David Prosser: Reversing the charges isn't always simple

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The Independent Online

Outlook If you run a large company in an industry that is regulated by Ofcom, thank your lucky stars for the four-day Easter break: it provides breathing space during which the watchdog won't be able to launch an attack on your business model.

Ofcom's intervention yesterday in the mobile phone market had something in common with its march into pay TV only 24 hours earlier. The determinations given were made in the name of consumerism, but were not prompted by complaints from actual consumers. The instigators of Ofcom's investigation into pay TV were BT and Virgin, two companies that have been frustrated by Sky's dominance of that market.

In the case of mobile telephony, it is the smallest players in the sector that have been pressing Ofcom to bear down on termination rates because they have most to gain from a crackdown (with fewer customers, their networks get fewer calls, and thus get to levy their own termination rates less frequently). Like Sky on Wednesday, Vodafone, Orange/T-Mobile and O2 were thus enraged yesterday.

This is not to say that Ofcom's judgement is misguided, however: just observe that when any watchdog takes action to boost competition, it inevitably creates winners and losers in the industry in question at the same time.

Nor are these what you would describe as victories for the little guy. BT, the big winner from the pay-TV intervention, is also a major beneficiary from the latest Ofcom move, since it has no mobile phone business but must pay a termination rate each time one of its many millions of landline customers calls someone's mobile number. It will be cock-a-hoop about a second gift from the regulator in as many days.

Similarly, Virgin is hardly a small enterprise. And Three, the mobile phone network that has been keenest to see Ofcom take action, is owned by Hutchison Whampoa, the Hong Kong-based conglomerate. A smaller business maybe, but one with a hugely wealthy backer.

The call that Ofcom has to make in these cases is whether it is delivering substantial benefits to consumers at the same time as it redistributes commercial advantage.

In the case of pay TV, it is easier to give an unequivocally positive answer: it will clearly to be customers' advantage if BT, Virgin and others are able to offer Sky's content more cheaply – that would create genuine competition in this market for the first time in a number of years.

In the mobile phone industry, however, the future looks much less certain, despite some triumphant talk of a price war yesterday. Termination rates generate roughly £2bn a year for the network providers – with the 2015 rate set at less than an eighth of the current level, that implies a loss of revenue of a little over £1.75bn in five years' time.

That is too much for Vodafone and the others to give up – the £2bn is 16 per cent of their UK revenues, so Ofcom's attack would represent a very serious hit. Call charges may come down, as the regulator suggests, but some or all of the costs will be recouped elsewhere: through less heavily subsidised handsets, for example, or even a charge on customers for receiving a call.

One group of losers could be people with pre-paid mobiles – those making pay-as-you-go calls rather than taking out a monthly contract.

The networks haven't always made the most of such accounts, safe in the knowledge that even if pre-paid customers call out out infrequently, they earn decent cash from them every time someone from another network gives them a call. Now, however, pre-paid consumers may find their phone providers looking to sweat them a little harder, or even to shift them on to contracts that produce guaranteed monthly revenues.

Ofcom must, of course, take action where it believes it is mandated to do so by the brief it has been given. And in the case of termination rates, it says it is attempting to implement European legislation in the UK (though the mobile phone networks insist it has gone significantly further than necessary under the terms of the directive in question).

However, the law of unintended consequences looms large in regulation. What looks like an intervention with irrefutably positive consequences for consumers rarely turns out to be so straightforward. Ofcom's officials may care to mull this over during their well-earned Easter holiday.

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