The cost-of-living crisis: why are telecoms bills also rising?

Bills are rising across the board, and the telecoms sector is no different. What’s driving up prices for phone and broadband customers in the UK? And why might these rises not reflect reality?

Increased food prices, increased gas, National Insurance rises – now phone and broadband bills are also set to go up, amid the escalating cost-of-living crisis that’s eating up more and more of UK household and business expenditures.

Of course, we’ve all been using up more and more connectivity since early 2020, but unlike with other commodities, there isn’t any shortage of bandwidth right now. So what, if anything, is behind these rises?

BT are the latest to announce “necessary” increases on tariffs, warning that many customers’ bills could go up by 9.3% from the end of March, adding an extra £3.50 a month (£42 a year) onto other rising bills, though prices for “financially vulnerable” customers on certain schemes will remain unchanged.

Nick Lane, managing director for consumer customer services, has blamed growing customer data usage; “We’ve seen a 90% increase on broadband since 2018 and 79% increase on mobile since 2019 as customers rely on our connectivity more than ever for things like working from home, education online and the growth in TV streaming.”

“Unlike most things we buy, like food, electricity or fuel, you don't pay more for using more as our data plans are unlimited, but we need to keep investing in our networks so they can handle this huge increase in demand.”

Vodafone and TalkTalk customers will also see an extra 9.3% and 9.1% on their bills, respectively, while O2 and Virgin Media will instead adjust their prices according to the Retail Price Index (RPI), at 7.5%, plus 3.9%.

“For many people, this will feel like a tax on working from home. The way we live and work has fundamentally changed and the business world has not fully caught up with it,” according to Martyn James, director of the consumer rights group Resolver.

With UK inflation soaring to 4.2%, and wage growth at 3.8% according to figures from the Office for National Statistics (ONS), many are now experiencing a pay cut in real terms.

BT and many other telcos base their prices on the Consumer Price Index (CPI), which measures the cost of goods, from food and drink, to clothing, furniture and hotels – as well as communications services.

The CPI produces a basket of goods used to calculate the price inflation indices, with the following ten products and services from the communications sector (2% of all representative items):

Currently at 5.4% compared with 0.9% in January 2020, the CPI is at its highest rate for a decade, and dangerously close to its historical high of 7.1% in March 1992.

CSPs reserve the right to raise prices each April by the CPI figure announced that January, plus an extra 3.9% (in the case of BT, the price rise is 5.4% + 3.9% = 9.3%). When the CPI rate is negative, prices are typically increased by only 3.9%.

Despite these rises to bills, however, communications services are having very little effect on inflation – in fact, they’re having a net negative effect:

It’s price increases in other areas than communications – overwhelmingly in food and drink, one of the industries most exposed to faults in the supply chain – that is driving up inflation in general, and as such, giving CSPs the chance to increase the cost of phone and broadband services.

This raises the question: why is the price of telecoms services benchmarked against the CPI, particularly as these prices do not accurately reflect the true cost of delivering services?

That isn’t to say that price rises aren’t sometimes necessary, particularly as CSPs also see their own costs increase (even if their employee wages aren’t one of those costs). But if these rises are to pay for service improvements, are customers going to see and feel the benefit of these?

Not all CSPs are choosing to increase their prices; regional provider KCOM was due to implement a price rise in March 2022 in line with the CPI index plus 3.9%, but later decided to cancel this price increase.

KCOM nonetheless continues to expand its fibre network, without burdening its customers with higher bills. With Hull and its surrounding areas served only by KCOM due to a series of historical quirks with local provisioning, this move saves residents and businesses from enforced price rises.

Energy costs and supply chain issues will no doubt stabilise, if not in the short term, but which, if any, of the CSPs would lower their prices in the event of a drop in inflation?

In December, to battle the soaring rate of inflation, the Bank of England’s Monetary Policy Committee (MPC) increased interest rates to 0.25%. The MPC’s next meeting in early February may see this rate rise again, but if external forces are the source of inflation, as they currently are, this may only serve to push those already in financial difficulty further into trouble.

Phone and broadband bills are just one part of a wider debate on what can be done to ease the burden of rising costs on consumers, particularly those of limited means. As we’ve written about before, telco revenue streams have not been keeping up with customer preferences for some time now.

According to Hyperoptic, more than 9 million customers are unaware of these impending bill shocks: 63% of those surveyed feel that the increases are unfair, and 48% wouldn’t have signed their contract if they’d known prices would go up.

Price rises are never a popular move, but CSPs must ensure that any increases are reflected in the quality of service delivered, and offer differentiated pricing structures or discount schemes to complement their standard offering. Is it time to revisit whether unlimited plans are really fit for purpose?
 
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