Draft Virgin Media Response to Ofcom’s CFI on consumer ... · reviews have concluded that...

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Virgin Media Response to Ofcom’s CFI on consumer switching

NON-CONFIDENTIAL VERSION

Executive Summary

1.1. Virgin Media welcomes the opportunity to respond to Ofcom’s Call for Inputs. We share

Ofcom’s objective of ensuring that switching works well for consumers. We agree that it is

prudent to ask first whether consumers who are switching are experiencing problems that

might justify allocating Ofcom’s resources in a future policy project, before starting any

further work.

1.2. Virgin Media particularly appreciates Ofcom’s decision to take a consultative and open

approach as it considers whether to undertake further work in consumer switching. Virgin

Media considers that the proposed direction of that work, as set out in the CFI, is such that

active engagement with stakeholders is vital.

1.3. We acknowledge the extensive work undertaken by Ofcom in addressing switching difficulties

on the Openreach network, culminating in the imposition of an enhanced Gaining Provider

Led (‘GPL’) process. These rules were introduced in response to market failures specific to the

Openreach network, problems that stem in part from its former monopoly status and long

history as a source of significant market power for BT. And of course Ofcom has also

implemented effective number portability arrangements for both fixed and mobile numbers

(as required under EU law).

1.4. However, the CFI – and some of Ofcom’s public statements – seem to contemplate a far more

ambitious role for regulation than addressing issues of market power and implementing the

requirements of the Framework Directive. At times, we are concerned that Ofcom appears to

adopt the position that Gaining Provider Led (’GPL’) switching should be the default model

across all networks and services. The basis for this seems largely to be a ‘policy preference’,

rather than robust evidence of a specific problem. Alone, this is not a sound basis for

intervention and would very likely lead to negative outcomes for consumers. Moreover, it

would be wholly inconsistent with Ofcom’s regulatory principles and duties.

1.5. The CFI provides an opportunity for Ofcom to re-think its approach, and to take stock of the

evidence. Virgin Media’s experience and Ofcom’s own analysis supports our view that there is

no major problem observed when switching between platforms in general (specifically,

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switching to and from the cable network works effectively, and switching between mobile

platforms works effectively). As well as setting out our views, this submission provides

relevant new evidence to assist Ofcom’s assessment – including commercial evidence from

our customers directly and performance assessment data from our business.

1.6. Each year, [CONFIDENTIAL] customers switch from the cable network, and [CONFIDENTIAL]

customers join the cable network.1 Ofcom’s own evidence is that most of these consumers

have no problems and find the process easy. Reported customer satisfaction amongst those

who have used the process has been rising steadily for a number of years. Ofcom’s market

reviews have concluded that competition in the UK fixed and mobile retail markets is

effective. And switches involving alternative platforms are less, not more likely, to generate

complaints about switching than the Openreach network – and this is particularly true of the

cable network.2

1.7. Based on this evidence, Virgin Media considers that the current processes applicable to

switching between platforms are functioning well and empower consumers to exercise choice

in a way that enables effective competition.

1.8. We are also concerned that Ofcom does not appear to recognise the risk to consumers of

regulatory failure. Operators such as Virgin Media can only make efficient investment

decisions, such as network expansion, against the backdrop of a consistent and predictable

regulatory regime.3 An important part of that regime is Ofcom’s own regulatory principles,

that have formed the bedrock of its approach for a decade, during which time they have

proved to be effective and workable tools to ensure that regulation is only applied where it is

needed. Any departure by Ofcom from ‘a bias against intervention’ or failing to ensure

intervention is based only on proven cases of market failure is likely to have a dampening

effect on investment and a consequential direct negative impact on innovation and

competition.

1.9. This submission also addresses some more detailed points and sets out answers to each of

Ofcom’s questions, with supporting evidence. We explain how and why switching between

services hosted on a single former monopoly platform is different to switching between

competitive platforms. On a single platform, there is the ability for providers to exclude each

other; the losing provider’s service must stop so that the gaining provider’s service can

commence. This shapes the relationship between providers and consumers, shifting the

balance of power away from the consumer and creating the case for regulatory intervention.

When switching between platforms, this is not the case. This simple, but profound, difference

is the most important reason why the policy rationale for regulating switching on the

Openreach network and in relation to number portability is a special case, not a general

theory that leads to regulating all switches.

1.10. Seen in this light, a general categorisation of switching between platforms as ‘cease and re-

provide’ overlooks the important – and necessary - distinctions between them. Some follow

1 [CONFIDENTIAL]

2 In this regard, Virgin Media notes that it is the least likely provider to be subject of a complaint to Ofcom (See

Ofcom Complaints Data Jan-May 2014, available at www.ofcom.org.uk) 3[CONFIDENTIAL]

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switching ‘processes’ that might be analogous to existing regulated processes; in other cases

no ‘process’ as such is required at all.

1.11. A better approach would be to distinguish switches by those that are:

(a) Provider-led switches. These are switches that occur in circumstances where two

providers must necessarily coordinate in order to effect the switch. The best-

characterised examples are in relation to intra-platform competition (where the losing

provider has the ability and the incentive to prevent commencement of a new service

by the gaining provider) and in relation to number portability (where the same issue

arises, with control of the number serving as the strategic mechanism of control rather

than control of the line). Provider-led switches can be further classified into GPL and LPL

systems (as already established in Ofcom’s thinking).

(b) Consumer-led switches. These are switches that occur between platforms. In consumer-

led switches, the establishing of a new service is not dependent upon the termination of

an existing service. Of course, to the extent that the old and the new service are close

substitutes in the eyes of the consumer, it may be desirable that their timing is

coordinated, but it is not a fundamental requirement. Consumers may have good

reasons for wanting a gap in service in some circumstances (e.g. purchasing a new pre-

paid mobile service) and in other cases may want to have two services running

concurrently (for example, to ensure that a new service is up and running satisfactorily

before agreeing to end an existing service).

1.12. It is harder to generalise about consumer-led switching than provider-led switching because

consumer-led switching is a diverse and complex set of activities that individual consumers

opt to undertake, generally in markets that are competitive.

1.13. Virgin Media is well-placed to share its experience of competitive markets and processes with

Ofcom, since [CONFIDENTIAL] as well as being a major fixed network operator.

[CONFIDENTIAL]

1.14. We also question whether Ofcom’s time and resources are well-spent on considering

switching between providers offering bundles, when such offers are relatively new, no formal

assessment of competitive conditions has been undertaken and where it has not been proved

that any perceived problems cannot be resolved through competition.

1.15. While we see no evidence of major problems requiring regulation of switching, there may be

an opportunity to improve the coordination of services in platform switching where a

customer receives a new service to replace an existing one. We are open to engaging in

discussions with other providers to explore opportunities for improvements. However, there

is also a need to ensure that the competitive nature of the market is not damaged. The

provision of bundled services in particular is relatively new and this nascent commercial

environment is highly competitive.4 There is no reason to conclude that competition will not

continue to drive better outcomes for consumers, achieving the laudable outcomes Ofcom

identifies in the CFI.

4 [CONFIDENTIAL]

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1.16. Our most significant concern is the broad-brush approach that the CFI takes to the question of

whether regulation ought to be introduced. The CFI implies that Ofcom’s view is that

regulation might be used to govern switching, not to deal with a specific problem (where no

other more proportionate response is possible) but to effect a desire to ‘improve outcomes’.

This is inconsistent with Ofcom’s statutory duties including the requirement that regulation be

‘targeted only at cases in which action is needed’.5

1.17. Competition, and not regulation, is the process that has, and will continue to, improve

outcomes for consumers in UK communications markets. The role of regulation is to act where

competition is not working, not to drive the delivery of services or to control every process.

1.18. We would welcome the chance to meet with the Ofcom project team to discuss the issues and

evidence in this submission.

5 Communications Act, section 3(3).

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2. Introduction

Ofcom’s task in assessing how to proceed is to ask: is there a problem?

2.1. This is the task Ofcom set for itself in the CFI process:

Fixed-line voice, fixed broadband, Pay TV and mobile voice and data services account for

the majority of expenditure on communications markets and services. Therefore we want

to understand whether switching processes are working well for consumers in these

areas, or whether there are problems which negatively affect consumer experiences or

competition.6

2.2. We agree with Ofcom that this is the critical question: Is switching working well – and if not,

what are the specific problems that the evidence reveals? This seems to us to be precisely the

right question for Ofcom to ask itself, and to consult with stakeholders.

2.3. Implicit in this approach is that the consideration of the role and applicability of regulation

falls to a later stage. As Ofcom put it in the CFI:

To the extent we consider that any further regulatory action is warranted, we will identify

the most appropriate powers to use, noting that we have a variety of powers to address

both consumer protection and competition issues. We will make this assessment in light

of the evidence before us at the time.

2.4. This focus on identifying problems seems a reasonable and efficient way for Ofcom to

approach this project.

