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Summary:

Ofcom wants to make it possible for consumers to pull out of their mobile contracts without paying a penalty, if the carrier raises the agreed contract price. But, as operators have warned, this may mean drastically reducing upfront hardware subsidies.

Nexus 4 in hand

The mobile phone subsidy model is already in trouble, what with devices such as the Nexus 4 threatening to bring smartphone pricing into the no-brainer pre-pay zone. But now carriers in the UK may have a new incentive to stop blending upfront device costs into their monthly fees: the telecoms regulator Ofcom has proposed allowing mobile (and landline and fixed broadband) customers to quit their contract sans penalty, if their operator hikes prices after they’ve signed up.

Ofcom’s move follows a great deal of pressure directly from consumers and from the consumer advice service Which?, which has run a campaign called Fixed Means Fixed since last July. On Thursday the regulator launched a consultation (PDF warning) on how to better protect people from price rises that are allowed under the small-print terms of their contracts, but that may not be obvious to most people when they sign up.

Why consumer protection could kill subsidies

Ofcom has proposed several options, which also include greater transparency of price terms and making it so that consumers must expressly opt into any variable-price contract. However, the regulator was clear that it favors changing the current rules so that “consumers are able to withdraw from a contract without penalty for any increase in the price for services applicable at the time the contract is entered into by the consumer.”

What does this have to do with handset subsidies? Everything.

Here’s how the current system works. Operators can raise their prices without letting customers bail out for free, as long as the hike falls short of causing ‘material detriment’ to the customer. What’s material detriment? Good question. It’s pretty much up to the operator to decide, and their measurements are wildly inconsistent – some set the barrier at inflation, some set it at 10 percent, and some mix those two up, depending on which ‘part’ of the overall charge we’re talking about.

You can hardly blame the average customer for not keeping up, and Ofcom says this situation is allowing a rather unhealthy trend. From the consultation document:

“With regards to the size and frequency of price rises in fixed term contracts, we consider there is a risk of these becoming a standard and regular practice in the communications sector. We note that some providers have increased prices more than once since 2011. Since most providers set a threshold… before they allow consumers to exit without penalty the incentive to raise prices once consumers have signed up to them will be large and any reputational damage to a provider will be diffused because competitors have pursued similar policies in the past.”

Which? itself recently pointed out that, in the last 15 months, all the major UK operators raised their prices at least once. The group’s campaign has garnered 37,000 signatures, and Ofcom has of course received many complaints about price hikes directly – it analyzed 1,644 of them in preparation for the new proposals.

Now, the operators have complained to Ofcom that “they are likely to review the way they currently subsidize handsets in order to reduce the risk to them if they have to let consumers exit the contract without penalty for any price rise”.

And what’s Ofcom’s response? A resounding “meh”:

“Our provisional view is that any disadvantages arising from changes in the way in that handsets are obtained by consumers would be outweighed by the protection offered by this option. This is on the basis in particular that handset manufacturers and handset/communications services retailers will continue to have a strong incentive to ensure that consumers are offered competitive and attractive deals for handsets.”

In other words, if Ofcom’s proposals go through, we may very well see a change in the way mobile phones are sold in the UK – currently a predominantly post-pay market, but maybe not for much longer.

In practice, this will probably mean that operators start charging a larger upfront fee for the handset in order to offset the risk of the customer quitting, or – as is already the case from where I sit here in Germany – splitting the contract in two, so that one part of the monthly charge is explicitly paying off the handset, and the other representing the service charge.

Either way, the actual cost of the handset would become much more apparent to the customer, making out-of-contract price a much more sensitive issue. Which is where the Nexus 4 comes in. Even less-savvy consumers can currently assess the low Google Play price and realise that they’re paying more than necessary if they get it on contract. This will only accelerate that trend, particularly if the Google-phone pushes down smartphone pricing in the same way the Nexus 7 did for tablets.

Let’s see if Ofcom’s proposals go through. The consultation closes on 14 March, after which Ofcom will reveal the finalized rule-tweaks. Operators will then have three months to change their strategies accordingly, so we could very well be looking at a major shift in the UK mobile market before the end of this year.

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  1. About time too. Far better to buy a bloat-free phone for a competitive price outside of a contract than pay an excessive subsidy for one that tends to come bloated with operator rubbish.

  2. They can do what T-Mo USA is doing and go to financing and the problem is solved with minimal downside for the consumer.
    Too bad the regulators are thinking this narrow. The carriers have too much control over the hardware and the software running on their network and that’s a much bigger problem. You end up with features that would be costly to the carriers crippled or removed , carrier spyware on many devices, no efforts from device makers to sell the devices any other way ,exclusivity deals and some new classes of devices that would harm carriers might never be made.
    In the end forcing the carriers to separate the cost of the device from the service would allow other players to try to sell phones and free the industry. The industry is being kept hostage by ,what in the end are, utility providers and that should not be acceptable for anyone.

    PS: Nexus 4 has no LTE and everybody assumes it was Google’s decision but nobody asks if it was the carriers. Maybe someone should.

  3. Lindsworth Horatio Deer Thursday, January 3, 2013

    Hopefully when the RIM Z10 is launched in February 2012, it”ll be free of subsidies!!! RIM sends out official invitations to its Blackberry 10 OS, Z10 Launch and PlayBook Tablet Launch http://bit.ly/X3dJ6m

    1. The subsidy-free model will really hurt RIM, since carriers will not be able to cross-subsidize between manufacturers or operating systems to keep a fourth system viable.

      Nokia was the first to cut the smartphone margin structure in order to get back into the race. Nexus 4 merely followed suit, albeit on an unlocked model. If carriers can’t help RIM then RIM has even less chance of rebuilding market share.

  4. Subsidized phones = unregulated (backstreet) money lending racket!

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