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EU Caution Ofcom Over Regulation of BT’s FTTC “Fibre Broadband” Prices

Friday, February 20th, 2015 (7:52 am) - Score 1,985

The national UK telecoms regulator’s plan to control the margin between BT’s wholesale and retail superfast “fibre broadband” (FTTC) prices has suffered a setback, albeit a non-binding one, after the European Commission (EC) warned that the “proposed approach lacks the necessary flexibility” and could result in higher retail prices for consumers.

The situation stems from TalkTalk’s repeated accusations, which have often received support from Sky Broadband, that BT has been “abusing a dominant position” in its wholesale supply of FTTC services to rival ISPs by conducting an “abusive margin squeeze” in superfast broadband pricing.

Ofcom ultimately rejected TalkTalk’s complaint (here), but the regulator did separately propose a new Significant Market Power (SMP) requirement (here) that would ensure BT “does not set the [Virtual Unbundled Local Access] 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” (VULA is what big ISPs use when selling FTTC).

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 TV content, which is offered for free to BT’s own retail broadband customers and at cost to rival ISPs. TalkTalk said they were “delighted” with the move, while BT described Ofcom’s statement as being “misconceived but not unexpected” and they rejected the idea of including BTSport into the test.

The first run of this margin test found that BT’s previous prices were fair and proposed no change, although BT fears that future runs using more current data after March 2015 might create some problems. This is partly related to BT investing ever larger sums of money into BTSport and not to mention the possible future impact of including mobile services into their bundles.

Ofcom originally planned to publish a final statement by the end of this month, although before that the proposal had to be reviewed by Europe. The EC have now furnished Ofcom with a formal non-binding comment on the proposals and they appear to have some reservations.

EC Letter Sample (Reuters):

Ofcom’s proposed approach lacks the necessary flexibility in particular with regards to the treatment of costs for BT Sports … The Commission considers that the proposed static approach unduly limits BT’s commercial activity with regards to a market in which it does not have [Significant Market Power].”

One particular area of contention is with regards to how Ofcom’s proposal considers that the costs of BTSport would be spread over 5 years, while the EC suggests that BT should be given the benefit of recovering those costs over a longer period of time. The EC notes that the current proposal could also result in BT increasing their retail prices and reducing their costs for BTSport.

Naturally BT has welcomed the EC’s comment and called Ofcom’s new test “fundamentally flawed“, while also recommending that the regulator adjust their proposal to reflect Europe’s review. Meanwhile TalkTalk suggested that the EC’s statement otherwise endorsed Ofcom’s new margin squeeze regulation and added that, “this must be the beginning of the journey to bring down superfast broadband pricing“.

Finally, Ofcom said they would consider what the EC had said and review it before publishing their final statement “in due course“. It’s worth pointing out that a lot has happened since the draft obligations were first posted in January, not least with BT finalising a £12.5bn agreement to buy mobile operator EE (here) and their grab of more Premier League TV football rights for the 2016/17 to 2018/19 seasons (here).

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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 Twitter, , Facebook and Linkedin.
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28 Responses
  1. Couple of points spring to mind here:

    1. How can the EU possibly conclude that BT does not enjoy SMP over the premier league football rights it controls?

    2. If TalkTalk will merely pass on any reductions in VULA to its retail customers (“the beginning of the journey to bring down superfast broadband pricing”), how can it claim to have a margin squeeze issue?

    1. Mark Jackson says:

      I suspect part of the answer to no.1 is because Sky remain the operator with SMP in Premier League footy. The recent £5.136bn rights deal is a case in point, with Sky buying content that accounted for £4.1bn of the total. So BT is a major player, but it’s clear that Sky still hold the lions share.. enough to hold a huge influence.