2.5. However, in other respects the CFI takes a more expansive tone that suggests regulation

should be used liberally, even as a matter of course, in relation to switching processes. We do

not agree with this approach, nor do we see it as consistent with Ofcom’s duties. It is self-

evident that regulation can carry risks and costs, as well as benefits. Not all problems that

might arise are likely to be suitable for a regulatory response. Each service (fixed voice,

mobile, etc) has highly specific issues and concerns, and Ofcom’s effort to understand the

common features of these switching processes sometimes appears to gloss over the

important differences between them and the need to deal with each of them on their specific

facts. The statutory framework makes it clear that regulation is a tool to be used as necessary

to deal with specific problems where they arise, provided the benefits of intervening can be

demonstrated to outweigh the costs.

2.6. When asking (as Ofcom does) ‘is there a problem?’ it is also often helpful to have a clear

picture in mind of what the absence of a problem would look like.

2.7. In principle, a regulator could seek to intervene in a market where it sees anything less than a

perfect outcome for consumers. However, it should be obvious that this is the wrong

approach and highly likely to increase the risk of regulatory error (of the ‘false-positive’ kind –

that is, seeing problems everywhere). Put another way, it will be possible to see some room

for improvement in almost any outcome.

6 Emphasis added.

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2.8. Therefore Ofcom should not ask itself, ‘could the status quo be improved?’ since the answer

will always likely to be ‘yes’ – rendering the enquiry meaningless. We assume it is

uncontroversial that Ofcom would not want to adopt such an approach (and in any event, it

would be inconsistent with Ofcom’s statutory duties and regulatory principles to do so). An

‘evidence based’ approach requires an objective justification that includes a clear statement

of the problem and the need for intervention before regulation is contemplated. Even when

regulation seems necessary, it is essential that Ofcom adopts the least intrusive and therefore

most proportionate regulatory approach to achieve a defined objective.

2.9. This is particularly important in competitive markets, since competition is a process which

involves patterns of market behaviour arising spontaneously through the interactions of

buyers and sellers – in simple terms, healthy competitive markets are rarely characterised by

smooth, orderly data demonstrating an ‘optimal’ outcome and often regulators must make

their assessment of what is happening in a complex market based on a sample or subset of

imperfect information.

2.10. Similarly, while it is useful that Ofcom use engaging and accessible language and frame its

questions in open ways, the idea that switching should ‘work well’ for consumers is not a

sufficient yardstick. In terms of transparency, it would be better to adopt a practical definition

of ‘working well’ that is that there are no specific identified problems.

2.11. One of the most effective aspects of the CFI, and one that Virgin Media supports, is that

Ofcom has been clear about the set of problems it is interested in looking at in more detail. By

setting out these problems in explicit terms, Ofcom provides an objective benchmark against

which the performance of different processes can be considered.

2.12. Virgin Media’s views on the relevance of these specific problems are set out in our response

to Ofcom’s consultation questions.

2.13. Virgin Media’s answers to Ofcom’s four questions are set out in section 2 below. The rest of

this section 1 deals with four over-arching points:

(a) The role of regulation in competitive markets and the need to ensure that regulatory

interventions are only contemplated where there is a specific and identified market

failure;

(b) The value of drawing on principles relating to switching that have been developed in,

for example, competition and consumer law, to inform Ofcom’s approach;

(c) Whether the time is right for a re-consideration of Ofcom’s ‘greenfields preference’ for

GPL switching (or at least the scope of its applicability). This preference may be better

suited as a principle to adopt in cases where the role of the regulator is to design the

switching process, but may not be appropriate in cases where the role of the regulator

is to intervene in the switching process only where problems arise; and

(d) Whether Ofcom might usefully identify some prioritisation principles that could inform

its approach (and aid transparency) as it considers how to proceed.

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Regulatory interventions should be reserved for cases of market failure

2.14. Virgin Media acknowledges the considerable work that has been undertaken by both Ofcom

and industry players in addressing the switching difficulties that many customers experienced

in respect of services delivered over the Openreach network. The work led by Ofcom in

tackling these problems since 2010 culminated in Ofcom’s final statement on consumer

switching published on 20 December 2013 which prescribed a move to what Ofcom termed

the Enhanced GPL NoT+ solution (“Enhanced GPL NoT+ Rules”).

2.15. These prescriptive rules were formulated in response to market failures specific to the

Openreach network and derive from circumstances which existed because of that network’s

former status as a monopoly. The Enhanced GPL NoT+ Rules were tailored specifically for that

situation and are thus likely to be entirely unsuited to switching between platforms or to

switching in markets which are effectively competitive without the need for access

regulation.7

2.16. As evidenced by the data set out in the rest of this submission – particularly the evidence

concerning customer complaints to Ofcom, customer satisfaction amongst switching

customers and overall levels of switching - switching between fixed platforms in particular

does not appear to suffer from any specific ‘market failure’ that would warrant regulation by

Ofcom. Industry processes have been developed over time to deal with the myriad challenges

associated with the delivery of services to millions of consumers and the evidence suggests

these processes are working well.

2.17. In any event, because regulators are not experts in process design, the risks of unintended

consequences and harm to competition are significant. Accordingly, even to the extent there

are any issues identified in current practices, in accordance with Ofcom’s principles, a cautious

approach is appropriate. The logical first port of call would be to clearly set out the issues and

then look to industry to resolve the issues through working groups (with Ofcom perhaps

performing a facilitating role).

2.18. When considering whether there are market failures in platform switching, Ofcom’s starting

point should be its own extensive understanding of these markets. Ofcom has consistently

found that the UK fixed communications markets works well for consumers, with wide

availability of services provided in an intensely competitive market driving lower prices, higher

quality, higher levels of satisfaction, higher levels of successful and easier switching and a

market that Ofcom described in the following terms:

… consumers in the UK are benefiting from one of the world's most price competitive

marketplaces for communications services.

Telecoms bills have been falling in real terms for the past ten years. However, consumers

are not just benefiting from cheaper deals - they are also getting much more for less, as

the quality and range of telecoms services has expanded hugely in that time. 8

7 For example, those processes are premised on Ofcom regulating the role that is already being played by

Openreach in managing and coordinating the transfer process. In consumer-led switches, there is no single operator who is in a position to control the consumers’ journey from beginning to end. 8 Ofcom ICMR 2013 press release.

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2.19. Ofcom’s research has established that UK consumers see greater benefits from lower-priced

communications services than consumers in other major European countries and the US.

Compared to French, German, Italian, Spanish and US consumers, Ofcom considers that those

in the UK can take advantage of consistently cheaper access to mobile phone, landline

telephone and broadband deals.9

2.20. Rather than evidence of a problem, or ambiguity about whether the market is working well,

the evidence of the UK is unequivocal that switching does work effectively and consumers can

exercise choice and ‘vote with their feet’. For example, the reasons given for switching by UK

consumers are precisely those which indicate healthy competition: first (by a wide margin) is

cost; second is poor service and third is the convenience of grouping different services into a

bundle.

2.21. Nor is there any evidence that difficulties in switching are impeding the effective operation of

the market – in fact, the vast majority of consumers who have switched, across all platforms

have consistently reported that it was easy to do so:

9 Ibid

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2.22. Of course, Virgin Media believes that the sector can and should do more to assist the small

minority (around 1 in 8) consumers who report that they find switching difficult.10 But Ofcom

has advanced no particular case for switching being a feature of this market that is not

working well – and from a competition policy perspective, all that is required to ensure vibrant

and effective competition is that a proportion of consumers are prepared to switch. Providers

will then have strong incentives to improve market outcomes for all consumers, since their

profitability is generally driven by their ability to attract new customers.

2.23. In Ofcom’s own analysis there is no lack of competitive pressure in the UK fixed or mobile

consumer communications markets. In those markets, there is scope for successful small

providers to grow, for large established providers to be successfully challenged for market

share and for innovations to spread quickly and be adopted rapidly.

2.24. As is set out in more detail in response to Ofcom’s questions, Virgin Media considers that

there are crucial differences between switching on the OR network and other forms of

switching:

(a) The forms of switching now under consideration (particularly switching between

networks or ‘platform switching’) are essentially consumer-led (an arrangement termed

‘cease and re-provide’ in Ofcom’s terminology (“C&R”)). The customer liaises with both

the gaining and losing providers to arrange to stop their old service (if they wish to) and

establish their new service;

(b) Furthermore, as both services can be provided to the customer concurrently, the same

need that arises in ‘substitutional switching’ (the sort of switching that applies on the

10

[CONFIDENTIAL]

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Openreach network, or when a number is ported) to ensure that one service ends so

that another can begin does not apply.

2.25. Of course, some consumers do want to achieve a ‘straight swap’ of one service for another,

and in those cases, as in any competitive market, there are strong incentives on the sector to

ensure that the customer experience is improved to win an increasing share of the market.

The provision of bundles is in particular is relatively new but highly competitive and there is

every reason to believe that commercial pressures in this nascent environment will continue

to improve the consumer experience.

(a) [CONFIDENTIAL]11

2.26. [CONFIDENTIAL].

