It is that time of year when Ofcom gives us their school report, prepared of course by Ofcom, in the form of a number of annual market reports. They paint a glowing picture of a pro-consumer, pro-competition beacon of regulatory excellence, who’s every seed has sprouted into a luscious crop. Ofcom think Ofcom are amazing. Thankfully, they also publish open data from which some of their interpretations are drawn.
Now, I’ve waxed lyrical before about how on Ofcom’s watch, or some might say with Ofcom’s help, the voice market is re-monopolising, how consumers are being harmed by third world number portability. However, I’ve also not yet said much publicly, lest it prejudice our own litigation, but I believe Ofcom are preventing a fair and transparent marketplace in mobile telecommunications. Nothing on those this time. But there are a few other nuggets that jumped out.
The 2019 “Connected Nations” update suggests that 5% of the UK’s geographic area and 2% of A & B roads are served by no operators at all, i.e. are ‘not spots’. On the face of it, that sounds quite good, and for foreign visitors or those with solutions based on roaming SIMs, that is quite good. But how many normal people do you know with four mobile phones, one on each of the oligopoly members’ networks? I suspect not many.
So whilst the headline is good and that last 3-5% is worthy of a contented last push, the reality is far less impressive, but far more newsworthy. Just 78% of geographic area and 76% of roads have coverage from all oligopoly members. This means for a normal person with a single phone, their area of potential non-coverage (and thus effective ‘not spot’) amounts to 22% of geographic area and 24% of A & B roads. It may be better or worse depending on network choice and breadth of travel but having no signal for a quarter of the time on a journey feels like a big deal to me.
When challenged on their approach, they are quick to point out that “prices are falling”. In fact, our lawyers have that exact phrase in a letter from them as evidence that their policies must be working. Their own homework marking paints a similar picture and solicits images of Ofcom-man in his pro-consumer cape. I view this very very differently, as SimCon attendees will have heard in the opening business update, but what do their own reports and data show?
“The volume of minutes originating from fixed-line connections fell again in 2019 (by 17%), while the volume of minutes originating from mobiles went up by 5%. Losses in revenues from fixed voice services contributed to a 4% decline in fixed telecoms revenues year-on-year.”
Forgive me for being a bore but I was taught that Revenue = Price * Volume in simple terms. So if volume has fallen 17%, and revenue has fallen the comparatively lower 4%, that must surely mean average prices have risen 16%. 16%, in one year!
Of course, that is fixed line – which apparently nobody cares about any more – but what about mobiles? Well, yes, if you look at the revenue derived by fixed operators calling mobiles, prices do appear to have fallen (i.e. prices have fallen faster than revenue) but is that relevant? As the quote above shows, volume is migrating to pure mobile, an oligopoly of just four operators, that in our experience Ofcom seems very keen to preserve.
That fall also reflects something else I talked about at SimCon, notably the massive shift of margin from wholesale to retail. Ofcom has regulated both fixed and mobile markets by imposing caps on wholesale interconnect rates, i.e. those rogues with Significant Market Power such as us, over poor little defenceless BT for example. I imagine their logic is that by regulating the wholesale price, the retail price will fall. We’ll come on to the retail price from their own figures shortly but from our experience and for now, let’s say it hasn’t changed much. The result is thus a massive shift of margin from wholesale to retail. The beneficiaries are not the consumer – they’re paying about the same – and they aren’t those who exist in the wholesale world only – such as us – either. No, it is those who have both wholesale and retail operations, the largest being those in the oligopoly.
So what about those prices? Well, looking at the latest annual data, retail mobile revenues have risen by 5% in the range of published data (2007-2018). Underlying that is an 86% increase in mobile bundle revenues, which cover voice, SMS, and data services. Ofcom also break down volumes of calls by categories, and SMS volumes, all of which have risen. If totalled though as simple units, the increase is just 38%, less than half the increase in bundle revenues. That implies that unit “prices” have more than doubled doesn’t it?
The missing piece in that logic is data of course. But Ofcom do not impose price controls on the price of a bundled unit of data, nor do they report price assumptions. That all suggests to me that they consider technology or even the market are doing an adequate job of controlling pricing and thus the amount spent on data, or its assumed price, cannot have dramatically or disproportionately increased. So what other factor is responsible for the rise in bundle revenue in the face of slower volume growth?
To add contradiction to confusion, they cite third party data which shows that monthly revenue per subscriber has fallen 17.5% based on notional bundles. So that’s great: bundle revenues are up 86%, revenue per subscriber is down 17.5%, yet prices are apparently falling. That can only mean there’s more than double the number of subscribers. I’d suggest the Daily Mail might be right about immigration, but they’d be better off using their foreign phone in order to get a signal!
What is clear is the large shift in margin from the market to those mobile operators with retail presence. Their revenue has risen faster than volume (defying mathematics by doing so as prices allegedly fall) and the share of mobile volume has been concentrated amongst the oligopoly. Fixed operator mobile volume has fallen, whilst mobile operator volume has risen, taking mobile operator share of mobile minutes from 82% in 2017 to 95% in 2018. Whilst their share of spend on mobile minutes has fallen (58% to 54%), this is likely better explained by 72% of subscribers now having a bundle, and we know bundle revenue has risen 86%, ergo fewer are paying for unit minutes which is what the 58/54% figures measure. If one instead looks at the spend on on-net minutes vs. off-net minutes, it has increased from 17.2% to 26.6%, suggesting a concentration of spend amongst the oligopoly and, by definition, a reduction of competition.
If that isn’t depressing enough, all of this has been ‘achieved’ by regulating the wholesale prices paid by off-net fixed and mobile operators terminating into these mobile operators – the Mobile Termination Rate, or MTR. Ofcom, with the correction of the Competition Appeals Tribunal on multiple occasions, has reduced wholesale termination rates by broadly 93%. There are a number of significant steps along the way that are noteworthy. For example 2007-2011 where the MTR was lowered by 68% at wholesale, but the average retail bundle price fell just 10% and mobile revenues (including fixed to mobile) fell just 33%.
Thus, over a sustained period under Ofcom’s watch, wholesale mobile prices have been regulated downwards by 93%, yet retail revenues have risen 5%, bundle revenues 86%, and the oligopolies share of mobile spend has risen from 82% to 95%. And the largest step changes in these factors appears to be inversely correlated with Ofcom’s actions! This suggests to me that what they have done has benefitted the oligopoly’s margins and market share, substantially more than it has benefitted the consumer. If so, Ofcom are strengthening the oligopoly, flattering their margins by their actions, with natural market forces and technology compensating and offering some benefit to consumers. Arguably, the only conclusion that leads to is that consumers would have been better off without Ofcom’s intervention.
But yeah, some prices are falling somewhere so you must be doing an amazing job – well done!