Why in-contract price hike controls will likely mean the end of UK handset subsidies

Britain’s telecommunications regulator, Ofcom, has told the country’s fixed-line and mobile carriers that they will no longer be allowed to keep customers tied to their monthly contracts if they raise prices before the contract is up.

That means any price hike, no matter how small, or even the lowering of a voice or data allowance mid-contract. The move follows a consultation earlier this year and it has massive implications for handset subsidies.

The end of the hidden “subsidy”?

At the moment, contract customers in the UK buy a phone and pay a monthly rate that mixes up two elements, namely the monthly service fee and the paying-off of the handset. This system can function because customers are locked into their monthly contracts, giving carriers an incentive to subsidize the devices to a degree.

The carriers had warned Ofcom that they were likely to stop subsidizing handsets if they were forced to allow customers to exit the contract without penalty, in the case of a price rise. That’s precisely what Ofcom has decided to do, so we can expect those mixed-in subsidies to disappear pretty soon. And yes, that potentially means prices will go up a bit.

Indeed, O2 has already moved to decouple the cost of the handset from its service contracts, similarly to how carriers operate in Germany (and to what T-Mobile recently decided to do in the U.S.).

The trade-off

For the customer, this has an added advantage on top of the ability to walk away in the case of price hikes: at the end of a two-year contract, it is much easier to continue with the service fee only.

In a sense, the real change here is psychological – consumers are no longer under the illusion that they’re getting a handset “for free” when they initiate a contract. But at the same time, they’re not locked in when their carrier decides to bump its pricing – and history shows the carriers really do like to do that, regularly.

So even though carriers may charge more up-front for their phones, once the new rules come into effect in 3 months’ time, consumers are less likely to be hit by mid-term price hikes. It’s a trade-off that at least makes costs more predictable.

Now we just need to see what the operators will do in reaction to Ofcom’s move.