2.27. Seen against this evidence, our most significant concern is the broad-brush approach that the

CFI takes to the question of whether regulation ought to be introduced, and the notion that

regulation might be deployed, not to deal with a specific problem but based on a vague desire

to ‘improve outcomes’. Ofcom needs to be clear whether regulation should be extended and

on what grounds. Ofcom has acknowledged that the bias against intervention means that

there is a ‘high hurdle’ to overcome before Ofcom can intervene and that it must ‘choose the

least intrusive means of achieving our objectives, recognising the potential for regulation to

reduce competition’.12 It is not clear that the CFI identifies what the problem is and on what

basis Ofcom proposes to intervene.

Ofcom’s approach to identifying problems should draw on established principles in

competition and consumer law

2.28. Equally, when considering the information that is submitted in response to the CFI, Ofcom will

be faced with a range of stakeholders with a range of concerns. Distilling out the issues that

are true candidate market failures from these submissions may be challenging.

2.29. Two important frameworks that Ofcom could draw on are:

(a) in relation to competition issues, Ofcom can and should apply economic principles

consistent with competition law; and

(b) in relation to consumer protection, Ofcom should apply approaches that are already

established under consumer law.

2.30. In relation to competition law, there is an extensive literature and body of case law dealing

with questions of foreclosure and switching issues – including not only under the ex post

regime but also under regulatory and quasi-regulatory processes (such as the market

11

[CONFIDENTIAL] 12

Ofcom’s Impact Assessment Guidelines, at paragraph 1.1

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investigation process).13 Ofcom could draw on these sources to help provide context to the

position in the communications sector.

2.31. In relation to consumer protection, there is equally a body of learning related to unfair or

exploitative practices that have arisen across different sectors that may be useful for Ofcom to

consider in order to understand whether there is scope to draw on that experience in

communications markets.14

2.32. If Ofcom does identify specific problems in relation to switching, analysing them through the

framework of existing competition law and consumer law tools will provide Ofcom with an

important insight into whether regulation might be appropriate. Ofcom has statutory

obligations to explore the use of its more general powers under a range of circumstances, but

that is not the only reason – analysing the comparative concerns of switching in relation to

communications and, say, other markets with similar characteristics (such as retail banking or

energy markets) can provide Ofcom with a greater insight into whether the problems that

Ofcom perceives would be considered to be material in other sectors, or whether Ofcom is

raising concerns that would be below the threshold of concern or immaterial in another

context.

Ofcom’s ‘greenfields preference’ for GPL switching processes

2.33. Ofcom has repeatedly expressed a preference for gaining provider led (GPL) processes on a

‘greenfields’ basis (that is, without considering the question of implementation costs).

2.34. In the CFI, Ofcom noted that:

2.3 Our September 2010 consultation (section 6) assessed these three switching models

on a ‘greenfield’ basis. We considered that GPL processes should be preferred for a

number of reasons. We noted that the GP has a naturally greater incentive to facilitate

the switching process than the LP, and that the process, with its one touch point, is easier

for consumers. We considered that GPL processes can be expected to lead to lower

switching costs than other processes, and in turn may support more vigorous competition.

2.4 Furthermore, we considered that LPL processes can facilitate ‘reactive save’ activity in

which LPs are, by virtue of the switching process, able to identify and target customers

who are switching away and make them a save offer not to switch. We considered that

this can in certain circumstances cause harm to consumers, and risks dampening

competition across the market.

2.5 We noted that GPL processes have some weaknesses compared to LPL processes. In

particular, since the process is led by one provider, with less upfront validation of consent

compared to other processes, there is a greater risk of switching occurring without the

consumer’s consent (often called ‘slamming’). We nevertheless noted that in our view GPL

weaknesses could be addressed through modifications to the GPL process. We thought

13

See, for example, the Competition Commission’s Market investigation into supply of bulk liquefied petroleum gas for domestic use (26 June 2006) and Statutory audit services for large companies market investigation (15 October 2013) – both of which involved setting remedies dealing with switching. It would also be relevant to consider the work undertaken in relation to switching in retail banking by the FSA/FCA. 14

See, for example, the OFT’s guidance on unfair contract terms, now adopted by the CMA (https://www.gov.uk/government/publications/unfair-contract-terms-guidance--2)

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that this could be done more easily than addressing the weaknesses associated with other

processes.

2.35. In the four years since it first unveiled its preference, Ofcom has not had cause to revisit or

reconsider the basic principles informing that position or to qualify how and why it might

affect Ofcom’s thinking on switching issues.

2.36. Re-examining Ofcom’s framework for analysis (as set out in the 2010 consultation where

Ofcom first consulted on the GPL preference) it seems clear that this framework was adopted

to consider the application of a GPL vs LPL process where Ofcom is deciding about the design

of an entire switching process. The 2010 consultation explains Ofcom’s view (as it was then)

of the relevant principles that Ofcom would apply in designing such a system. These are the

principles that apply when Ofcom is a ‘choice architect’ – that is, Ofcom itself is responsible for

framing the options and processes that consumers encounter.15

2.37. These are not necessarily the principles that would (or should) be adopted by industry if it

were to design arrangements to deal with consumers leaving or joining a network. The

objectives Ofcom identifies are set by reference to Ofcom’s statutory objectives; the choice

that Ofcom describes is Ofcom’s own assessment of what it would prefer to be the design of

the switching process.16 The modifications that it discusses to various options are changes to

existing regulatory rules.17

2.38. This illustrates that Ofcom’s GPL preference is not likely to be relevant in any case involving

consumer-led switching. In fact, the GPL preference is only likely to be relevant (if it is at all) in

a relatively narrowly defined scenario, which is where Ofcom has a statutory role to regulate

an entire switching process. The only relevant examples of such a responsibility of which

Virgin Media is aware in the UK regime are:

(a) In relation to services provided on an SMP network, where Ofcom’s involvement flows

from its role in setting and implementing conditions to address SMP. Regulating certain

forms of switching on the Openreach network might be said to fall under this category;

and

(b) In relation to number portability.18

2.39. Ofcom has no such general role in relation to any other switching activity, and to assume that

it does (in combination with the GPL preference) is to commit an error of law: taking the view,

in effect, that all such processes should be regulated. The correct view is that, in relation to

15

The concept of a ‘choice architect’ comes from Richard H Thaler and Cass R Sunstein in their influential book on public policy design, Nudge. 16

Compare for example, the principles that might apply in terms of cost recovery in a commercial setting with the approach that Ofcom proposes to be the ideal in paragraph 6.41. Ofcom notes ‘the need to recover switching costs between providers according to a charging mechanism that leads to switching charges that are objectively justifiable, proportionate, non-discriminatory and transparent, and that are likely to contribute to efficient switching processes and effective competition.’ These are laudable sentiments (and some may be relevant to the consideration of some commercial actors in some contexts), but expressed in this way, are self-evidently drawn entirely from Ofcom’s statutory framework. 17

See, for example, paragraph 6.61 of the 2010 consultation. 18

Universal Service Directive, Article 30.

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other switching issues, Ofcom’s role is focused on intervention only in those cases where

action is needed. Unless there is a problem, there is no basis for Ofcom to act.

2.40. This means that it is important for Ofcom to proceed cautiously in applying the GPL

preference in any analysis of switching outside the confines of ‘SMP switching’ and number

portability.19

Ofcom should consider applying prioritisation principles

2.41. The core question asked by the CFI is: what next? In seeking an answer, Ofcom should adopt

an approach that is transparent, objectively justified and enables Ofcom to assure itself that it

is acting in a proportionate way.

2.42. One way to help achieve that objective would be to adopt a framework or principles that

might be applied in deciding how to prioritise different projects.

2.43. The Competition and Markets Authority recently published its ‘CMA Prioritisation Principles’,

which provide a useful reference point to Ofcom (in keeping with the recent desire to

strengthen inter-agency co-operation and the role of the CMA as the custodian of good

practice amongst the regulators). The CMA has indicated that the principles below will be

used as its guidance when deciding which cases to take:

A. Impact

3.1 What would be the likely direct effect on consumer welfare in the market or sector

where the intervention takes place? Consumer welfare includes better value for

consumers in terms of price, quality, range or service, both static and dynamic, and may

also include non-financial detriment such as the avoidance of physical harm or emotional

distress. We may prioritise work because the direct effects would specifically benefit

disadvantaged consumers.

3.2 What would be the likely indirect effect on consumer welfare? This principle captures

further improvement to consumer welfare and consumer confidence that results from

changes in consumer, business or government behaviour which is prompted by the CMA’s

action. It thus captures deterrence and improved awareness for consumers, business and

government.

3.3 What would be the expected additional economic impact on efficiency, productivity

and the wider economy? This captures whether, as a result of our actions, efficiency

would be expected to increase or growth be encouraged in a particular sector or across

the economy.

B. Strategic significance

3.4 Does the work fit with the CMA’s strategy and/or with other CMA objectives? This will

include whether there are elements of strategic significance of the work that are

additional to impact. The CMA will periodically review and publish its strategy in line with

19

This does not mean that Virgin Media’s concerns with the GPL preference are limited to its application in areas in scope of the CFI. We have some more fundamental concerns - for example, Ofcom’s reasoning in forming the GPL preference relies on a view of reactive save that is not based on robust economic arguments and fails to establish clear evidence of consumer harm.