    2. Steve Jones says:

      Couple of points spring to mind here:

      1. How can the EU possibly conclude that BT does not enjoy SMP over the premier league football rights it controls?

      That one is easy to answer. Neither EU or Ofcom have determined that BT has SMP in sports cover. That’s simply because the assessment for SMP is not over individual subsets of a wider market. So the rights to a minority of games is not, in itself, consider to have SMP as it doesn’t allow a company to control pricing. Of course, it’s a matter of judgement as to what constitutes a market, and if you want to take things to extremes you might consider the rights to just one game would give SMP for that game.

      2. If TalkTalk will merely pass on any reductions in VULA to its retail customers (“the beginning of the journey to bring down superfast broadband pricing”), how can it claim to have a margin squeeze issue?

      Talktalk don’t just want a reduction in VULA charges, they want action by Ofcom to ensure that they have a healthy margin by regulating BT Consumer pricing too. Hence the controversial issue of the treatment of BT Sport. So Talktalk’s ideal result is a reduction in VULA and maintenance of BT Consumer prices at a premium level. Besides competition from BT Consumer, Talktalk will also be aware of competition from VM so the ability to offer lower prices in that area is clearly desireable.

    3. I take both points about the footy, but to me it is not that much different than the mobile operators – where we have multiple operators with different market shares all of whom are deemed to have SMP for call termination on there own networks. When you look at what BT is doing – paying huge sums to the Premier League for football content and then giving it away to its own broadband customers, whilst charging a lot for other ISPs to take it, then really Ofcom ought to wake up in my view.

      Re VULA – I have read previously that reductions in VULA charges is exactly what TalkTalk want, and have been banging on about for quite a while. I do agree with Steve’s final comments though about the ideal result. Can’t see it happening with Ofcom the way it is.

    4. Steve Jones says:

      I should clarify that it’s Talktalk’s idea of an ideal result, not necessarily ideal for others of course. VM for one will not want to see cut-price as they have been complaining for years that Ofcom’s priority on minimising the wholesale costs of fixed lines has been a huge disincentive for investment in fixed networks.

      As for giving away BT Sport, it’s not so much given away as sold as part of the package. BT actually got away relatively lightly with the latest premiere league football costs. They paid about 30% more for an enhanced package whilst Sky paid a huge amount more (the result is Sky are paying far more per game). That was partly down to the structure of the bidding process which was done “blind”. That is Sky had no idea who they were bidding against, if anybody so went for a “knock-out” as their business is defined by premier league football. BT apparently took a calculated risk that there were no more serious competitors (no one operator is allowed more than 70% of matches anyway).

      Anyway, looking at other reports, it appears that the EU commission’s complaints aren’t against the principle of the margine squeeze tests including BT Sport, but that the rules Ofcom are using are far too rigid and narrowly defined. Like many things, investments in rights such as these are a long term investment with strategic aims, not simply that they payback in rigid 6 month slices.

    5. “it’s not so much given away as sold as part of the package”

      lol!

    6. Steve Jones says:

      I fail to understand the mirth. All sorts of things get wrapped up in packages. Sky do it, VM do it, mobile operators do. It’s simply part of a retail marketing exercise. Why else would BT Consumer bother with this unless it believed it would attract customers through a mixture of retention, attracting them from other operators or up-selling their own products. It might, or might not work, but it’s all part of a competitive market in retail.

      I, personally, have no interest, but my brother migrated from ADSL on Zen to FTTC on BT because he follows club rugby.

      In any event, BT Sport is also resold to other retail customers, clubs, pubs and some other networks. It’s not all directly attributable to Infinity customers.

      nb. Sky do the precise opposite thing. The bundle cheap broadband with their subscription operations (where they have SMP in some areas, chiefly sport).

    7. Simple really. The price did not go up when they started to include BT Sport – hence it is being given away.

    8. PaulC says:

      BT sport is clearly given away with certain broadband packages. FTTC 80Mb Unlimited from BT has for example dropped in price from £26 to £20, so there is no way the price is built in unless they were charging extortionately for it when things were £26. Any costs are obviously made up elsewhere, more than likely the ever increasing line rental.

