get on the same deal as me. But they can’t. Because, while it is true that there are SIM only deals around, they don’t offer what I have had for years. So clearly my letter only touched the surface of how this deception operates, it is more subtle and arises out of a combination of factors that shepherd consumers towards bundling even though many would benefit from an alternative.

The deal I have has been discontinued by Virgin, who used it to differentiate when they were getting into the market, and I don’t know anywhere else that offers an equivalent (other than Orange via their matched other tariffs scheme, where I am now). This is the root of the problem. When Virgin needed to compete to build market share, they offered exactly the kind of unbundled approach that my letter advocates. Now they have settled on their market share, they are content to focus on maximising revenue because that makes them more money than offering a more attractive deal to their customers. This may be a sign of maturity in a market, but there’s another way of looking at it: stagnation and loss of innovation. This is when consumer interests are subjugated by dominance, not of a single operator (as catered for in competition law) but by the dominance of a an exclusive informal cartel of sameness (as in Banking). The market is effectively closed to new entrants and competition in the form of truly innovative products—ones that address consumers interests as opposed to shareholders—has stopped.

The comparison with Banking seems to have some merit with one difference being that I guess a mobile phone operator would be allowed to go to the wall. Otherwise, we now have a similarly a cosy group who have nothing to fear from new entrants. So instead they only compete fully in emerging markets, while financing this by milking mature markets as much as possible, and complaining loudly at the lightest touch of regulation, as in the recent moves to limit exorbitant roaming charges (which has been another example of their competition-phobia).

Whether I am atypical or not, I don’t think mobile operators operate competitively in the way a market is supposed to. A competitive market is supposed to provide benefits to business and consumers, to offer business the opportunity to innovate and be rewarded for it, and to create value and choice for the consumer, not just to allow business to innovate in maximising the amount of money it can extract. I think Ofcom has a duty to address this issue because it has a duty not just to enforce competition law, but to act in the interests of consumers as well as to maintain a healthy competitive business environment.

But what other consumers think is important, not just me. Please leave your thoughts in a comment.

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