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its overall ambition of being consistently one of the leading competition and consumer

agencies in the world.

3.5 Is the CMA best placed to act? Alternatives to CMA action could include:

• private enforcement

• action by CMA partners such as members of the Consumer Protection Partnership or

the UK Competition Network, other UK regulators or law enforcement bodies, or the

European Commission

• market developments, self-regulation, or new UK or EU regulatory or legislative

developments.

3.6 What would be the impact of the new work on the balance of the CMA’s current

portfolio of work?

C. Risks

3.7 What is the likelihood of a successful outcome?

D. Resources

3.8 What are the resource implications of doing the work? This includes:

• whether the resource requirements of the work are proportionate to the benefits

from doing the work

• the period over which the resources will be needed

• any savings created for the CMA by enabling us to meet our objectives more

efficiently.20

2.44. A framework of this type cannot be applied mechanically, and like the CMA, Ofcom will also

wish retain a strong degree of discretion and judgement about where to focus its efforts.21

Some elements are set; Ofcom has been clear that it wishes to devote resources to

considering switching issues in general, and that this is a strategic priority for the

organisation.22 There is no need for the CFI process to duplicate those established positions.

2.45. But it would be useful to adopt a more systematic method for assessing the relative priority of

the services in scope – and to link that to Ofcom’s duties. For example, a preliminary view

about the possible consumer impact of any intervention would be useful, together with a

high-level view on possible costs. Ofcom has experience of developing and applying this type

of framework (in relation to its enforcement activity, for example), and that expertise could

20

CMA Prioritisation Principles, section 3. 21

The CMA notes, for example, that 'We will not apply the principles in a mechanical way: judgement and a reasoned balancing exercise are required for each case which necessitates that we consider the principles in the round and on a case-by-case basis. Where appropriate, we may also consider other relevant factors. In other words, prioritisation will not take place in isolation but will always be a relative question which necessitates considerations of the CMA’s overall portfolio and resources available at that time.’ (CMA PP, paragraph 2.2). 22

See, for example, Ofcom’s Annual Plan 2014-15.

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usefully be brought to bear to ensure that Ofcom is proceeding in a way that best matches the

use of its resources to its statutory and established priorities.23

23

See, for example, Ofcom’s Enforcement Guidelines, at section 4.13.

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3. Answers to Ofcom’s consultation questions

3.1. Virgin Media has split its answer to the two questions in Q1 into separate sections, as they

raise quite different issues.

Q.1A Do you agree with our characterisation of the switching processes and practices

for the networks and services in scope for this phase of work?

3.2. Virgin Media has further split its response to Ofcom’s question about its ‘characterisation of

the switching processes and practices for the networks and services in scope for the this phase

of work’ to deal with the following issues separately:

(a) The services that Ofcom has identified as falling within the scope of the CFI (the first

Table 1 on page 6);

(b) Ofcom’s decision not to include switches involving ‘minor’ platforms (paragraph 3.2 and

the first Table 1 on page 6); and

(c) Ofcom’s classification of switches into GPL, LPL and C&R as discussed in paragraph 2.2

and Ofcom’s identification of the different types of switches that apply in different fixed

networks (the second Table 1 on page 9).

3.3. Each of these issues is dealt with separately below.

Services in scope – is there any underlying logic?

3.4. Ofcom identifies three sets of services as being in scope, as set out below:

3.5. These processes have widely divergent characteristics (in terms of Ofcom’s project):

(a) The delivery of fixed voice and broadband services within the KCOM network bears

some obvious and close similarities to the Openreach network.24 It seems likely to

involve Ofcom in questions of proportionality in relation to a relatively small platform;

(b) Consideration of ‘fixed service bundles’ spans services inside, and outside, the European

Framework. Any new regulation of ‘bundles’ would be an expansion of regulation into a

fiercely competitive market and raise complex questions of jurisdiction. The market is

24

Virgin Media makes no submissions on the substantive questions relating to that platform.

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moving quickly and has changed a great deal in the past few years, and seems set to

continue to evolve, bringing challenges in terms of keeping Ofcom’s view up-to-date

and sufficiently current to enable any meaningful conclusions to be drawn at this early

stage;

(c) Mobile number portability is an area that clearly does fall within Ofcom’s jurisdiction –

the question being whether there is a pressing need to revise rules that are operating

broadly effectively and in line with Ofcom’s obligations to implement the European

Framework; and

(d) ‘Switching’ in the mobile market without any number portability feels like it may have

been included for completeness – as far as Virgin Media is aware, Ofcom has not

previously evinced any concerns about this area beyond the need for consumer

protection in relation to mis-selling (which Ofcom addressed in 2009).25 As discussed

below, this description is ambiguous and could be read as including much activity that

does not involve switching in the classic sense, since many consumers have multiple

devices, including in their private and employed capacities, or for different purposes,

and so only a sub-set (possibly even a minority) of customer acquisitions will be

‘switches’ in the sense it is normally understood.

3.6. Virgin Media makes no submission on whether Ofcom should examine switches on the KCOM

copper network.

3.7. The bundling of fixed voice, broadband and pay TV provided over fixed networks is a

significant development that has enabled millions of consumers to simplify their billing,

consolidate their accounts and to reduce their overall expenditure on fixed services, as

evidenced by Ofcom’s own research as set out below. Within the fixed communications

market, there are high levels of switching and customer movement between platforms. There

are no barriers to engagement (those consumers who opt to be active are able to do so) and,

reflecting this empowered environment, consumers are increasingly focused on value.26

3.8. Customers have never been more demanding in seeking providers who can meet their needs,

and they have never been more empowered to share their good experiences and to punish

brands that let them down. Ofcom advances no evidence in the CFI that bundling of itself

brings with it any specific problems or issues that demand that switching between bundles

requires a regulatory response.

3.9. Here is Ofcom’s own evaluation, in January 2014, about competition and choice in the market

for bundled services. Ofcom’s assessment was that, if anything, the area of concern is the

remaining stand-alone services, particularly voice:

1.24 Bundling of services continues to be a feature of the communications sector. Over

half (60%) of consumers now buy at least some of their services as a bundle. Recent

pricing analysis suggests that bundling plays a key role in ensuring that consumers

obtain a better deal for their household’s communications services.

25

See Ofcom’s Mobile Mis-selling Statement, 17 March 2009 (http://stakeholders.ofcom.org.uk/consultations/mobmisselling/statement/) 26

See, for example, Ofcom’s market analysis about the falling price of a basket of communications services, with the period of the economic downturn producing increased pressure on prices (and margins).

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[…]

1.26 This evaluation report generally reflects positive indicators about the level of choice

and value for consumers. As noted in the section on availability, consumers continue to

enjoy high levels of choice in telecommunications markets. Overall, indicators are

consistent with good value, as the average UK household spend on communication

services fell in real terms. There was an increase in household communications spend on

fixed internet services mainly as a result of growth in household take-up of fixed

broadband services and consumers switching to superfast services (with a headline speed

of ‘up to’ 30Mbit/s or higher).

1.27 However, we have observed a rising trend in fixed-line telephony prices when they

are purchased on a standalone basis (i.e. not as part of a bundled package). Consumers

are able to mitigate price rises to some extent by purchasing communications services

in bundles and/or opting for line rental pre-payment.27

3.10. We emphasise that this is the outcome of Ofcom’s own research.

3.11. One area of particularly intense competition has been in the commercial innovations

associated with bundled offers. Bundles have grown not because providers have imposed

them - they could not do so - but because individual consumers, in ever increasing numbers,

choose the convenience and simplicity of taking a bundle of services (as well as, for example,

other services such as Netflix). When switching, as millions of consumers have done in the

past few years, consumers mostly choose their new provider on the basis of the bundled offer.

As a result, intense competition has developed around the bundle offer, and providers do all

they can to ensure that their bundles are viewed by consumers as good value and high quality

offers.

3.12. Even aside from the issue of whether Ofcom has a general role to intervene in consumer-led

switching, the question of whether it is sensible to devote time and effort to a consideration

of switching between communications providers offering bundles would require Ofcom to

consider questions such as:

(a) Is there a problem evident with the way that consumers are being served?

(b) What is the nature of the problem? Is it related to competition? If so, that seems more

prudently dealt with through the framework of a market review.

(c) Is it a question of consumer protection? Virgin Media is not aware of specific concern

that has been raised – in fact, the opposite seems true: customers taking a triple-play

bundle are far less likely to be slammed than voice-only customers, for example.

(d) Is the market stable enough to consider intervention? Bundles are relatively new, and

take-up continues to grow, with patterns of consumption changing and some important

features of the market still in flux. To avoid premature action, in a nascent market, it

would be better to allow for issues to be resolved through the process of competition,

rather than assume that Ofcom must intervene.

27

Consumer Experience Report: Policy Evaluation Report, 24 January 2014 at paragraphs 1.24 – 1.27. Emphasis added.

