Ofcom Moves to Reduce Uncertainty for Consumers, Increase It for ISPs and Mobile Service Providers

The Ofcom ban on inflation-linked price increases by suppliers of home broadband and mobile services is an example of a well-intentioned government policy that could have unintended consequences for consumers the rule is meant to protect. 

In principle, the new rule only seeks to protect consumers from uncertainty and sudden, unexpected price changes.  Ofcom believes that using metrics such as consumer price indexes as a means of setting future prices is not transparent or predictable enough for consumers.

“With household budgets squeezed, people need to have certainty about their monthly outgoings,” Ofcom says. “But that’s impossible if you’re tied into a contract where the price could change based on something as hard to predict as future inflation.”

But ISPs face the same dilemmas when inflation is high and unpredictable. 

So the rule essentially shifts uncertainty from consumers to providers, who now must make definitive decisions about the level of future inflation. 

On the other hand, perhaps the new rules also will enforce a higher level of managerial prudence, creating incentives for cost controls that better protect firms from uncertain inflation levels. 

The new rules do not restrict provider ability to set the level of their prices. Providers may increase their prices during the contract period. However, the rules prohibit providers from including inflation-linked, or percentage-based, price rise terms, and require that the price increases be identified at time of contract signing. 

In other words, ISPs and mobile service providers can specify that price changes are possible, but only in currency terms, not percentages, and only at set times. As a practical matter, that means ISPs and mobile providers will have to gamble on the level of future inflation increases. 

source: Ofcom 

The real issue for ISPs and mobile service providers is greater uncertainty, even as consumer uncertainty is reduced. 

By definition, “inflation” means a general rise in prices. In other words, the price of “everything” goes up. To the extent that suppliers of home broadband and mobile services face higher prices, adjustments have to be made. But the new Ofcom rules create high incentives for guessing right about future inflation rates. 

If firms guess wrong about future inflation rates (their scheduled price increases are insufficient to match inflation), they either will raise consumer costs elsewhere; suffer reduced profits and revenue (which imperils firm survival) or push such pain onto their suppliers, when possible. 

Suppliers might cope by restructuring service plans as well, offering products with fewer features that cost less, plus fuller-featured plans that can be priced higher. Providers might bundle additional products that produce more revenue and profits without changing subscription prices. 

If no other options are feasible, then service quality has to be cut in some way, as cost is taken out of the business.

Such pro-consumer policies happen because policymakers can claim to be protecting the consumer, much as lawmakers pass laws to be seen as “doing something” about problems. 

“Doing something,” even without a solid understanding of causal relationships, seems to happen all the time, even when it is not clear the solution will “solve” the problem, or actually creates new problems.

Sometimes policies that are equally well-intentioned cause other problems, such as reducing living standards for citizens. As much as we might support “clean energy” policies, those programs drive up energy costs for citizens, affecting the least well off the most. 

Policy	Problem Exacerbated	Impact
Federal Sugar Program limits imports	High food prices	Artificially increases sugar prices, costing consumers up to $3.7 billion annually and disproportionately affecting the poor
Energy and Environmental Policies	High energy costs	Drives up energy prices, which disproportionately impacts low-income households
Occupational Licensing	Job market barriers	Creates unnecessary obstacles for the poor in obtaining jobs that could lift them out of poverty
Restrictive Land Use Regulations	Housing affordability	Increases housing costs, making it more difficult for low-income individuals to afford housing
Minimum Wage Laws	Job opportunities	May reduce job opportunities for low-skilled workers

Most observers could agree that occupational licensing exists at least partly for reasons of consumer protection. But those same laws also create obstacles for people who cannot afford the time or money to obtain their licenses. 

Likewise, minimum wage laws--however much we like them--also can eliminate jobs, while increasing wages for those who continue to be employed. It’s often a trade-off. Would you prefer more jobs with less-certain wage rates, or fewer jobs with higher wages? 

It is not so much a choice of “good versus bad” but which outcome one prefers. 

The point is that the Ofcom policy, intended as a consumer protection measure, will, in the face of inflation, force suppliers to find other ways of recovering higher costs. 

Often, with well-intentioned policies, it is the externalities (unintended consequences) that are the bigger issue. There, it is not so much that the particular policies failed, but that new problems were created by policy “success.”

Policy	Intended Outcome	Unintended Consequences
Prohibition (1920-1933)	Eliminate alcohol consumption	Rise of organized crime, increased corruption, black markets, and potential increase in alcohol-related health issues due to unregulated production.
War on Drugs	Reduce drug use and trafficking	Increased incarceration rates, disproportionate impact on minority communities, rise of drug cartels, and potential increase in drug-related violence.
Suburbanization Policies (Post-WWII)	Promote homeownership, economic growth	Urban decay, increased reliance on automobiles, sprawl, environmental degradation, and social isolation.
Agricultural Subsidies	Support farmers, ensure food security	Overproduction, market distortions, environmental damage, and increased food prices for consumers.
Minimum Wage Laws	Increase income for low-wage workers	Potential job losses, increased unemployment, especially among young and unskilled workers.
Price Controls (Rent Control, Price Ceilings)	Protect consumers from high prices	Shortages, decreased quality of goods and services, black markets, and disincentives for investment in housing.
Tariff and Quotas	Protect domestic industries	Higher prices for consumers, reduced consumer choice, retaliation from other countries, and potential job losses in export-oriented industries.
Welfare Programs	Provide safety net for the poor	Dependency culture, disincentive to work, increased government spending, and potential for fraud.

The new Ofcom rule might work well in times of stable and predictable inflation, as much as it will cause issues when inflation is high and unpredictable. When ISP and mobile execs plan incorrectly, business stress will result. 

As much as consumers get better price certainty, ISPs will face higher uncertainty. In an industry with little margin for error, that might be quite consequential.