UPD CMA Reject TalkTalk and BT Appeals Over UK Fibre Broadband Prices

The Competition and Markets Authority has today rejected opposing appeals by BT and TalkTalk against Ofcom’s “margin squeeze” test, which is designed to keep the incumbent operator’s FTTC (VULA) based superfast broadband prices fair. But BT did win a small victory over its compliance period.

Last year Ofcom, after some badgering from TalkTalk, imposed a new Significant Market Power (SMP) requirement upon BT to ensure that they didn’t “set the [FTTC] VULA margin such that it prevents an operator that has slightly higher costs than BT (or some other slight commercial drawback relative to BT) from being able to profitably match BT’s retail superfast broadband offers” (here).

The VULA service is how Openreach (BT) sells their FTTC “fibre broadband” product to rival ISPs, such as Sky Broadband and TalkTalk. In essence the new SMP rule meant that Ofcom would keep a close eye to make sure that BT was playing fair and maintaining a “sufficient margin between [their] wholesale and retail superfast broadband charges.”

Ofcom’s test also factored other aspects of BT’s retail pricing, such as with how it bundles free BTSport TV content in alongside broadband, although the European Commission later cautioned Ofcom, in a non-binding comment, that its approach “lacks the necessary flexibility” (here).

However TalkTalk, with support from Sky (Sky Broadband), complained that Ofcom’s test was “insufficient” and failed to adjust for differences in call revenues. On the opposing side BT moaned that the regulator’s market analysis was “manifestly inadequate and wrong“, ignored an opinion by the EC that questioned some aspects of the approach (here) and was based on a “defective … rigid monthly test.”

At this point the matter was referred to the CMA (here), which after nearly six months has today given its verdict (full summary).

Statement from the CMA

“In its final determination on the BT appeal published by the CAT today, the CMA dismissed BT’s challenges in all but one of the issues it was asked to look at. It agreed with BT that Ofcom had made an error in setting the length of the relevant compliance period and determined that this should be extended to 6 months from the current one month.

The CMA dismissed the challenges in TalkTalk’s appeal.”

Broadly speaking the ruling says that Ofcom “acted reasonably” and upholds the original test, albeit still forcing the regulator to “extend the compliance period to six months” instead of being monthly and also applying it on a fixed-date basis (i.e. this will align the six-monthly compliance period to BT’s half-yearly reporting schedule, namely 1 April to 30 September and 1 October to 31 March).

A BT Spokesperson told ISPreview.co.uk:

“We’re pleased that the CMA has found that Ofcom’s test is too restrictive (due to it requiring compliance on a month by month basis) and doesn’t allow us enough flexibility.

They have recommended that the test should be made less restrictive on BT (by extending the compliance period from one to six months) whilst rejecting TalkTalk’s claims that other aspects of the test were too generous.

BT has been passing the test as it is currently designed, and the changes recommended by the CMA will allow us to compete with greater flexibility in future.”

However it’s worth pointing out that Ofcom has been told that they can still retain the current reporting requirements on BT, including the provision of monthly data to the regulator and the current calculation of costs and revenues for each monthly cohort of customers. Naturally we also asked TalkTalk for a comment, but they declined.

UPDATE 1:59pm

Added BT’s comment above.

UPDATE 4:27pm

Now TalkTalk has decided to comment.

A TalkTalk Spokesperson told ISPreview.co.uk:

“We are pleased that the CMA has upheld the principle of fibre margin regulation. It is obvious to everyone except BT that regulation is needed in order to bring down consumer prices, enable competition and drive consumer uptake. It is just a shame that the current margin regulation has done nothing to increase uptake or address the fact that BT’s uptake of superfast broadband is three times that of its competitors. It is clear now that UK consumers need and deserve a full charge control.

Given that BT’s attempts to overturn the regulation have now failed, we hope that this is the end of the matter, and that they don’t take advantage of the current weak appeal system that impedes Ofcom’s ability to make strong, pro-competitive interventions for the benefit of consumers.”