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3.13. Currently, the only reason Ofcom have raised for wanting to consider regulating switches

involving bundles is that bundles have been very popular with consumers (which Ofcom

frames as their ‘importance’ to consumers):

3.8 Communications are increasingly purchased in ‘bundles’ of two or three services

offered by a single provider; at the start of 2014, around 63% of UK households take some

form of bundle. Just over a quarter (28%) of UK households take a fixed voice and

broadband service bundle; a further 23% take a bundle which also includes Pay TV (ie.

‘triple play’). About half of those switching fixed voice, and over half those switching

broadband services, also switched another service at the same time.

3.9 Given their importance, we plan to consider switching processes for bundles of fixed

voice, broadband and Pay TV (including triple play) provided over the Openreach, cable

and satellite platforms as part of the next stage of our work.

3.14. This ‘importance’ does not, by itself, seem a sufficiently compelling reason to trigger a process

(a major Ofcom project) that is likely to cost consumers, directly and indirectly, millions of

pounds and take several years to complete.28 It would be better to establish a clear problem

or problems in relation to bundle switches, and then consider whether a policy project might

be the right vehicle to address those problems. There is no need to regulate, and so the case

for regulation needs to be made, not assumed. For example, in relation to mobile, the market

has been left to evolve under competitive conditions without regulatory intervention in

switching (other than to ensure number portability). The result has been a high level of

switching, intense competition and relatively low levels of complaints (as indicated below).

Mobile is clearly ‘important’ to consumers, but it does not follow that time and money spent

considering regulation of that market would be well-spent, rather than being wasted.

Shifting the focus from fixed voice and broadband to include pay TV

3.15. The shift in Ofcom’s focus to include pay TV – setting to one side the jurisdictional question –

does not seem to be responding to a particular problem or issue linked to pay TV switching.

Pay TV complaints to Ofcom, for example, are significantly lower than fixed voice or

broadband complaints:

28

Consumers pay for Ofcom’s policy projects in three ways: Ofcom’s own costs (for example, the costs of the professional staff and consultants supporting the project) are charged in the form of administrative fees paid by communications providers (and hence, by customers); the increased costs to the sector of participation (for example, the internal and external costs of maintaining the teams who compile economic evidence or consultants’ reports on areas that Ofcom identifies as those it is (as the CFI puts it) ‘keen to understand’ and finally the opportunity cost of the harm that is suffered as a result of Ofcom expending time and effort that could more usefully be deployed elsewhere.

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3.16. This data suggest that Ofcom’s previous focus on fixed voice and broadband is the right one:

there is no obvious issue or problem relating to pay TV that is driving consumer complaints

relative to voice or broadband. (It is also striking that the level of complaints in relation to

mobile services is generally much lower than fixed communications services).

3.17. Ofcom asks in the CFI about the various problems that it has previously identified in consumer

switching on the Openreach platform and Virgin Media’s comments on those questions are

set out in the relevant answers below.

Shifting the focus from the Openreach platform to competing platforms

3.18. Similarly, the shift in focus from the Openreach network to consider switches between other

platforms does not seem to be driven by a specific concern that is arising in relation to those

platforms.

3.19. Ofcom’s own complaints data suggest that a focus on the Openreach network may be the

right one: alternative platforms are less likely, not more likely, to generate complaints –

particularly in relation to the cable network. While even a single consumer complaint is a call

to action to improve our services, Virgin Media is nonetheless pleased to be the least-likely

provider to be the subject of a complaint to Ofcom.29

3.20. The clear performance gap between the Openreach platform and its competitors can be seen

clearly in the data relating to fixed voice services:

29

Jan-May 14 complaints data, published in July and available at www.ofcom.org.uk.

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3.21. This trend – that the problems are more likely to arise on the Openreach network than other

networks – is even more pronounced in relation to broadband services, where consumers

served by the largest providers on the Openreach platform are roughly five times more likely

to complain to Ofcom than customers of either of the alternative platforms:

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3.22. And in relation to pay TV, the same pattern can be seen – with complaints about pay TV

services delivered over the Openreach network systematically higher than other platforms

since their launch. In fact, nearly one in every 10,000 customers of BT or TalkTalk’s pay TV

services calls Ofcom in any given month to complain about their service (rising to one in 4,000

customers in the month of August 2013).

3.23. This data is, of course, entirely consistent with Ofcom’s data on the quality of services in other

dimensions – particularly broadband speeds – which shows that the Virgin Media network

out-performs its rivals.30






3.29. This evidence is directly relevant to Ofcom’s consideration of the priority of any examination

of the cable network, since it goes to the question of whether there is sufficient evidence of

consumer harm – that is, of a problem – to warrant consumers bearing the costs of an

extensive policy project, and the risks to stifling investment and innovation associated with

over-regulation.

30

Ofcom’s Broadband Speeds research has consistently ranked Virgin Media as the highest-performing network in the UK.

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3.30. So, taken in the round, what does this data tell us? In relation to fixed services, it suggests that

it is the presence of alternative platforms (and specifically in fixed broadband, the presence of

the cable network) that is correlated to higher consumer satisfaction and better consumer

outcomes. It also strongly suggests that Ofcom’s focus on addressing the shortcomings of

service delivery over the Openreach platform is not arbitrary or accidental, but reflects a long-

standing performance gap between inter- and intra-platform competition. It is not therefore

possible to extrapolate from the problems identified on a single monopoly network to

assume, without further evidence of specific problems, that other competitive platforms and

networks should be regulated.

3.31. Reflecting on the history of regulation in the sector, it certainly suggests that any move by

Ofcom that imports the problems of the Openreach network onto other platforms is likely to

harm the interests of consumers. As discussed further below, Virgin Media’s customers are

protected from a number of dangers, such as slamming and erroneous transfers. They also

greatly benefit from having access to accurate information about implications of switching for

their other Virgin Media services.

3.32. To strip away the protection those consumers enjoy would harm their interests (and be the

opposite of what Ofcom’s power to regulate to protect consumers is intended to achieve). To

launch a policy project to consider doing precisely that, as the CFI seems to contemplate,

without a clear and identified problem to be tackled, does not seem to be consistent with

Ofcom’s duties.

GPL, LPL and C&R: what it reveals - and what it makes harder to see

3.33. Ofcom’s division of services into gaining provider-led, losing provider-led and ‘cease and re-

provide’ is not wrong of itself, but if it is overly-widely applied, carries a risk of limiting

Ofcom’s policy thinking. The diagram below illustrates Ofcom’s approach.31

3.34. At the time when this classification was devised, Ofcom’s focus was considering whether to

harmonize processes on the Openreach network and, specifically, the choice between GPL and

LPL.

3.35. The question of whether to choose GPL over LPL or vice versa is very important in some

contexts, such as services provided by a single underlying network, but it is less important

when dealing with situations that are currently unregulated and of little relevance at all in

circumstances where different platforms compete (and so there is not necessarily always a

‘losing’ provider).

31

See CFI, paragraph 2.2.

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3.36. The most important difference between inter-platform competition, and competition

between providers on a single platform is that when platforms compete, the losing provider

has no ability to prevent a new provider commencing service (even if they have the incentive

to do so). This simple, but profound, difference means that the policy rationale for intervening

to regulate switching in relation to services delivered over the Openreach network or in

relation to number portability is absent.

3.37. Currently, all switches arising as a result of competition between platforms are grouped by

Ofcom under the term ‘cease and re-provide’. This is something of an unhelpfully broad

category, since it does not describe what is happening, except in the crudest terms. This was a

reasonable approach in the context of Ofcom’s previous work, which was focused on the

choice between GPL and LPL in a provider-led system (i.e. the Openreach platform). However,

consumer-led systems need to be regrouped and delineated in a different way.

3.38. The scope of the CFI is largely concerned with different types of consumer-led switching (as

illustrated by Ofcom’s second Table 1 on page 9). Accordingly, now is the right time to re-

examine the label ‘cease and re-provide’ and see whether it still makes sense.

3.39. The first thing to note is that C&R is an extremely broad category that includes, for example:

(a) Consumers deciding to move from one platform (say, the Openreach platform) to

another platform (such as cable), in a classic ‘switch’ scenario: the consumer wants to

end one service and begin a new service that is a very close substitute that they take

instead. In the case of voice services, this switch may happen at the same time as

porting a number (which of course, is provider-led) or it may not.

(b) Consumers switching between services that are not close substitutes – for example,

moving from purchasing a pay-monthly mobile contract with a feature-phone and

upgrading to package that includes all of the previous elements but also a subsidised

smartphone and high-speed data connection and data package.

(c) Consumers deciding to take an additional service as well as their existing service (which

happens especially in TV and mobile services, where two or more handsets or devices

are a common choice, particularly as the device market grows more fragmented

between, for example, phones, tablets and other internet-enabled devices).

3.40. Seen in this light, grouping all these events together as ‘cease and re-provide’ masks the

important distinctions between them – and the fact that there is unlikely to be a single

‘unified theory’ that should guide the approach of regulators in relation to them. Some follow

switching ‘processes’ that might be analogous to existing regulated processes; in other cases,

there is no ‘process’ needed at all.