    9. Steve Jones says:

      Of course we are see cost shifts between nominal line items. All the ISPs are doing it, largely to keep the “headline price” of broadband down. I’m strongly in favour of the ASA making all broadband providers headline their package costs including all the non-optionals (like line rental of course).

      However, whichever way you cut it, it’s the package that’s being bought. Whether you call it “free” or not is a matter of marketing. It all, eventually, has to be cost recovered from the price charged.

    10. PaulC says:

      What price do you believe is being charged for BT sport on BT Internet packages then?

    11. Steve Jones says:

      BT Sport isn’t separately itemised on Infinity, so who knows. It’s worth what potential customers think it is to them. After all, there are several ISPs to choose from which resell the same GEA-FTTC product.

    12. AndyH says:

      “FTTC 80Mb Unlimited from BT has for example dropped in price from £26 to £20″….erm no it hasn’t.

    13. PaulC says:

      You must have some idea of the cost if you claim it is part of the cost of a package. You can get broadband at the moment from BT for under £5 per month with BT sport included. What is the cost of BT sport in say that package?

      @Andy yes it did…
      http://www.ispreview.co.uk/index.php/2015/02/uk-isp-bt-cuts-76mbps-infinity-2-unlimited-broadband-price-20.html

    14. AndyH says:

      Right, so their pricing hasn’t changed. It was a special offer for new customers for the first 12 months.

    15. PaulC says:

      Call it what you wish but if BT Sport pricing is built into the cost of the broadband package the percentage of the cost for BT Sport must of been different with that offer. Furthermore it makes even less sense as that price was shortly after BT had spent billions more on football rights for next season. So a price reduction if there is a charge for BT Sport in a broadband package makes even less sense.

      Furthermore the Unlimited 76Mb product used to be £26, it is now £25 excluding any offers, that is a £1 decrease again meaning the charge if it is built in for BT Sport must of been reduced. Again makes little sense considering recent expenditure on rights.

      All this leads to a simple question of how much is being charged for BT Sport within these packages? There has to be atleast a guideline figure or if it varies a bottom and top end pricing percentage or structure.

      Furthermore if it is charged for the cost must be so insignificant it is basically nothing (or indeed free) as you can currently buy a BT broadband package for £4.75 which includes BT sport. How much of that £4.75 is for the broadband and how much is for BT Sport?

      These are not unreasonable questions if information you are presenting insist that the product incures a charge.

    16. AndyH says:

      Why does it make little sense?

      What about other revenue streams for BT Sport? Commercial subscriptions/VM agreement/advertising/non-BT individual subscriptions?

      You’re assuming that only BT retail customers subsidise BT Sport, when this is far from the truth. They’ve done their maths and modelled the numbers when submitting their bids. Clearly they are confident they can make it a profitable venture – BSkyB certainly has been able to in the past.

    17. PaulC says:

      “Why does it make little sense?”

      You can not spend more money yet charge less and still optimise your profit. Thats what has happened with the broadband packages that include BT Sport though.

      “What about other revenue streams for BT Sport? Commercial subscriptions/VM agreement/advertising/non-BT individual subscriptions?”

      The price BT can sell the rights to their channels to Sky, Virgin etc is regulated by Ofcom, this would not be enough either to recoup the 1+ Billion just recently spent.

      “You’re assuming that only BT retail customers subsidise BT Sport, when this is far from the truth.”

      No i am not, in fact im including those because if it were just BT Retail or rather Vision and Youview people paying for the service that would not be making them money either as they only have approx 2 Million customers for both those platforms from memory.

      “They’ve done their maths and modelled the numbers when submitting their bids. Clearly they are confident they can make it a profitable venture – BSkyB certainly has been able to in the past.”

      Nowhere did i decline that they could make a profit from BT Sport. What i question is where the profit is coming from and if a charge for BT sport is built into all packages that include BT Sport then please explain what the charge is. Even more so on the broadband + BT Sport package currently selling for just £4.75 (IE 17Mb 40gig cap includes BT Sport).

