UPD Ofcom Tackle BT’s Fibre Broadband Prices But Kill TalkTalk Complaint

The national UK telecoms regulator has today dropped TalkTalk’s “margin squeeze” complaint against BT’s superfast broadband (FTTC) prices, but has moved to promote competition in the market by launching a new consultation that would force BT to “maintain a sufficient margin between its wholesale and retail superfast broadband charges” and thus allow other ISPs “profitably to match its prices“.

At this point it’s important to stress that Ofcom has two separate, yet still technically related, investigations into BT’s “fibre broadband” (FTTC) prices. One relates to the regulators general approach to the ‘margin’ that BT sets between its wholesale and retail fibre prices, which is what today’s consultation is about, while another references TalkTalk’s “margin squeeze” complaint against BT’s current wholesale FTTC prices. The cases may be separate but they both cross into similar territory.

The separate TalkTalk investigation began last May 2013 after the ISP complained to Ofcom that BT was “abusing a dominant position” in its wholesale supply of superfast broadband (primarily FTTC) services to rival ISPs by conducting an “abusive margin squeeze” in superfast broadband pricing (here).

At the time BT completely refuted TalkTalk’s complaint (here) and stated that there was a “lack of any evidence” to support the case, although Ofcom disagreed and decided that there was enough merit in the situation for them to launch a probe into whether BT had “failed to maintain a sufficient margin between its upstream costs and downstream prices“. In fairness, TalkTalk’s own FTTC prices often seem cheaper than BT’s, but pricing is usually more complex underneath than it is on the surface.

Meanwhile TalkTalk’s CEO, Dido Harding, has made no secret of the fact that, in the absence of a fully unbundled (LLU) alternative to BT’s ‘up to’ 80Mbps capable fibre-based FTTC products (the best ISPs can currently get is a virtual unbundled solution called VULA – Virtual Unbundled Local Access – that isn’t as flexible and makes it harder for ISPs to differentiate themselves), she would like to see BT cut the related wholesale price that it charges ISPs by around £4 +vat a month (here). However TalkTalk’s primary complaint has not been successful.

Ofcoms Statement – TalkTalk Complaint

Ofcom has investigated TalkTalk’s complaint under the Competition Act 1998, and has provisionally decided there are no grounds for action. This investigation is separate from the new rules we are proposing for BT under the European telecoms framework today. BT, TalkTalk and third parties whom Ofcom has accepted as having an interest in the investigation will be invited to make written representations on Ofcom’s provisional decision.

So what about this new consultation? At this point it’s important to remember that, in 2010, Ofcom adopted a relaxed approach to regulation of BT’s new “fibre” FTTC and FTTP services, which was intended to last for around five years and came as a response to BT’s concern that it would be difficult to justify their £2.5bn commercial investment in the new services if strict regulation got in the way. BT continues to maintain this position.

However that period of regulatory grace is now coming to an end and Ofcom are beginning to consider future strategy and pricing, especially in light of the Government’s £1bn+ investment to help expand superfast broadband coverage through the Broadband Delivery UK (BDUK) programme (the bulk of this has been allocated to BT).

So today’s consultation is all about Ofcom’s judgement of whether BT has been allowing rival ISPs enough margin to make a profit off their superfast broadband (FTTC) lines, which doesn’t just look at broadband in isolation and will also consider the impact of other aspects like BTSport TV (this is offered for free to BT’s own retail broadband customers but at cost to rival ISPs). PlusNet’s fibre products will also be a factor in Ofcom’s judgement because they are owned by BT.

Ofcoms Statement – BT Fibre Prices Consultation

Our overall regulatory aim should be ensuring that BT cannot use its [Significant Market Power] in the [Wholesale Local Access] market to set the VULA margin over the period of the market review such that it causes retail competition in superfast broadband to be distorted. We consider that this aim is best achieved in this review period by ensuring that BT does not set the 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.

The most appropriate and proportionate option for achieving this aim is to impose an SMP condition requiring BT to set the VULA charge so as to maintain a minimum VULA margin, with a requirement on BT to provide the data necessary to monitor compliance every six months, supplemented by guidance on our detailed approach to assessing compliance with the condition.

It’s been suggested that Ofcom’s new “margin squeeze” test could ultimately result in ISPs paying lower prices for BT’s Fibre-to-the-Cabinet (FTTC) services, possibly in the order of £2 per month less (here), although at this stage the regulator is consulting more on how the test should work and be structured than what its outcome would be. In addition, BT’s Fibre-to-the-Premise (FTTP) lines will not be considered, which isn’t a surprise given their limited availability and uptake.

At the time of writing neither BT nor TalkTalk have put out an official statement, although we did chat briefly with BT yesterday about their expectations of Ofcom’s consultation. BT told us that Ofcom’s proposed test might potentially provide some “welcome clarity” for itself, especially if the rules are clearer and thereby discourage the type of claims and criticism that we’ve already seen.

Ofcom’s Fixed Access Market Review (FAMR) recently said that competition was working in the fibre market and so BT doesn’t appear to be envisaging any significant or unexpected disruption to their current approach, although we’ll have to wait a bit longer to find out. The consultation will remain open until 28th August 2014 and a final statement is then expected to be published by the end of 2014.

Ofcoms Fibre Prices Consultation
http://stakeholders.ofcom.org.uk/VULA_Margin_Consultation.pdf

UPDATE 8:13am

BT has furnished us with their official statement on the matter.

A BT Spokesperson told ISPreview.co.uk:

“We are pleased that Ofcom has rejected TalkTalk’s competition complaint and shown that BT’s fibre pricing is completely fair.

The consultation is welcome. We hope it results in regulatory clarity and certainty, and discourages spurious claims such as that made by TalkTalk.

There is strong competition in the UK broadband market and we are confident our pricing will pass any regulatory test that may be put in place. It is important that Ofcom encourages investment as well as competition, and recognises the full costs involved in deploying fibre.”

UPDATE 9:15am

Now it’s TalkTalk’s turn, which perhaps unsurprisingly overlooks the failure of their competition complaint.

A TalkTalk Spokesperson told ISPreview.co.uk:

“We’re really pleased that Ofcom is today announcing that it now proposes to start regulating fibre more effectively. We have long maintained that the time has come for fibre to be more robustly regulated, starting with a margin squeeze test. This leads naturally towards full price regulation in 2017. What matters most is ensuring a level playing field and competition for fibre in the future. Once implemented, these new rules will make British consumers and businesses better off.”

UPDATE 21st October 2014

Ofcom has today officially closed TalkTalk’s original complaint (above), after provisionally deciding there were no grounds for action in June. A non-confidential version of the decision will be published “shortly“.

UPDATE 22nd October 2014

A copy of Ofcom’s full decision can be found here, all 281 pages of it.