3.41. A better classification would be to divide switches into those that are:

(a) Provider-led switches. These are switches that occur in circumstances where two

providers must necessarily coordinate in order to achieve the switch. The best-

characterised examples are in relation to intra-platform competition (where the losing

provider has the ability and the incentive to prevent commencement of a new service

by the gaining provider) and in relation to number portability (where the same issue

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arises, with control of the number serving as the strategic mechanism of control rather

than control of the line). Provider-led switches can be further classified into GPL and LPL

systems (as already established in Ofcom’s thinking).

(b) Consumer-led switches. These are switches that occur between platforms. In

consumer-led switches, the establishing of a new service does not require that an old

service be ended, as a matter of technical necessity. Of course, to the extent that the

old and the new service are close substitutes in the eyes of the consumer, it may be

desirable that their timing is coordinated, but it is not a ‘showstopper’. Different

consumers may have different degrees of concern about managing the transition, with

some reasonably tolerant of a gap in service in some circumstances (buying a new pre-

paid mobile service, for example) and in other cases, prepared to pay for two services to

ensure that a new service is up and running satisfactorily before agreeing to end an

existing service.

3.42. This would then open up a discussion about the different characteristics of consumer-led

switching (some of which doesn’t look very much like ‘switching’ at all).32 It is harder to

generalise about consumer-led switching than provider-led switching because consumer-led

switching is a diverse and complex set of activities that individual consumers opt to undertake,

generally in markets that are fiercely competitive.

3.43. Although it pre-empts the debate to dive straight into the regulatory implications of getting

this classification right, it seems likely to Virgin Media that consumer-led switching is less

likely to lend itself to a single, over-arching intervention (which would involve the regulator

designing a process) when there is no necessity for a single ‘process’ that all switches follow.

Instead, it is likely to involve the application of general principles and any intervention only on

a case-by-case basis where there is a clear need to do so (and perhaps using a range of

powers, including general competition law and consumer law enforcement powers).

3.44. In unregulated provider-led switching, Ofcom’s view is that the consumer often ends up

losing, because regardless of whether the losing or the gaining provider has the upper hand,

they each have a set of incentives that may not align with the consumer. GPL and LPL

represent extreme positions where one provider or the other is fully in control of the switch.

Ofcom’s work in provider-led switching is generally to ameliorate the potential abuse by a

provider (gaining or losing) of their position of strength with respect to the customer:

(a) Unscrupulous gaining providers have an itchy trigger finger, and need to be pushed to

ensure that the consumer has in fact made an informed decision to switch, and

understands the consequences – for example, any early termination fee payable -

before initiating a transfer. In these cases, Ofcom is intervening to require more

disclosure to consumers pondering a switch, more robust validation of transfers,

awareness of the consequences of transferring and protection against slamming.

32

For example, a consumer purchased a new tablet and buys a mobile data connection for that device. The consumer faces a competitive choice of provider, and the option of number portability. Is this a ‘switch’? It does not appear to be, in Ofcom’s terminology. Now imagine the consumer bought the device under a pay monthly contract and has recently left the contract and so is buying that connection with an intention of ending another contract – is that a switch? It would appear that it is. But what is the difference? The choices, processes and outcomes facing the consumer are all identical. Would Ofcom anticipate regulating one and not the other? If so, why? And if they had a similar device a year ago – is it still ‘switching’? And so on.

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(b) Unscrupulous losing providers drag their heels, and often have an incentive to draw out

the transfer process or simply refuse to carry out the switch. In these cases, Ofcom is

generally intervening to ensure faster cooperation between operators, or ensuring that

there are no obstacles (such as refusal to provide a code to enable a port to be carried

out) that could thwart the consumer’s desire to switch.

3.45. As a result of these two issues, in provider-led switching, the generally-observed result –

widely seen and embedded in the European Framework - is that the regulator can serve to

strike the balance between these poles, forcing the two providers to coordinate their activities

and respect consumers’ wishes so that neither is able to take advantage of the consumers’

vulnerability.

3.46. As Ofcom has made clear, it considers that it is preferable (and easier) to deal with the first

problem than the second (i.e. given a free choice, it would opt to give control to the gaining

provider and then address the issues noted above, rather than vice versa).

3.47. By contrast, there is no such clear ‘theory of harm’ in relation to consumer-led switching. By

contrast, in consumer-led switching, it is generally the case that neither provider has the

upper hand – their roles are constrained by two sets of competitive forces:

(a) First, competitive pressure by other providers – if they do not offer a good switching

experience, they will suffer a range of harmful effects and their offer to the consumer

(made either to a new or a departing customer) will not be accepted;33

(b) Second, the power of the consumer – since the consumer is not beholden to any

provider, they can always walk away and ‘start afresh’ with a new provider.34

3.48. The focus of the work following the CFI must surely be to understand how and under what

circumstances consumer-led switching is currently performing well for consumers.

3.49. So a different classification, that seems better suited to the next phase of Ofcom’s work might

look something like this:

33

[CONFIDENTIAL] 34

These two factors are obviously closely related, since they are both a reflection of the same process – competition – at work.

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Ofcom’s decision not to include switches involving ‘minor’ platforms (paragraph 3.2 and the

first Table 1 on page 6)

3.50. Virgin Media considers that, while Ofcom is considering at the ‘broad brush’ level what areas

of work it might consider, then switching between smaller platforms or service options (such

as ‘over-the-top’ delivery) may not need close consideration.

3.51. This may change once Ofcom narrows its focus – for example, in looking at voice services, it

may be relevant to consider alternatives such as OTT services in relation to voice calls, instant

messaging/SMS and so on. It would not be sensible to exclude these innovative services in

assessing whether there is a market failure.


Ofcom’s approach to switching of mobile services

3.53. Ofcom’s current proposal is to consider separately the issues associated with switching that

does, and does not, involve number porting.

3.54. This seems to Virgin Media to be a sensible and obvious distinction to make. Porting numbers

represents a provider-led process that has an obvious and clear regulatory nexus: as the

Universal Service Directive makes clear, Ofcom must regulate porting (and already does so).

3.55. Adopting the analysis noted above, switching in mobile generally is consumer-led. The picture

is one of a diverse and vigorously competitive market in which competition operates at many

levels simultaneously, and so a consumer might have a choice of:

(a) Communications service providers who can offer a data connection and related services

(such as voice calls, voice mail, SMS and so on);

(b) Device manufacturers offering devices (phones, tablets and many others); and

(c) Service providers – such as Facebook/What’s App, Microsoft/Skype, Google and so on –

that offer services that are either distinct to the application layer or may compete

directly as substitutes for some of the services offered by communications providers.

3.56. This is obviously a very high-level sketch; in truth, each of these categories is richly populated

with a variety of players, aggregators, intermediaries and resellers, including other users (in

content generation, for example) making the picture extremely complex.

3.57. A consumer who is ‘switching’ may be switching one, two or all three of these elements. For

example, in terms of a ‘switching process’, the needs of a consumer who is in the market to

purchase a new tablet (under a subsidised contract) may be completely different to the needs

of a consumer who has an existing handset and seeks a SIM-only arrangement. Sometimes,

communications services regulated by Ofcom will be bundled with online services (such as

video messaging or social networking services) or included in novel ways in service offerings as

an input. The entire sector is extremely dynamic and highly competitive.

3.58. The simplest and obvious strategy for Ofcom to pursue in light of that complexity is to make

sure that the mobile number portability arrangements are effective and consistent with the

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Universal Service Directive (since they are a modular input to a number of processes), and

beyond that, not seek to intervene in the wider market activity except to the extent there are

defined problems that fail to be addressed by competition law or by acting to protect

consumers. This does not extend to attempting to bind all such customer acquisitions or loses

into a single process (if that were even possible).

Q1.B Are there aspects of such processes that you consider have significant

consequences for consumers’ experiences of switching or the functioning of markets?

3.59. Virgin Media makes comments below on three significant features of consumer-led processes

(a) Consumer-led processes have been developed under competitive conditions;

(b) There is no evidence of any problem in relation to switches to and from the cable

network

(c) There is no evidence of any general problem with consumer-led switching

Consumer-led processes have been developed under competition conditions

3.60. One aspect of the consumer-led process that has significant consequences for the consumer

experience of switching in those markets and the functioning of that market is that those

markets are often intensely competitive. In terms of determining Ofcom’s approach, the

presence of effective competition is the most important relevant feature of fixed bundle

markets and the mobile market.

3.61. It is a truism that competition is a process, and the core elements of the process are the

freedom of providers to vary their offers, and the freedom of consumers to choose their

provider and effect their switch. It follows that the competitive character of the markets is

affected by the ability to switch, and that interfering with, or changing, the switching process

carries particular risks of harming or distorting competition.

3.62. The risks of consumers may be significant of even a modest harmful impact on competition in

either of these markets. It has been competition from alternative platforms – particularly the

cable network – that have driven the innovations in bundling of services that create benefits

for consumers. One particular concern in a fast-moving sector is the risk that any regulation

will limit scope for innovation in relation to services or processes (for example, by preventing

or delaying different service offers from being brought to market because they did not ‘fit’ the

switching process designed at a single point in time). The harm to consumers resulting from

chilling future innovations as a result of over-regulation is a relevant policy concern in

switching and one that Ofcom ought to consider as an important issue in its deliberations.