      So far you have not answered this despite me asking several times. To me on a package that cheap you can not be making much if it were just broadband or just BT Sport let alone both.

      Perhaps it would be easier if you broke down the broadband cost involved in that £4.75 package for us to see how much profit is left for the sports included with it.

      This i believe is a reasonable query to ask if you believe profit or even a cost for BT Sport is applied to these broadband + BT Sport packages.

    18. AndyH says:

      You’re asking questions no one can answer on here.

      It’s impossible to give a generic answer as to the BT Sport contribution from each package, because the bandwidth usage will vary between end users and this affects the profitability (or loss) from each account.

    19. PaulC says:

      Usage allowances do not come into the picture BT Sport viewing does not count towards any usage allowance.

    20. AndyH says:

      I’m referring to the backhaul charges. It’s the same company, but it’s not cheap to build/maintain/upgrade the backhaul – it’s why other ISPs are charged £48+ per Mbps.

      Heavy users cost ISPs money, there will be no profit on those accounts.

    21. Paul says:

      I am not sure what you mean, if backhaul were a problem and costing them money then why would BT allow BT Sport online viewing to have no usage allowance?
      Even More so on a package which for other activity is a 40GB limit.

      With regards to other ISPs that provide BT Sport such as Virgin, Sky etc they use their own capacity rather than BTs for BT Sport.

    22. MikeW says:

      Somewhere in the discussion on BT Sport, you have to figure a few other considerations…

      BT undoubtedly want to run a pay TV empire just like Sky and VM, only fed as an OTT IP service. They have to start by getting people used to paying for TV via broadband, and capturing share in a similar way to how Sky started – through use of Sport. Eventually, they’ll add more to the TV options.

      Being able to add high value services (like TV content) on top of the commodity broadband service is hellishly valuable to BT, because it makes it harder for people to leave. Less leavers makes for less churn, which makes for higher revenue per user over time. Those initial discounts don’t last forever.

      Getting more people to buy higher-priced options on the commodity broadband, adding paid TV services, and reducing churn – all of these very much offset the raw cost of sports right.

      As for backhaul … Remember that the TV service is broadcast using multicast IP. It doesn’t use backhaul in the traditional manner, but does have its own infrastructure that has to be paid for. That has to be, pretty much, a fixed cost per broadcast channel, no matter how many users are subscribed, or even watching.

    23. Paul says:

      How would you explain it is currently paid for?

  2. DTMark says:

    For broadband services, BT [Retail] in effect pays the cost price since all that’s happening is that money is moving sideways in the same company.

    Every other supplier would have to pay more, the Wholesale price.

    To make it equivalent, everyone would have to pay the cost price.

    Which gives nobody at BT any incentive to get out of bed in the morning.

    I don’t see how this type of vertical monopoly can ever work to deliver the competitive benefits that are claimed.

    1. Steve Jones says:

      BT Consumer have to produce a profit on their own merits using the same price as the other retailers. If BT Consumer were not to do so, then they would fall foul of competition rules. BT Consumer produces separate financial figures.

      The classic way of a vertically integrated company is to perform a “margin squeeze” by artificially transferring costs from the upstream side of the business to the downside one. There’s very little flexibility to do this now given very rigid regulatory separation. BT Consumer’s market share on fixed line is the lowest of any of the incumbent’s in comparable EU markets.

      There is another point, and that is to what extent OR would have invested without a major customer clearly committed to the promotion of the FTTC products. In the retail space, BT consumer have been by far the most active marketers of the products, with the LLU operators lagging behind. That’s not surprising, as the LLU operators have their own investments, and the OR GEA-FTTC products threaten quite a lot of that. So there is a lot of doubt whether OR would have risked the investment. There were many institutions who just favoured using OR as a cash-cow and minimising investments.

