In the autumn of 2020, bosses at BT were faced with a problem. Britain’s economy was reeling as the second deadly wave of the Covid pandemic took hold, and millions of Britons were still shut out from their offices, working from home.
Demand had ballooned for BT’s sprawling broadband network and its EE mobile phone service, as the nation Zoomed in to meetings and switched to shopping online. Its contracts, like those of other telecoms companies, allowed it to increase prices each year by linking them to inflation. But in the lockdowns, with the wider economy in freefall, inflation had collapsed close to zero, limiting the firm’s ability to recoup costs.
BT’s bosses took action. In September 2020, the company added a supplementary charge of 3.9 percentage points on top of the usual inflation-linked rise. At the stroke of a pen, a measly increase of less than 1% became a chunky 4.5% rise.
Executives at Vodafone appear to have taken note. Two months after BT, they made the same call, announcing contracts would rise by inflation plus 3.9 percentage points.
One former Vodafone insider said the company considered how to respond to BT’s pricing change. “They didn’t want to be above BT, as this would bring undue attention. But they didn’t want to go lower as it would be a missed revenue opportunity.”
In March 2021, other big telecoms companies followed BT and Vodafone’s lead, moving to inflation plus a supplement. TalkTalk opted for a slightly lower 3.7 percentage points on broadband contracts, while Virgin Media O2 went for 3.9 percentage points. It also chose the higher retail prices index (RPI), as opposed to the more commonly used consumer prices index (CPI).
By now, the Covid vaccine had arrived, allowing factories and offices to reopen and trade to resume. The rate of inflation ticked up. From a low point of 0.2% in August 2020, it jumped to 2.1% by May 2021, and continued to climb. The original problem with the old inflation-linked rises no longer applied.
Nonetheless, in November 2022, iD Mobile (owned by the retailer Currys), and mobile operator Three introduced a 3.9 point supplement. By then, Russia’s decision to throttle gas supplies to Europe had sent energy prices skywards, and propelled the rate of inflation above 10%.
In early 2023, when it was clear the Bank of England was struggling to prevent inflation from becoming embedded in the economy, Tesco Mobile introduced the 3.9 supplement for out-of-contract customers. Virgin Media announced that its RPI-linked increases for broadband, landline and TV customers would also include a 3.9 percentage points from April 2024.
In total, the Guardian has found the rate was adopted, and is still being used, by six companies across 11 of their mobile and broadband brands.
The companies argue record levels of investment are required to upgrade their networks to the latest 5G technology, and to manage the flow of data as video meetings and streaming of TV, film and music become more popular. Virgin Media O2 alone invested £2bn in its network last year.
BT argues its price increases reflect the level of investment it needs to make across its networks and service. A spokesperson said the annual rise was contracted, transparent and clear. “We understand that price rises are never wanted nor welcomed, but recognise them as a necessary thing to do given the rising costs our business faces.”
Vodafone said its increase reflected “industry-specific costs beyond inflation – which include costly infrastructure projects and investments that help us anticipate and answer the ever-increasing demand for data”.
A spokesperson for Virgin Media O2, which uses the higher RPI measure, said “the suggestion that the industry has a uniform approach to pricing is demonstrably untrue”, and highlighted how “a quick Google” showed TalkTalk added 3.7 percentage points on to inflation, Shell 3 percentage points, and Sky used discretionary rises not linked to inflation. Some smaller operators, including Hyperoptic, Cuckoo and Zen, did not raise prices at all this year.
Virgin Media O2 said its price increase applies only to airtime contracts, and not handsets, adding: “We are facing higher costs ourselves at a time when demand for both mobile and broadband has never been higher.”
Sky used an average 8.1% increase across its broadband and TV service in April, below the RPI-linked increases applied by Virgin Media O2.
“We don’t think CPI or RPI should determine what people pay for broadband and mobile,” a spokesperson for Sky said. “Not only does it mean unfair prices for customers, but it also means they are locked into contracts without the ability to leave penalty-free.”
Several smaller providers – including budget brands owned by some of the larger firms – have kept their pricing competitive. Giffgaff, Smarty, Voxi and Sky Mobile did not increase prices by inflation this spring, and Lycamobile froze its prices for six months.
A spokesperson for Three said it understood consumers were under pressure, but that its rising running costs and investment plans meant it had to pass costs to customers. They added: “Our prices remain some of the most competitive in the market.”
The telecoms regulator, Ofcom does not regulate prices in the broadband and mobile retail markets, where it says the choice of providers offers enough competition. But it can intervene where a provider has significant market power. In February, it launched an investigation into transparency around mid-contract price rises after finding about one-third of customers did not know this could happen. But its current review will not consider limiting or banning them, and does not address why so many operators chose to add the same 3.9 percentage point supplement.
The regulator said: “Ofcom has repeatedly called on providers to think very carefully about whether significant price rises are justified during an exceptional period of hardship for many people. However, in recent months, we’ve seen more providers move to an inflation-based calculation, limiting customers’ choice of contracts that are not subject to these price rises.
“We’re taking a close look at these issues to consider whether tougher protections are needed.”
Lack of intervention allowed extraordinary increases this spring, the time of year when most telecoms companies put up prices. With CPI above 10% and RPI above 13% in January – the reference month used for annual bill increases – consumers faced an increase on their bills of up to 17.3%.
For the economy at large, the price hikes have added to the UK’s overall inflation rate for all goods and services – just as the Bank of England battles to crush inflation by raising interest rates. Annual inflation in telecoms jumped from 3.5% in March to 7.9% in April, and rose further to 9.1% in May – the highest rate since 1991.
Economists say that inflation-plus telecoms contracts risk adding to the persistence of inflation. Paul Donovan, the chief economist of UBS Global Wealth Management, said: “Any process where you have an indexation of prices which is rigidly built in is going to potentially prolong inflation at least for that sector.”
The Unite union, which represents many workers in telecoms, is particularly worried about the proposed merger between Vodafone and Three. If approved by regulators, it will reduce the number of providers that run their own network from four to three in the UK. “We need the competition regulator, the Competition and Markets Authority, to step in to prevent this damaging merger and stop this endless cycle of greedflation,” said Gail Cartmail, executive head of operations for Unite.
The CMA said it would review the impact of the merger. Vodafone and Three argue that by merging they would help to improve competition by acting as a larger challenger to BT and Virgin Media O2, the two largest companies in the mobile market. A spokesperson for Vodafone added: “We hope [the CMA] will find – as we strongly believe – that it will boost competition in the industry and benefit both customers and the country.”