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Switches to and from the cable network

3.63. As previously noted, switching to and from the cable network is working well. It is both

efficient as a process and delivering good market outcomes for customers. This is evidenced

by both Ofcom and Virgin Media data.35


3.65. Beyond a small minority, there is not and has never been evidence that customers struggle

with or are not aware of the process associated with platform switching. For instance, at the

outset of Ofcom’s current review, there was little difference in the results of consumers

surveyed who found either C&R, NoT or the MAC/PAC processes difficult.36 [CONFIDENTIAL].

3.66. Virgin Media believes that switching should be straightforward and efficient, reflecting the

swift implementation of the consumers' informed choice and taking into account underlying

costs (where applicable). More than that, Virgin Media is committed, through its marketing

and engagement with its customers, to the idea that switching should be a good and

informative customer experience. We believe that it is vital that - as the CMA has emphasised

- consumers should be able to access, assess and act in relation to any switch.

3.67. We believe that the current switching arrangement in relation to platform switching fulfils

these criteria.

3.68. The CFI does not provide any evidence to suggest that switching between these platforms is

not working effectively.

Problems with consumer-led switching generally?

3.69. Nor is there any evidence in the CFI (or even a general ‘theory of harm’) that is linked to

consumer-led switches generally.

3.70. As noted previously, provider-led switching generally occurs where the nature of the process

or control over some strategic right or asset (such as the access line or telephone number)

affords one or other of the providers a position of bargaining power as against the consumer

(that ought not to be, but regrettably in some cases is, exploited by unscrupulous providers).

Q.2 Do you consider that the eight issues that we identified in section 4 in relation to

switches on the Openreach network are relevant for the networks and services in

scope for this phase of work? If so, to what extent are they relevant and why? Are

there other issues we should also consider?

3.71. Virgin Media does not agree that all eight issues identified by Ofcom in the CFI are relevant (in

the sense of being present or likely to affect consumers) in relation to switching to and from

the cable platform and for switching in mobile. Both of these forms of switching are ‘platform

switching’ and involve creating or ending connections to competing networks. Both these

35

[CONFIDENTIAL]. 36

Figure 15 – Ofcom’s 2010 consultation, Strategic Review of Consumer Switching.

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forms of switching are consumer-led. As a result, they have common characteristics that mean

consumers are protected from a number of the problems that can only occur in provider-led

switching. Our response to each of the eight issues are set out below.

Multiple processes for switching the same service / bundle of services

3.72. Ofcom’s concern is that:

4.5 Current arrangements for both fixed and mobile mean that consumers can face

different switching processes or a mix of processes in order to switch. In some cases there

are two processes available for switching the same service (eg. GPL for broadband

delivered over Openreach, C&R for broadband switched to or from cable, LPL or GPL

processes in mobile switches). For switching some bundles, consumers need to use two

separate processes (eg. to switch triple play services away from Sky, GPL is used for the

voice and broadband elements, and C&R for the Pay TV component).

3.73. As Ofcom’s analysis shows, there are not ‘multiple’ processes for platform switching; there are

two: one involving number portability (which is only relevant in a limited sub-set of cases) and

then one concerning all other services and all other switches. There is no equivalent of the

different processes that applied on the Openreach platform. Those multiple processes arose

not as a result of commercial activity, but because Ofcom had mandated different processes

for different services and different forms of wholesale access. This concern is not relevant in

either the fixed environment (as between the Openreach and cable networks) or between

mobile networks.

3.74. Accordingly, the consumer harm which Ofcom identified in its earlier work as flowing from the

existence of multiple switching process does not apply to switches to and from cable services.

In any event, any specific consumer transfer process will reflect the needs of that customer.

Our experience is that even if there is a choice of pathways, even a complex set of pathways,

as long as the customer knows which way their switch is happening, and they are happy with

it, there is no problem per se with the fact that the switch might happen a number of different

ways (for example, to accommodate different flavours of bundle).

3.75. In any event, the existing processes for switching to and from the cable network seem to work

reasonably well and is easily understood by customers ([CONFIDENTIAL]).

3.76. In mobile, the issue is different: in a sense there are ‘multiple processes’ but only in the sense

that the consumer journey can take many different paths and be built from a number of

different discrete units (for example, changing/replacing a handset; carrying across services

from OTT providers from one network to another; and so on). There is little evidence that

these constitute a problem that is impairing the ability of UK consumers to access the mobile

market, which has the highest penetration levels of any personal communications service.37

37

See, for example, the assessments of competition in mobile markets that Ofcom has undertaken in relation to its review of mobile call termination rates in 2011 and the upcoming review in 2015 as well as the competition assessment reached in designing the 4G auction rules. All of these proceedings found that under current market structures (i.e. with four national wholesalers) that competition in mobile markets worked effectively. No reference was made to difficulties that consumers had in switching in general.

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Consumer difficulty and unnecessary switching costs

3.77. Ofcom’s concern here is that:

4.7 Our previous work noted that switching provider can involve costs for consumers. This

can include time spent and any anxiety and confusion that arises, as well as direct

financial costs. These costs may vary between switching processes. We noted that higher

switching costs are also likely to be detrimental to consumers in that they will tend to

discourage switching and so dampen competition.

[…]

4.10 The switching processes we have in scope are either C&R or LPL processes. LPL

mobile number porting processes both involve multiple touch points and create potential

for save activity. C&R processes for both mobile and fixed services, as well as for switches

of bundles where two switching processes must be used, also result in multiple touch

points.

3.78. Ofcom’s comments about losing provider led (“LPL”) switching is not relevant because, as

Ofcom itself acknowledges, switches to and from cable services and in mobile services (other

than when porting) are consumer-led.

3.79. Ofcom notes that its research suggests that C&R switches result in ‘higher switching costs’ for

consumers when compared to GPL. ‘Switching costs’ is something of a misnomer in this

context; what Ofcom means is that the consumer must end the contract with the existing

provider. This is generally a single phone call, email or message.38

3.80. If Ofcom is intending to take forward this analysis, it will also need to take into account the

potential problems of a GPL system such as:

(a) Aggressive tactics of Gaining Providers to win consumers. By the time the consumer has

received the ‘Losing Provider’ letter they are likely to be committed to the switch;

(b) The complete ban on any discussion with the LP which means that consumers are not

fully informed at the time of switch about any differential (other than in terms of price)

of the differences in networks or services or even how to organise termination of the

service to avoid Early Termination Charges; and

(c) Any supporting evidence to highlight the benefits to consumers of staying with their

existing provider.

38

To illustrate that there is a gap between what the economic literature generally regards as a switching cost, and Ofcom’s use of the term, here is one of the leaders of the field, describing switching costs: ‘A switching cost results from a consumer's desire for compatibility between his current purchase and a previous investment. That investment might be a physical investment in (a) equipment or in (b) setting up a relationship, an informational investment in finding out (c) how to use a product or (d) about its characteristics, (e) an artificially-created investment in buying a high-priced first unit that then allows one to buy subsequent units more cheaply, or even (f) a psychological investment.’ Klemperer, P. ‘Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade’, Review of Economic Studies (1995) 62, 515-539, accessed at http://www.nuffield.ox.ac.uk/users/klemperer/competition.pdf. It is noteworthy that making a phone call to an existing provider to end a contract falls into none of these categories (except perhaps (f), if the consumer has strong attachment to the brand)).

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3.81. An untested premise of Ofcom’s reasoning is that it is this additional phone call or message

that is having a material impact on competition in the market. In all the markets Ofcom has in

scope, these markets have been the subject of multiple competition assessments by Ofcom.

What is striking is that, as a general position, none of those reviews have ever hinged on (or

even remarked on) these ‘switching costs’ that Ofcom is now concerned with.39

3.82. Here is Ofcom’s assessment of the fixed retail narrowband market, one year ago:

3.19 Evidence on consumer switching and satisfaction with fixed line services also

supports the view that the supply of retail narrowband services remains competitive. In

the 2012 Consumer Experience Report, we found that switching levels had remained

broadly unchanged for narrowband services at around 10%; the same level as in 2009.40

3.83. Similarly, Ofcom’s analysis of mobile call termination explored in detail the likely responses of

consumers to different changes to the underlying structure and level of various mobile

charges; no mention is made of any obstacles to switching in general terms, and Ofcom’s

analysis is predicated on the ability of consumers to switch their behaviours, and their

providers, quickly and responsively to changes in underlying market conditions.41

3.84. In all of this work, in either fixed or mobile markets, Ofcom does not identify any evidence of

harm to competition related to problems with switching in general of the type that would be

actionable under competition law (whether under the conduct regime or as a market

investigation). Weighed against these costs (which seem to be at least plausibly to be

immaterial, in light of Ofcom’s findings) needs to be set the significant benefit of additional

control and empowerment in the ordering process that a consumer-led process affords

customers.

