The independent regulator and competition authority for the UK communications industries, Ofcom, announced today a fundamental review of the regulation of Royal Mail(LSE: RMG).
Should shareholders quake in their boots?
The mere mention of escalating regulation makes me shiver, as I think of the pincer-grip regulating authorities have around the throats of banks and utilities in Britain. For customers, regulation is good, of course, but there is a strong argument that regulatory issues can crimp investment returns for shareholders in regulated industries.
In the case of Royal Mail, Ofcom reckons the review will ensure regulation remains appropriate and sufficient to secure the universal postal service, given the recent withdrawal by Whistl from the direct delivery letters market, which has resulted in Royal Mail no longer being subject to national competition.
Royal Mail must wonder how it can ever make decent profits in the difficult letter-post market. The obligation for the firm to deliver wide national coverage is onerous, as many deliveries are to out-of-the-way places and therefore unprofitable. The firm has long complained that Whistls cherry-picking of profitable city routes without delivering to the Dingly Bottoms of the country was hardly fair competition at all. Now Whistl is gone and in steps the regulator with a threat to ramp up compliance rules a big hammer to deliver another blow!
Its all in the script, though
Ofcom says it established a regulatory framework for Royal Mail in 2012 to ensure UK consumers and businesses benefit from a universally priced, affordable postal service, six days a week. The framework includes greater commercial freedom for Royal Mail to operate in its challenging market, removing regulations that threatened to undermine the universal service, and adding safeguards to protect postal users.
Now, Ofcoms review will incorporate existing work the regulator undertook to assess Royal Mails efficiency, consider the firms performance in the parcels market, and assess potential for the postal service provider to set wholesale prices in a way that might harm competition.
Whistls announcement that it intends to withdraw from the direct delivery postal service market came on 10 June. No longer, then, will Whistl collect, sort and delivers bulk mail entirely using its own network, which leaves Royal Mail without any national competition for direct delivery of letters. One glimmer of light remains, though: Ofcom recognises that competition remains strong in other postal markets such as parcels and access mail the term used where operators collect and sort mail before handing over to Royal Mail to complete delivery. Perhaps because of this, understanding regulatory changes will remain a light touch.
Ofcom reckons Royal Mail is in a stronger position financially than when the regulator last reviewed the postal framework. As a public company, Royal Mail is making good progress on cost-reduction and with operational efficiency. However, I expect such demands to be ongoing and side with the government, which plans to dispose of its remaining 15% holding in the firm if I held any Royal Mail shares, Id think about selling, too.
Royal Mail faces an uphill struggle, unlike a potential investment that our analysts at the Motley Fool believe is poised to excel. If you click the link that follows, you can find out more about an exclusive Motley Fool wealth report that examines the hidden story behind one of the most promising e-commerce plays on the stock market. You can follow this idea up right now, free of charge or obligation, by clicking here.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.