Business, Innovation and SkillsWritten evidence submitted by Mobile Broadband Group (MBG)

1. The Mobile Broadband Group (“MBG”), whose members are the UK businesses of EE, Telefonica UK (O2), Three and Vodafone, welcomes the opportunity to submit evidence to the Business, Innovations and Skills Select Committee in relation to its pre-legislative scrutiny of the draft Consumer Rights Bill.

2. Our submission focuses on three specific areas of the Bill:

Services

Digital Goods

Unfair contract terms

Summary

A Government commissioned report (published in November 20121) stated that, over the next ten years, “the net present value (NPV) of the direct welfare benefits from public mobile services is estimated at £273–341 billion.”

The MBG believes that these benefits will be more easily delivered by the Government’s proposed evolutionary approach to clarifying consumer rights, as opposed to the more revolutionary approach of aligning the rights for goods with the rights for services.

Trying to align rights for goods and rights for services would not deliver net benefits for the economy or consumers.

The MBG supports the proposals to clarify rights for digital goods (subject to a few points, such as the distinction between a “bug” and a “minor fault”.)

Proposals for “transparent and prominent” present practical difficulties in the communications sector and need further consideration.

Background

3. The first mobile networks in the UK were launched in 1985 with the expectation that total demand for mobile services amounted to about 500,000, mostly business, subscriptions. Today there are over 82 million subscriptions in the UK. Over time the infrastructure has been upgraded with new technology and additional capacity to match the growth in subscriber numbers and expectations. In 1992, the first digital (2G) networks were launched, followed by 3G in 2003 and now 4G in 2012–13.

4. Mobile telephony has transformed the way consumers communicate and the way businesses operate. In the round, the consumers” experience of mobile has been overwhelmingly positive:

Voice minutes consumed have risen to 122 billion minutes per annum2

The majority of voice calls are now initiated from a mobile phone (54.2%), as opposed to a landline

The market is competitive, served by four network operators and numerous retail service providers and mobile virtual network operators

Since 2007, in real terms, a basket of mobile services has declined in cost by 42% (as against a decline of just 5% for a bundle of fixed services)

The market is also characterised by high rates of innovation

94% of consumers express overall satisfaction with their mobile service (Ofcom 2013 survey).

5. The increased volume, particularly in data usage has been driven by customers finding ever more ways to use a mobile for both business and personal purposes, such as e-mail, mobile search, social networking, e-money, location services, buying products on-line, accessing personal bank accounts, on-line gaming and many more.

6. Liberalisation of the telecoms market has been a huge success and has delivered for the UK”s mobile consumers, both in terms of overall service and value for money. Consumers primarily want lower prices, innovative devices and services and more coverage. These have been delivered against a backdrop of continuing investment and falling prices.

7. There is therefore enormous pressure on operators to balance the need for further investment with the need to cut costs. In such a competitive market, there is no room for “nice to have” expenditure. Every item has to be carefully assessed and prioritised. Unnecessary compliance costs ultimately feed through to customer charges.

Services

A Government commissioned report published in November 20123 stated that, over the next 10 years, “the net present value (NPV) of the direct welfare benefits from public mobile services is estimated at £273–341 billion. (To put this in perspective, the proposed new high-speed rail line (HS2) is expected to generate benefits with an NPV of £47–59 billion over 60 years.4)

Around 90% of this value will be enjoyed by consumers, who will be able to increase their usage of their mobile handsets for voice and increasingly data, while enjoying new services and lower prices. Operators will realise a lower surplus over the next ten years, owing to the investments needed to deliver 4G services and expand their networks to meet demand.”

8. In view of the huge benefits delivered to date and the operators” (and Government’s) ambitions for the future, the MBG supports the evolutionary approach to consumer rights in relation to services proposed by the Government, rather than the more revolutionary suggestion of aligning rights for services with the rights for goods.

9. The Government has set out its reasons for making clarifications to consumer rights: “consumers are less likely to engage in the market” and “are more likely to suffer detriment they are unable to resolve”.5 Clearly, with 82.7 million subscriptions in the UK, the first argument does not really hold for the mobile market. With respect to the second, the communications sector differs from many others in that customers, if necessary, are able to resolve disputes through the Alternative Dispute Resolution (ADR) scheme that mobile operators are required to offer under the General Conditions of Entitlement.

10. Across the communications sector (fixed, mobile, broadband), approximately 10k consumers make use of ADR schemes6 each year. In relation to the 100 million or so communications subscriptions, this number reflects the high levels of satisfaction in the industry but also demonstrates that customers do use ADR, where appropriate.

11. Nevertheless, the MBG agrees that clarifying general consumer rights and simplifying remedies could be beneficial to consumers. Simplicity and legal certainty are generally good principles to adopt.

12. For this reason, the MBG supports the Government’s proposal not to align the law on services with the law on sale of goods, as there are material differences between the two that could make the costs of compliance and the risks of unintended consequences outweigh any consumer benefit.

13. With respect to goods, the seller is in a position to inspect all inputs during the process of manufacture (which today is usually a highly automated, controlled, mass produced process) and to inspect the assembled product before dispatch, offering a warranty to the customer for a limited period thereafter. Where the goods are sold through independent channels, the retailer is able to carry out additional inspections and offer a warranty underwritten by the manufacturer.

