UPDATE BT Refute TalkTalk Commissioned Study of its FTTC ISP Prices

National UK telecoms operator BT has said that they “completely refute the basis” of a controversial new TalkTalk commissioned study into its superfast broadband charges as bearing “little resemblance to the actual costs incurred“.

The confidential report from German analyst Wik Consult, which was leaked to the internet on Sunday by technology writer Ian Grant (here), is said to contain evidence that might support TalkTalk’s case against BT’s alleged anti-competitive margin squeeze of superfast broadband (FTTC) pricing and which is now the subject of an initial probe by Ofcom (here).

According to Ian Grant, the report offers “credible evidence” that “BT is charging more than double what it should for wholesale superfast broadband products“. In reality it’s difficult to reach that conclusion from the limited information provided, although the report does make for an interesting read and will probably give Ofcom some extra food for thought. Naturally BT are less forgiving.

A Spokesperson for BT told ISPreview.co.uk:

“TalkTalk claims that BT has failed to maintain a sufficient margin between the price of Openreach’s GEA product and the price of BT Retail’s Infinity product. Yet by TalkTalk’s own admissions to the City, it is profitable for them to sell fibre broadband based on the GEA price. This undermines the whole basis of their complaint to Ofcom.

Far from seeking lower GEA prices, TalkTalk’s complaint appears to suggest they are looking for higher prices for BT Retail’s Infinity product. BT Retail’s total input costs for its fibre product are actually higher than TalkTalk’s, so any suggestion that they have an unfair advantage is nonsense.

We completely refute the basis of the WIK report which has modelled its costs on a theoretical network that bears little resemblance to the actual costs incurred by Openreach or the competitive environment in which we undertook our initial fibre investment. We have already accepted a long payback period for that investment and the current prices for GEA reflect that.”

BT continues on to claim that the “low prices” and open access nature of its network have helped the United Kingdom to build “one of the most competitive markets for fibre in the world“, where more than 80 ISPs are using or offering superfast broadband products via their network.

However critics might suggest that, at the infrastructure level, BT is still the only available option for most ISPs. Meanwhile plans for alternative national networks (e.g. Fujitsu UK) tend to end up flopping due primarily to economic and regulatory constraints. But that’s another matter.. sort of.

Ofcom are now considering whether or not BT has, by allegedly failing “to maintain a sufficient margin between its upstream costs and downstream prices” (TalkTalk’s claim), abused a dominant position under UK and/or EU competition law. The regulator is expected to make a decision about whether or not to pursue the investigation before the end of this year.

A TalkTalk Spokesperson responded:

“In order to open an investigation into the gap between BT’s wholesale and retail fibre prices, Ofcom must have reasonable grounds for suspecting that BT have infringed the Competition Act by operating a margin squeeze so it is simply untrue to say there is no basis to our complaint. We have been clear that we believe this squeeze can be addressed through reducing the wholesale prices that all ISPs pay, which is supported by WIK’s analysis, and categorically disagree with any assertions that we are seeking higher retail prices.

BT should certainly make an appropriate return on their fibre investment but given BT’s monopoly it is essential that there is a regulator on the pitch to ensure prices allow effective competition, particularly since much of the network is being substantially funded by the taxpayer. History has shown that effective monopoly regulation leads to true retail competition which in turn leads to better choice and value for consumers.

The number of customers buying from BTOpenreach is not a relevant measure of the level or intensity of retail competition. If BT are so confident that their wholesale charges are reasonable then perhaps they should publish their actual incremental fibre expenditure and costs as they do for other regulated products.”

Sadly such cases, when formally pursued, have a tendency to drag on for years and some are already concerned that this might risk becoming counter-productive (here).

UPDATE 9th May 2013:

Added a reaction to BT’s comment from TalkTalk above.