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)…