3.85. If Ofcom did have a concern of this type – in other words that was, in substance, a

competition concern (and not a consumer protection issue) then the correct form of

proceeding would be a competition law investigation or exploring the option of a market

investigation reference. Under either option, Ofcom would be expected to gather material

evidence as to the effect of the investigated conduct or feature of the market.

3.86. In its discussion in the CFI, Ofcom plays on the opportunities for save activity which some

providers engage in as part of LPL situations. As noted below, Virgin Media believes that

Ofcom’s reasoning on reactive save, and particularly Ofcom’s view that reactive save

necessarily harms consumers, is wrong. Ofcom’s analysis should be subject to closer scrutiny

and proper analysis if further reliance is to be placed on it.

Lack of consumer awareness of the implications of switching

3.87. Ofcom’s concern here is expressed in the following terms:

39

See, for example, Ofcom’s 2009 and 2013 Narrowband Market Review Statements. 40

Fixed Narrowband Market Review Statement, 26 September 2013 at paragraph 3.19. There is some discussion of switching costs for business customers (for example, the costs of switching to VoIP – see paragraph 5.105). Emphasis added. 41

Mobile Call Termination Statement, 15 March 2011.

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4.14 The switching processes we have in scope generally require the consumer to contact

the LP to organise a cessation of service, and so give LPs corresponding opportunities to

inform the customer about any financial or contractual implications of switching.

4.15 Formal LPL processes for mobile number porting allow switchers to be informed

according to standard industry practice. However, for C&R switches, no formally agreed

industry standard exists, and CPs’ practices for informing consumers about the

implications of switching vary.


3.89. In competitive markets, providers have a strong incentive to ensure that their customers are

aware of the implications of switching, and as a result, invariably tend to achieve that

outcome. It is only when the usual forms of consumer protection are suppressed by regulation

(i.e. in GPL systems) that issues of slamming and lack of awareness arise. Given the high levels

of competition within the fixed line communications market, Virgin Media sees no reason for

Ofcom to consider whether to regulate platform switching, on the grounds of poor consumer

awareness of the implications of switching.

Insufficient customer consent and the problem of ‘slamming’

3.90. Ofcom notes that:

4.19 LPL processes used for number porting in mobile switching include checks to

authenticate the customer identity and so should reduce risks that a switch takes place

without the customer’s consent. C&R processes used for fixed services have fewer such

checks, since they are default processes with no formally agreed industry standards.

3.91. The most important point about the relationship between designing a switching mechanism

and slamming is this: slamming does not happen when the consumer leads the switching

process. For example, cable customers are protected from slamming by the existing processes

because of the inherent control of the switching process that consumer-led switching affords

and, in the case of ports, the verification process. Similarly, Virgin Media does not, could not

and would not serve customers without their consent. Consequently, there is no question of

inbound slamming. The technical work which must be done at the customer’s premises to

install the service necessarily means that a customer could not be slammed.

3.92. Ofcom assumes that without ‘formally agreed industry standards’, the quality of decision-

making and process management in consumer-led switching is poorer. That is not Virgin

Media’s view – our experience is that competitive markets perform better for consumers than

regulated outcomes. But in any event, as Ofcom notes elsewhere, it has no information about

unregulated switches, and so its conclusions reveal little more than the presumptions that

inform Ofcom’s thinking, rather than evidence of market conduct.

Erroneous transfers (ETs)

3.93. Virgin Media feels that cable customers are protected from ETs by the existing process.

3.94. As with slamming, large-scale ETs are only possible where regulatory intervention prevents

operators from taking commercial steps to avoid them occurring.

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3.95. Ofcom also makes a specific request for input from Virgin Media in relation to ETs:

4.27 We are interested in stakeholders’ views in this regard, including whether switches

from Virgin’s cable network to the Openreach network may remain subject to some of the

risks of ETs which we identified for Openreach, for example because of inaccuracies within

the Openreach address database.

3.96. The answer is, in summary,[CONFIDENTIAL]. We would welcome the chance to discuss this

issue with Ofcom directly and providing material on this issue separately.

Loss of service

3.97. As a result of the high degree of control that consumers enjoy directly in respect of ordering

and scheduling the installation and cessation of cable services, there is scope for consumers to

make decisions that could result in unwanted overlap or gaps where they receive no service at

all. Much of this problem could be managed through better customer education and support

during the process. All providers are incentivised to deliver good experiences for customers,

and education focused on achieving that should be an ‘easy sell’.

3.98. Virgin Media has always been interested in ways that it might better coordinate activities for

the convenience of its customers (subject to the requirements of competition law).

3.99. The most obvious concern on this point relates to unwanted misalignment of services. It must

be recognised, however, that many customers opt to cease a service without starting a new

service and others add a second service with the intention of using both for a period of time

(sometimes indefinitely). As a result, there is no scope for an assumption that all transfers will

involve a ‘switch’).

3.100. It is not obvious that regulation is a plausible answer to this issue. The evidence provided in

this submission supports the view that the problem is reducing over time, and likely to be

addressed commercially and potentially with industry once the extent of the problem, if any,

is understood.

Lack of platform neutrality

3.101. This point is not relevant to platform switching.

3.102. The fact that different processes exist for switching across different platforms should not be

regarded as a ‘lack of neutrality’. Rather, it is a recognition that there are differences arising as

a result of different network technologies and other characteristics. There is no a priori reason

why these processes could or should be identical (for example, as between switches between

providers supplying services over the Openreach network and as between Openreach and

other platforms).

3.103. Ofcom’s concern as expressed in the CFI is a competition concern. If Ofcom considers that

competition between platforms is in some sense insufficient to constrain Openreach-based

providers, which might have expected to be the subject of some commentary at some point in

Ofcom’s extensive reviews of the relevant markets. If Ofcom considers it has new evidence on

this subject, it should be made known to stakeholders so they can consider it and

communicate their views.

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Reactive save

3.104. Virgin Media has serious concerns as to the robustness of Ofcom’s conclusions on the effect of

reactive save activity. In essence, Ofcom’s concern that save activity is a ‘nuisance’ overlooks

entirely that consumers need to be fully informed at the point of switch of what service they

currently are proposing to switch from (i.e. broadband speeds, inclusive minutes, free repair

of set-top-box) to ensure that if they are switching to get a better deal it does in fact turn out

to be the case. Virgin Media submits that this information is essential to enable the consumer

to take an informed decision as to whether to switch. We emphasise that often this

information is only available from the existing provider (and any other provider has a strong

incentive not to provide it).

3.105. As set out earlier, Virgin Media believes that Ofcom’s view of reactive save is simplistic and

wrong. Virgin Media directs Ofcom to its earlier submissions on this issue, during the last

phase of work on consumer switching.

Summary

3.106. Consolidating views from each of the sections above, the summary view in relation to each of

Ofcom’s areas of focus (‘fixed bundles’ and ‘mobile without porting’) is noted below:

Ofcom’s analysis of potential problems with reference to cable and mobile switching

Problem Fixed bundle switches Mobile without porting

Multiple processes for switching the same service / bundle of services

No No

Consumer difficulty and unnecessary switching costs

No No

Lack of consumer awareness of the implications of switching

No No

Insufficient customer consent and the problem of ‘slamming’

No No

Erroneous transfers (ETs) No No

Loss of service Yes, in part No

Lack of platform neutrality

No No

Reactive save No No

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Q.3 Could the current switching processes for the networks and services in scope be

modified to result in a better experience for or protection of consumers, and/or more

effective competition? If so, why and how should they be modified? Are any

modifications in your view available that might be implemented relatively quickly and

easily? What risks and costs might be associated with these revisions or

modifications?

3.107. Virgin Media’s submission is that this question is premature ahead of understanding whether

there are indeed any issues.

3.108. Ofcom should not at this stage be:

(a) Referring to ‘modifying’ processes, when in relation to fixed services offered over

platforms beyond the Openreach platform. The situation is more accurately described

as extending regulation to a situation where it does not currently apply;

(b) Asking the question in a way that calls out (and illustrates an undue preference for) a

particular response. Is there any process used by consumers in great numbers that

could not be ‘modified to result in a better experience’? Is there any form of

competition that could not be ‘more effective’? By using relative measures, rather than

objective benchmarks or principles, Ofcom’s framing sets the bar impossibly high for a

finding that no action is necessary – which is inconsistent with Ofcom’s regulatory

principles and duties.

3.109. In response to the final question, we note that the main risks and costs are the problems

associated with over-regulation: harm to consumers (and to competition), wasted expenditure

and inefficiency. All of these risks are borne if Ofcom contemplates devoting time and effort to

policy projects without thinking through whether there is any material positive impact likely

for consumers.

Q.4 Is there anything that you consider is relevant to the switching of networks and

services in scope for this phase of work that we have not set out in this document?

3.110. No – we have made a number of submissions in section 1 of this submission that are of an

over-arching nature and are included first in order to assist in present our points to Ofcom in a

way that is easiest to consider and digest. We do not repeat those submissions here but they

all constitute parts of our answer to Question 4.

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