14. Services, on the other hand, are not usually mass produced; the customer experience tends to be very much particular to the individual. Moreover, for continuing services, a “fit for purpose” outcome would effectively introduce an ongoing warranty or perpetual guarantee that was far more onerous than is the case for goods.

15. The MBG would not support an “outcome based” approach for services in the communications sector for the following reasons:

The Interdependence of Networks

16. For any given customer communication, an individual communications provider is usually responsible for only one leg or element of what can be an extended chain of interdependent (as opposed to sub-contracted) Communications Service Providers (CSP), underpinned by a network of interconnect, peering and access agreements, where each takes responsibility for their leg of the journey. The “originating access provider” (ie the CSP to whom the customer pays his or her bill) cannot be responsible (or should be held liable) for the overall customer experience across this extended chain.

17. The service that a mobile customer receives is extremely comprehensive: voice communication (making calls, receiving calls) throughout the UK and overseas (through international roaming agreements with other providers), Internet access (within the UK and overseas), other data services (such as e-mail, text messaging and instant messenger), applications (eg mapping, information services, location services).

18. In order to provide such services, a mobile operator is dependent on third parties in the interconnected value chain. At its simplest, this can be connecting one UK mobile network to another UK mobile network for voice or SMS communication. When providing access to mobile data, the customer will receive data through many third parties eg the network providing the services and a chain of additional operators linking to servers hosting the website which may be located in any jurisdiction.

19. CSPs generally have little overall control over the quality of the chain. Even if a CSP takes care to interconnect only with those that offer a high network quality, there is no guarantee that others in the chain will (or can—regulation often requires that there is no discrimination).

20. Thus the fault behind poor call quality or websites that are slow to download could originate with any of the CSPs along the chain (which is only as strong as its weakest link). It would cause customer confusion and frustration to hold out the expectation of “satisfactory quality”, if the originating CSP was not in a position to deliver it.

Independence of customers

21. The actions of customers themselves also have an impact on the level of service that each experiences. For example, large numbers of people making calls or accessing web sites simultaneously can cause network congestion. In mobile, crowds congregating in one place can overload local cellular capacity.

Costs of sub-contractors” warranties

22. In addition to the independent interconnect partners, CSPs rely on perhaps hundreds of sub-contractors to design, build, maintain and operate their network. In order to mitigate exposures that could arise from sub-contractors in an “outcome based” regime, CSPs would have to renegotiate supply contracts. (For example, a supplier causes some part of the service to go down by severing a cable with a digger, or making a mistake during a software upgrade). There would be significant transition costs in re-negotiating the supplier agreements and the suppliers would of course look to pass on the costs, ultimately to consumers, of their increased risk.

Measuring “satisfactory quality”

23. In order to base contracts on “satisfactory quality”, and to provide an element of legal certainty, it would be necessary, and extremely difficult and expensive, to establish exactly what “satisfactory quality” entailed, particularly with such a multi-faceted service as mobile. For example, would it cover: level of network coverage (for different mobile services—eg 2G, 3, 4G etc), network availability, number of dropped calls, internet access speeds, the reliability of international roaming, traffic management policies, or a combination of these factors? Mobile services are also affected by local factors (tree coverage, weather, and building materials) that may change with time.

24. In our sector, clearly the regulator would have to be involved and, we believe, would have to spend considerable resources in establishing appropriate benchmarks. They would also have to consider whether “satisfactory” was an absolute term across the industry or a term that applied only to the basis on which any given CSP had sold its service; presumably the latter would be the more appropriate. When one contemplates the scale of what might be involved, it is not surprising that Ofcom has not considered this approach to date. It has found other, more focused, ways of addressing particular consumer issues that have arisen in the communications sector.

Not relevant to actual consumer complaints in the communications sector

25. As can be seen in the table below, an “outcome” based approach would not actually deliver any additional consumer rights that would be relevant to the great majority of issues that can cause customers difficulties.

The Ofcom Annual Report for 2011 published the following table of complaints:

Automatic contract renewals

1,050

Additional charges

5,650

Broadband speeds

1,400

Charged for cancelled service

4,500

Complaints handling

15,750

Migration

5,300

Mis-selling

15,300

Silent calls

10,350

Other

53,450

Total complaints

112,750

This table relates to the whole communications industry, not just the mobile sector.

26. Of the categories of complaints specified above, perhaps only “broadband speeds” is directly related to an “outcome” based regime, around 1% of the whole. Even in such cases, for the reasons stated above around interdependence, the fault may not have been attributable to the originating CSP, in any event.

27. In summary, the MBG believes that there would be considerable transition and compliance costs involved with changing to an outcome based approach for services, where the potential marginal benefits for consumers are uncertain and small. It will make more sense for our services to continue to be subject to the standards set by our regulators to ensure consumers are sufficiently protected.

28. For all the reasons given, it would have the opposite effect of simplifying and clarifying consumers” rights and remedies. As mentioned above, the forecast consumer welfare to be delivered by our industry over the next ten years is considerable. There are no compelling reasons to jeopardise these by risking a potentially disruptive and revolutionary change in the underpinning regime for consumer rights.

