Non-Confidential Making communications markets work well for customers A framework for assessing fairness in broadband, mobile, home phone and pay-TV Virgin Media welcomes the opportunity to respond to Ofcom’s thoughts on how it will consider issues of fairness in its future work. This is important. ‘Fairness’ of itself is too vague a concept to guide usefully the actions of providers. We therefore appreciate Ofcom’s work, and its acknowledgement that the issues are complex. To make our response tangible we have used the example of the so-called ‘loyalty penalty’ to illustrate some of the issues we think Ofcom will need to unpick when it assesses fairness. In summary: • There is a temporal aspect to fairness that is missed in a simple static comparison of winners and losers. In broadband, competition and investment has meant that customers are much better off than they were in the past. We think that this should be weighed in any assessment of fairness. If all customers are better off than they were, but some are better off than others, this should matter. • Ofcom might also consider whether the practice or outcome being assessed for fairness is widespread or common for other products or services throughout the economy, but not considered to be unfair in those cases. If so, surely special justification is needed to explain why it is unfair in telecommunications. We doubt whether tagging broadband as an ‘essential service’ meets this requirement. • Ofcom should carefully explain why a practice or outcome is considered unfair; even if it requires Ofcom to move outside of “traditional economic analysis”. It also requires more than listing often expressed ‘areas of concern’. In the case of the loyalty penalty, customers who are prepared to make an investment in time and effort to haggle with their existing provider, or switch to a new one, can make a saving on their bill for the supply of identical or similar services. Why is this unfair? Competition among providers has meant that not all customers achieve the same outcome, but they are treated in the same way and no one is prevented by the provider from taking advantage of the keener prices available. Simply saying that it is widely thought to be unfair (as others have done) is insufficient, and should not drive policy. If unfairness is confined to a particular cohort of customer, for example those that experience vulnerability, then this should be made explicit along with the reasons why. • By extension, Ofcom must explain why a different outcome, or set of prices, is fairer. In the case of the loyalty penalty, is it better that all customers pay the same price? Should new customers pay more than those that have been ‘loyal’? Why would either outcome be judged fairer than the current situation? 1 • Ofcom might consider whether its past or future actions might exacerbate perceptions of unfairness. For example, have the steep reductions in the price of Openreach’s wholesale anchor product exacerbated the gap between upfront offers and the prices paid by customers who have not engaged? Will smart data (Open Communications) have a similar effect in the future? • Ofcom is right to consider the consequences of correcting the ‘unfairness’, particularly if this has implications for other policy objectives: getting more engaged customers and encouraging investment in fibre or 5G. We had hoped that Ofcom’s new strategic priorities might help in making these trade-offs. • More guidance is required on how (or whether) Ofcom will decide whether firms are “exploiting behavioural biases” rather than simply accommodating how customers, in real life, make decisions. Question 1: Do you think our characterisation of what might constitute fair and unfair practices is appropriate? Question 2: Do you agree with the questions set out in our fairness framework? Are there any other questions that should be included? Please set these out in your response. Question 3: What additional information or guidance, if any, would you like to see included in our fairness framework? We set out below our thoughts on the various aspects of Ofcom’s framework. Dynamic assessment of distributional fairness 1. Not entirely. Both procedural and distributional fairness appear to be static tests; the former is an absolute test and the latter is relative. Under procedural fairness there is a yes/no answer as to whether (say) the customer has been given the right information at any point in time. However, distributional fairness seems to be a relative test i.e., it is about “some customers gaining and others losing out” (3.16). 2. We believe that Ofcom should take a more nuanced consideration of in what sense those that are ‘losing out’ are really suffering. The static characterisation of distributional fairness ignores what has happened to customers over time. The structure of prices is an outcome of a competitive process that has played out over time (and which Ofcom laid the foundations for). 3. In brief, firms running networks with a high proportion of fixed costs compete to retain existing customers and attract new ones, often from their rivals. Market research done for Ofcom indicates that triple-play customers need a saving of around £23 per month to switch provider and £20 to persuade them to change deals 2 with their existing provider (we think of this as a negative switching cost).1 Our own research shows that a better deal / value for money attracts [] of the joiners to Virgin Media.2 The presence of these discounted deals for new customers would indicate that there are enough price sensitive customers in the market to make this worthwhile for providers to offer. Potential gains (alongside an easy switching process) are what typically encourage customers to switch; it is therefore not surprising that the structure of prices reflects this behaviour. Indeed, these discounted deals help overcome one well know behavioural trait: status quo bias – sticking with what you know unless there is some good reason to switch. 4. In an assessment of fairness, Ofcom should also ask whether under this process of competition a customer gained relative to his or her previous position rather than simply relative to others at an instant in time. 5. To get away from using too many aggregate averages we have constructed a simple example of a customer who could be thought of as the ‘victim’ of the loyalty penalty (a loser today versus someone who has acted differently). Although indicative, we believe that the numbers are a reasonable illustration. We assume: a. The customer joined in early 2011 and pays for an 18-month introductory offer of £20 per month for broadband and fixed-line telephony. b. After 18 months, the time limited discount ends and the amount paid per month increases to £30 per month. c. The customer has neither a) haggled with his or her existing provider b) switched to another supplier nor c) changed package and has had a 5% per annum annual price increase (‘the price walk’). 6. The table below shows the monthly amounts paid by the illustrative customer. We also introduce two pieces of aggregate average a) average download speed and b) average data consumption. The latter are both sourced from various Ofcom publications. 1 https://www.ofcom.org.uk/__data/assets/pdf_file/0022/117076/Consumer-engagement-quantitative- research-2018-slide-pack.pdf Slide 54. 2 Confidential 3 Year 2011 2012 2013 2014 2015 2016 2017 2018 Monthly 20 25 31.5 33.1 34.7 36.5 38.3 40.2 Outlay (£) Average 17 23 30 58 97 132 190 240 monthly data consumption (GB) Average 7.6 12 17.8 22.8 28.9 36.2 46.2 54.2 download speed (Mbps) 7. This illustrative customer pays more in absolute terms than he did in 2011 when he joined, and in 2012 when his introductory offer ended and he is likely now to pay more than customers who have haggled or switched but buy the same services (the static relative test referred to paragraph 1). However, over this period his consumption of data has risen 14-fold and the quality of service that he receives (measured by download speed) has improved significantly3. So, for this customer, unit prices have declined exponentially and the capability of his service has greatly improved.4 Looked at this way, the customer is much better off relative to his position on joining. Ofcom should weigh up whether this effect should be ignored from any assessment of fairness. 8. Note that this is experience for the customer is different from other sectors where some customers experience a price walk. In insurance, each year a customer’s premiums may rise - but the value of the insurance per pound paid (in terms of the amount that can be claimed in, say, the event of loss or damage) often does not increase; it goes down. In the energy markets the price per unit of energy has increased and the monthly bills have risen despite a reduction in consumption.5 In these examples, customers may plausibly be said to be worse off than they were in the past.6 9. The upshot is that broadband customers, even if they have stayed with the same provider and have not sought to negotiate a new deal, can be characterised as better 3 In its work on the USO, Ofcom has made the case that a download speed of 10Mbps is the minimum quality of service required for the average family engaged in a variety of activities. 4 Ofcom does allude to this in 3.4: “We also recognise that there are differences between regulated sectors which will need to be reflected in approaches to achieving fairer outcomes for customers.