Whilst it is a commonly accepted economic principle that in a competitive market prices will drift towards marginal cost, the propensity of the UK consumer not to switch has driven this cost down – and that will change.

The UK is not a ‘switching’ market. On average only around 15% of consumers will switch broadband provider year on year, and it is this security that allows both the service providers (ISPs) and the infrastructure builders to drive prices down. Service Providers rely on the fact that a customer will be likely be with them for a period significantly longer than the initial contract term and the acceptance that a customer will be lost within their contract term is mitigated by this low switch rate. So whilst it is a commonly accepted economic principle that in a competitive market prices will drift towards marginal cost, the propensity of the UK consumer not to switch has driven this cost down – and that will change. The price the consumer pays is made up of a basket of items: the cost of acquiring the customer, the tech needed to deliver the service (and increasingly more of that is needed at customer premises as ubiquitous WiFi coverage is expected), estimated support and operating costs for the customer’s lifetime and both the wholesale buy price and technology to integrate with it. All of these areas look likely to be hit. In particular, the more competitive the market place the higher the cost of acquisition will be as providers have to compete harder to stand out and differentiate themselves on something other than just price. On the infrastructure layer competition may have an even greater inflationary effect which will be reflected in wholesale prices. Whilst interest rates are low it is possible for companies and the investors bankrolling them to accept a slower return, and a lower IRR based on lower weighted costs of capital, but this only holds true when relatively safe, and high levels of take up can be expected over the medium term. If the government elect not to extend the fibre rates relief (or preferably remove fibre tax all together)…

Inefficient and high-cost spectrum licensing is stifling competition, innovation and growth in the UK’s telecommunications market

Image by James Wainscoat, Unsplash

Established by the Office of Communications Act in 2002 Ofcom is, among other things, responsible for issuing, policing and importantly, costing spectrum space in the UK.  It is often accused of being inefficient and overly costly with accusations of a “top heavy salary bill” and “extravagant offices” being levied at it continuously.  More importantly though, it can be argued that it is inefficient and high-cost spectrum licensing is stifling competition, innovation and growth in the UK’s telecommunications market – something that with the impending cloud of Brexit and an increasingly skills-based economy is an even more concerning situation. Ofcom reports that, for the year 2014/15, total spectrum management costs totalled just under £51.5 million, whilst fees totalled just over £267.9 million (Source: Ofcom: Spectrum management costs and fees 2014-15).  Removing the MoD’s contribution from this (as this is essentially just public money moving hands) Ofcom brought in a spectrum licensing surplus of a little over £61.5m.  Two questions arise from this: Firstly, it is hard to see how the costs of managing such a fundamentally intangible asset can be so high.  Spectrum is, after all, not a physical asset that has to be maintained.  Applications for frequency use require a comparatively binary decision as to whether or not the requested assignment is (or should be) available within an area.  Applying for a licence at the moment, however is not a straight-forward process.   Fixed wireless link licence details still largely have to be submitted in paper form (albeit though PDFs) and are manually processed by Ofcom’s spectrum licensing team.  This paper-pushing exercise is slow, ineffective and one directional, often incurring a high opportunity-cost loss to businesses.  A self-administered, truly digital, solution with instant licence approval and payment would be an obvious solution to this problem. Secondly, these surplus generating licence fees are simply a tax on business, equivalent to the rates / “fibre tax” paid on traditional infrastructure.  As with any…