Digital Content

29. The mobile operators in the UK are active participants in the digital content value chain: at various times providing mere connectivity to digital content, as a mobile Internet Service Provider, providing a portal through which customers can access third party digital content, and providing digital content directly to customers.

30. The MBG very much supports the Government’s desire to clarify consumers” rights in relation to digital content, which we agree have features that make them distinctive from physical goods and require a slightly modified approach if the rights of both consumers and producers are to be properly balanced.

31. For example, once a customer has loaded a piece of software onto his or her computer and backed it up, as is good practice, it is not practical to have a short term right to reject that software, when, as a consequence of some minor fault, the customer could effectively obtain free software.

32. The Government has expended enormous resources trying to minimise the incidence of piracy. It would be unwise to open up another avenue that could be exploited in this way.

33. We particularly support the provider”s right under clause 42, without restriction, to modify digital content post sale. As the Government acknowledges on page 35 of its impact assessment on digital content “Bugs are considered standard in digital content on issue and as such it is proposed that a reasonable person would expect a certain amount of bugs when purchasing digital content. Therefore the existence of bugs will not necessarily amount to a breach of the guarantee as to quality and fitness.”

34. The Government goes onto to say, though: “However as some forms of digital content, such as music, or e-books, can be expected to be of a very high quality, we will retain the “freedom from minor defects” aspect of quality for digital content and clarify in guidance that bugs may be acceptable in some forms of content”.

35. The MBG will be very interested to see how the Government will distinguish between a “bug” and a “minor defect”. We suggest that a better approach would be to eliminate the “freedom from minor defects” aspect. It will be sufficient to rely on fitness for purpose.

36. We will also need to be clear that providers will continue to be permitted, through the contractual arrangements, to discontinue customer support, as is often the current practice, in the event that the customer does not consent to receive necessary updates or is using software that has become uneconomic to support.

37. If the consumer experiences significant negative impact from an update consumers would have the right to revert to the prior version. This is a less costly and burdensome way to reduce the potential consumer harm that could be caused by an update.

Unfair Contract Terms

38. In summary, the MBG generally supports the Government”s proposals to refresh the law on unfair contract terms.

39. Our most significant area of uncertainty, though, is over the term “transparent and prominent”.

40. The MBG strongly supports the principle of transparency. All mobile operators publish comprehensive, accessible price lists. However, some businesses—and communications service providers are a good example—face real practical difficulties in making every aspect of their pricing “prominent” purely because of the sheer volume of information.

41. The price list for call charges for each operator runs to many pages and the whole price list for call charges should be regarded as forming the essential bargain, as customers are able to call any telephone number on the worldwide network, in accordance with the ITU settlement, and CSPs have no knowledge in advance of which numbers customers will call.

42. Ofcom, through regulation, requires that the pricing for calls to certain number ranges (such as 0870 numbers) should have equal prominence to other headline charges, such as the price of calling landlines. However, it is simply not practical (and would be self-defeating) to give equal prominence to all calling charges. Prominence is surely a relative term. It would be ridiculous to get to a position whereby only prominent charges were considered part of the essential bargain and less prominent charges were not. It should be permissible for the most frequently used call charges to be highlighted and for other, less frequently used prices to be clearly signposted to the CSP’s tariff sheet.

43. Those customers that are interested in particular charges—those that are less frequently used by the majority of consumers (say the price of calls to India or the price of calling 0870 numbers)—are able to review the call charges that are of specific relevance to them prior to purchase, if they so wish.

44. The MBG believes that drawing a customer’s attention to the full price list would satisfy the requirements of clause 67.4 (“A term is prominent for the purposes of this section if it is brought to the consumer’s attention in such a way that an average consumer would be aware of the term”.) but think it is necessary for the Government to provide clarity on this point in order to deliver legal certainty.

45. We also believe that the Government needs to expand on the intentions that lie behind Clause 71.2 (“If a term of a consumer contract is especially onerous or unusual, the trader must ensure that the term is drawn particularly to the consumer’s attention”).

46. What does especially onerous (as opposed to just onerous) or “unusual” mean? Perhaps compared to custom and practice in the industry. What happens if the unusual term then becomes custom and practice? What does “particularly drawn to the customer’s attention mean?” Is it a form of particularly prominent prominence?

47. Our instinct is to suggest deletion of this clause, as it will cause more confusion than it clarifies and that the consumers” interests are already adequately protected by existing law and the other suggested changes to unfair terms legislation.

3 September 2013

1 Analysys Mason: Impact of radio spectrum on the UK economy

2 All data from Ofcom Communications Market Review 2013

3 Analysys Mason: Impact of radio spectrum on the UK economy

4 http://assets.dft.gov.uk/publications/hs2-economic-case-appraisal-update/hs2-economic-case-appraisal-update.pdf

5 Para 12, BIS, Consumer Bill of Rights, Proposals on Services, Impact Assessment

6 Mott McDonald, Analysis of ADR adjudications, May 2011

Prepared 20th December 2013