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UPD3 Ofcom Propose Not to Cut BT’s FTTC Superfast Broadband Prices for ISPs

Thursday, Jan 15th, 2015 (7:24 am) - Score 1,369

The national UK telecoms regulator has today revealed the outcome from its recent consultation into whether or not the cost of BT’s superfast broadband Fibre-to-the-Cabinet (FTTC) lines for rival ISPs needed to be adjusted in order to “maintain a sufficient margin between [their] wholesale and retail superfast broadband charges“.

The consultation indirectly sprang from a competition complaint that was lodged by TalkTalk in May 2013, which alleged 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). BT completely refuted the claim.

Unfortunately for TalkTalk that complaint was not successful (here), although Ofcom did decide to take a closer look at the “margin” that BT sets between its wholesale and retail fibre prices in order to see whether or not it could adopt a new approach that might help to address some of the wider concerns.

Ofcom therefore proposed a new Significant Market Power (SMP) requirement that would ensure 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“. Take note, VULA stands for Virtual Unbundled Local Access and is the solution that ISPs like TalkTalk use in order to offer “fibre broadband” FTTC services to their customers.

Crucially Ofcom said that they wouldn’t just look at broadband in isolation and also intended to consider the impact of other aspects like BTSport, which is offered for free to BT’s own retail broadband customers but at cost to rival ISPs. The fibre products offered by BT’s sibling ISP PlusNet were also factored into Ofcom’s consultation.

TalkTalk’s CEO, Dido Harding, has previously said that she would like to see BT cut the wholesale price that it charges rival ISPs by around £4 +vat a month (here), although recent reports have indicated that £2 might be more likely (here). But the failure of TalkTalk’s complaint, combined with Ofcom’s recent Fixed Access Market Review (FAMR) stating that competition in the fibre market was working and BT’s recent retail price rises, suggested a much less significant change. BT’s move to gobble EE may also have a future impact.

In the end today’s new draft regulatory condition (pricing rule), which has been notified by Ofcom to the European Commission for approval, states that Ofcom currently sees no need to force any change of price upon BT.

Ofcoms Statement

Ofcom’s indicative assessment is that BT is maintaining a sufficient margin under the new draft rules. Therefore, the condition is a safeguard which limits BT’s ability to reduce retail margins in future, and ensures that any increases in BT’s costs must be reflected in its prices.

BT currently provides BT Sport free to its superfast broadband customers, and the new rules take into account the costs and revenues of these sport channels, as well as other elements included by BT in its retail superfast broadband bundles.

Today’s draft decisions are aimed at ensuring that different operators can compete in the developing broadband market in years to come, so that consumers benefit from competitive prices, network investment and high-quality, innovative services.

The regulator did however note that their indicative assessment of BT’s compliance with the draft condition “uses data sources from a mix of years, so the assessment will not precisely reflect the current position.” In addition, Ofcom vaguely says that they’re also “considering how the next generation of ‘ultrafast’ broadband services – which will provide speeds around 1 Gbit/s – can best be achieved. This may involve further investment to upgrade the infrastructure currently used to provide superfast broadband.”

The outcome will not shock observers of the process, many of whom will have been anticipating a much more tepid result than some might have hoped, although at least the operator will soon have to ensure that future adjustments comply with the new rule.

The new measures are of course still subject to review by the EC, although Ofcom expects to publish a final statement in February 2015. The new regulatory condition would then commence from the beginning of March 2015 and remain in place until March 2017, when the current regulatory review period ends.

NOTE: Under the new rule BT would have to provide the data necessary to monitor compliance every six months.

UPDATE 8:20am

The reaction from BT is in and it’s very lukewarm.

A BT Spokesperson said:

Ofcom’s statement is misconceived but not unexpected as it largely confirms the approach they outlined last year. We will now consider our response, which may include an appeal.

We’re not opposed to the principle of a test. In fact, we passed the standard Competition Act test recently and Ofcom has said our current prices will also pass this new test when it comes into force.

However, we do not think our sports costs should be part of any assessment and we reject the notion that Sky and TalkTalk require further regulatory assistance. They have more than 40 per cent of the broadband market between them compared to BT’s 31 per cent.

BT is trying to ensure real competition in pay TV sports for the first time in 25 years. Yet the UK’s lop-sided regulatory regime means Sky remains largely unregulated, while further hurdles are proposed for us, the pay TV challenger.”

UPDATE 8:42am

Next up we have TalkTalk’s response, which appears to be a lot happier with the result; despite the decision not to adjust prices.

A TalkTalk Spokesperson told ISPreview.co.uk:

We are delighted that Ofcom has confirmed that from now on superfast broadband will be a price regulated product. They are right to be concerned that BT could abuse its position to undermine competition in superfast broadband. Robust regulation creates a more competitive market that better serves consumers and small businesses.

We do think however that consumers should be disappointed that the proposals will not lead to an immediate price reduction. Broadband is critical to our future. This must be the beginning of the journey to bring down superfast broadband pricing and make consumers and Britain better off.”

Meanwhile, from further reading of Ofcom’s document, we note that BT’s plans to launch a consumer mobile service during the spring will be factored into the margin test (albeit only when mobile is included as part of a bundle). Ofcom will also re-run the test using modern price data some 2 months after the EC approve their draft regulation, which is important since the current decision is largely based off 2012/13 pricing.

At the same time TalkTalk and other ISPs often privately suggest that it may well be time to consider if the market would be better if Openreach were completely separated from BT, although such an idea has been proposed many times over the last decade and has yet to gain any traction.

UPDATE 9:40am

Market research firm Macquarie Research has put out an interesting perspective on today’s news, which is worth a read for some forward thinking context.

Macquarie Research Statement

Event

Our initial interpretation on the Ofcom’s VULA margin was that BT may be under pressure as it was effectively squeezing competitors’ margins. After further investigation this may not actually be the case and thus BT is complying with current VULA margin requirements.

Impact

However, with further reflection the strength of the message regards to allocating BT Sport costs is significant (section 6.354). Ofcom signals a material change in view and is looking to allocate BT Sport costs on a “take-up” basis as it reflects usage. This is effectively dominated by fibre customers. Any additional subsidisation or rights inflation clearly has more of an impact going forwards than originally envisaged.

Ofcom also signals that mobile should be included in any bundle calculation (sections 5.87 and 6.74), which in our view may impact BT’s commercial strategy when introducing bundled tariffs post the acquisition of EE. Indeed the Ofcom draft will focus more on BT entering the mobile market as an MVNO.

Action and recommendation

As such our conclusion remains the same. We continue to believe the Ofcom ruling is aimed at growing the wholesale fibre customer base more equivalent to BT’s retail Infinity base growth. It also has implications for BT’s strategy with sports rights and mobile, suggesting rationality going forward as any incremental subsidisation will have VULA margin implications. Indeed the contradiction of current EPL rights is that fostering competition in the auction has only inflated consumer costs both at retail and wholesale levels. BT substantially increased traditional access line and voice call costs in recent years by around 5-6% pa to recover its investment in sport and Sky has increased the cost of Sky Sports 1 and 2 by 4-5% pa. The overall financial impact on BT however is reduced by the potential purchase of EE, which significantly increases the scale of BT. We retain our Neutral rating.

Mark-Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook and .
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