UPD BT Demand Ofcom to Stop Subsidising TalkTalk and Sky’s UK Broadband

The endless spat over competition in the United Kingdom’s wholesale broadband ISP market took another turn today after BT used a new report from Plum Consulting to support their calls for Ofcom to “level the playing field” by ending its “pricing distortion” policy, which they claim allows rival ISPs to offer cheaper services.

Ofcom’s original 2005 Undertakings committed BT to a “functional separation” of systems and processes in order to support the development of “effective competition” in the UK telecoms market. One product of that process was the introduction of Local Loop Unbundling (LLU), which allowed rival ISPs to install their own kit inside BT’s telephone exchanges and thus gain more control over both the line and their prices.

The move meant that BT could no longer dominate the consumer broadband market with its own wholesale packages and resulted in a wave of cheaper and often more advanced broadband products from rivals (e.g. some ISPs were offering up to 20Mbps ADSL2+ lines years before BT), although it should be noted that BT still remains the single largest consumer broadband ISP in the country.

BT admits that today’s market is now “one of the most competitive broadband markets in the world“, but they also believe that this supports their call for Ofcom to stop setting “prices that favour some operators over others“. In particular they believe that fully unbundled (MPF) lines are being set “below cost“, while BT’s own wholesale lines and shared LLU products thus end up being more expensive.

John Petter, CEO of BT’s Consumer Division, said:

“TalkTalk and Sky have enjoyed subsidies for the best part of a decade but it is time for that to end. Both are successful companies and both are more than capable of standing on their own two feet. It is particularly unfair that BT has to give Sky a commercial leg up when they consistently refuse to provide us with fair access to their own services.

Ofcom should be given credit for driving competition deeper into the network but that success needs to be reflected in current regulation. We know that Ofcom want to tackle this distortion but we want them to act now given this is a highly dynamic and competitive market. All we are asking for is a level playing field where prices reflect costs and consumers benefit as a result.”

According to the new BT commissioned report from Plum, Sky Broadband and TalkTalk have allegedly benefited from this “pricing distortion” by £623 million over the past 9 years (i.e. Fully Allocated Cost). It’s understood that Ofcom are working to re-balance aspects of the market but they also envisage this as something that would happen gradually over the next 6 years, which Plum claims could add a further £369m to the “distortion” tally (total £1bn).

BT states that the situation has also made “life difficult for smaller ISPs, many of whom didn’t have the capital to invest in LLU, and who have suffered a competitive disadvantage as a result“, which might be true for some providers but equally others have happily embraced cheaper wholesale LLU solutions from rivals like TalkTalk.

The operator notes that Ofcom’s current proposal is to reduce the gap between the relevant products from £19 per annum to £10 over the next three years, although they point to how the regulator also estimates “the true cost difference to be between £0 and £4” as an example in support of their claim.

However BT’s rivals tend to tell a different story. Last year Vodafone accused BT of being in breach of its regulatory commitments by allegedly making profits of nearly £5bn more than the level that Ofcom is claimed to deem acceptable (here), which at the time BT described as “wildly inaccurate“.

Meanwhile Sky Broadband and TalkTalk frequently complain that the absence of a truly LLU comparable product in the new market for superfast broadband (FTTC) products (note: it’s technically very difficult to develop one), which is one reason why some services are so similarly priced, has meant that BT continues to dominate services and pricing with their own wholesale offerings.

Last year TalkTalk added to this argument by launching a complaint against BT with Ofcom, which accused the incumbent of conducting an “alleged margin squeeze in superfast broadband pricing” (here); Ofcom are expected to release their preliminary findings soon.

A TalkTalk spokesperson told ISPreview.co.uk:

“The people who have benefitted from Ofcom’s regulation is consumers. What BT are actually calling for is for consumers and businesses to pay more for broadband, and for that money to go straight into BT’s pockets. Ofcom should be proud of how their approach to regulation has lead to the UK having one of the most competitive markets in the world and they must keep it that way. We urge Ofcom to ignore this self-serving request.”

Naturally Ofcom’s on-going Fixed Access Market Review(s) are currently examining all of these issues and expect to report back on most of them around late spring or early summer.

UPDATE 12:57pm

Added a comment from TalkTalk above.