An inflation wheeze is dialling up sales for telecoms providers

Inflation means this year is going to be pretty miserable for consumers. Telecoms providers aren’t making it any better.

As was widely reported earlier this year, broadband and mobile operators have found a new ruse: in-contract annual price rises pegged to inflation, with a dollop of fixed rate increase on top.

True, spending on telecoms pales in comparison to energy price rises. But it has represented around 3-4 per cent of household spending, or £80 a month according to Enders Analysis. And the way the increases are implemented rankles.

At BT and EE, Vodafone, Virgin Mobile and O2, consumers can now enjoy an annual price rise of 3.9 per cent plus inflation partway through their contract. A merged Virgin Media O2 even uses the outdated measure of retail price inflation as the basis for its price increase rather than the more widespread consumer price index. Had prices been set on the basis of June’s inflation figures, that would have meant a 2.4 percentage point larger increase for Virgin Media O2 customers than BT, EE and Vodafone ones. At least the company only applies that to the “airtime” portion of a contract, not the handset element too.

To put it bluntly, this is a wheeze. We know consumers are lazy once they’ve signed up for something. That’s why regulators have had to act on loyalty penalties across sectors. This is another way of imposing in-contract price increases by semi-stealth, regardless of whether providers (and the regulator) say they are upfront about it.

It is also a wheeze that seems to be working out nicely for operators. Last week all three of BT, Vodafone and Virgin Media O2 published results that cited the role of UK price rises in helping boost revenue and earnings growth. Adjusted earnings before interest, tax, depreciation and amortisation for BT’s consumer unit climbed at an annual rate of 20 per cent in April-June. At Vodafone, service revenues in the UK and Ireland climbed 6.5 per cent in the wake of the contractual price rises.

Telecoms companies justify the increases in three ways. The first is that they are experiencing cost inflation too thanks to energy prices and wage demands, as well as CPI being built into wholesale prices. The second is to point to the vast investment they are making in network infrastructure. But if the 3.9 per cent charge is to fund extra investment, it is odd that so many companies have decided they have exactly the same investment need. The third defence is the most instructive. That is to point to the value that consumers get from their data packages.

For years the price consumers pay for what they use has been in real terms decline. Data usage has been going up by around 30-40 per cent a year. Prices haven’t. Companies have hit on a backdoor way to recoup some of the costs of that increased demand on their networks.

Providers have also arguably been making below their cost of capital. The recent direction of industrial policy has been to encourage investment in broadband and 5G infrastructure. That has perhaps made governments — and regulators — more willing to accept operators pushing through price rises. When Ofcom published its pricing trends report last year, it noted that in 2021, providers had implemented above-inflation increases after years of falling rates. It then repeated the industry line on what consumers are getting in return: increased investment to support growing demand. That doesn’t suggest it is about to crack down on the practice.

The risks for providers are threefold. Most straightforwardly, consumers could trade down when they come out of contract if price rises are too egregious. Secondly, political priorities could shift from favouring investment to looking more at consumer protection. So far the focus has been on vulnerable consumers, with things like social tariffs for households receiving universal credit. But politicians could encourage more widespread action against above-inflation increases. And third, prices rising consistently across the industry could encourage an increasingly protectionist Competition and Markets Authority to block any further attempts to consolidate, a longstanding desire of the industry (and investors).

Assuming there isn’t an imminent backlash, there is worse to come. While the rises were steep enough this year — 9.3 per cent at BT and 11.7 per cent at Virgin Mobile — the Bank of England’s latest forecasts put BT’s increase next year closer to 17 per cent. That might be enough to force action from operators. Otherwise consumers will be stuck with another squeeze — and telecoms operators join the list of companies whose prospects are actually improving in the face of inflation.

cat.rutterpooley@ft.com
@catrutterpooley