      Of course BT will want OpenReach to maximise revenues, but at the moment there is regulatory forebearance on the pricing of the GEA VULA products in order to encourage investment. Ofcom’s dithering on their regulatory approach delayed such investment; the regulator’s strategy had been to hope that NGA infrastructure investors would come along, but the uncertainty they left in the market just wasted time. In any event, the regulatory forbearance on VULA pricing levels will surely not last, once it shows signs of being the dominant DSL solution.

      In any event, the UK’s regulator has never been called to task for lax regulation by the EU, unlike many of the other major countries where principles like “equivalence” are hardly present.

    2. DTMark says:

      But there isn’t a company called BT Retail. Or BT Consumer. Or, Openreach. There is one company called BT Plc.

      “Internal separation”, apart from breaching a golden rule of what I’d call “interference in private companies” (OK, we know the history, the regulated status, and why this is so) does not alter that. I do not see how you cannot have an effective “margin squeeze”. BT cannot and must not operate like some sort of “happy co-operative” with others who are competitors. It has shareholders and duties and rightly so.

      As far as investment goes, no company, especially one with a history of chronic underinvestment and poor products and services, is going to turn down a gift of a billion pounds with the certainty of a further cash stream to come.

      “The risk of investment” cuts both ways. Previously, you alluded to the cost of maintaining for instance the infra, poles, cabling. Someone has to pay. Except, here, nobody is paying. It just sits rotting away unused, because it cannot deliver anything useful, so it has sat there for seven years generating no income. There is also the risk of irrelevance which I don’t see being weighed.

    3. Steve Jones says:

      Of course somebody is paying for the maintenance and the replacement of telegraph poles and the like (from what I see from OpenReach, that’s about 48,000 replaced per year). Maintenance costs are all part of what’s included in the regulated wholesale price for fixed lines. Those very same telegraph poles (and ducting) can, occasionally with enhancements, carry fibre optics as easily as copper. Indeed, if you look at the OR valuation of the fixed infrastructure that is the major part, not the copper network as such.

      It’s a simple fact that, without some reasonable expectation of a return, investors simply won’t put money into the network. They will just stop non-essential maintenance and seek to maximise income whilst that’s still possible. There’s probably at least another £500m a year that can be extracted that way. It was a seriously considered by city investors at one point, especially when BT’s share price dropped to as low as 73.4 pence (as it did in April 2009) and the total market capitalisation of the company was below £8bn.

      In any event, you need a legal basis for your approach. Ofcom don’t have powers to do it. They would have to make a referral to the Competition Commission, the outcome of which would be very uncertain (especially as the grounds look dubious given BT’s relatively low share of the retail telecoms market). Such a process would take years, and would be open to judicial review. That’s especially so in the light of the 2006 settlement (which has achieved Ofcom’s main aims), and BT shareholders might well have a good legal case that their investment has been prejudiced by what amounts to a retrospective change on a settlement on which they based their investment decisions. BT Consumer would be put at a profound disadvantage as they are not an LLU operator and would have made very different investment decisions under full legal separation. (Not to mention where BTW fit into this picture and their role as a supplier to many smaller operators).

      All this stuff was considered in late 2004, when Ofcom threatened BT with a reference to the Competition Commission. It was known at the time that any such exercise would have taken a minimum of two or three years and, with a doubtful outcome, would have put a huge dampener on investment in broadband, both by BT and the LLU competitors as it would have put structural changes in BT on hold. A full legal and physical separation of BT would have taken more time to achieve (even longer than the functional one under the settlement). Instead, Ofcom accepted the “voluntary” equivalence settlement as that, relatively rapidly, achieved a reasonably stable regulatory and commercial environment for LLU investment. Now that ADSL has run its course as a solution, that may be something of a handicap in the long run, but it did establish a number of strong retail competitors to BT consumer.

      In short, you aren’t going to get what you want unless a government decides to force it through, and given the potential disruption and cost to the exchequer (bear in mind they are ultimately liable for the pension fund), I don’t see it happening.

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