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Ofcom Impose Rule to Keep BT’s FTTC Superfast Broadband Prices Fair

Thursday, Mar 19th, 2015 (7:53 am) - Score 1,700

The UK telecoms regulator has, following corrective advice from Europe, today announced the 1st April 2015 introduction of a new margin test rule that will mean BT must “maintain a sufficient margin between its wholesale and retail superfast broadband charges“, in order to allow rival ISPs some profitably to match its prices.

As a quick recap, the current situation began in May 2013 after TalkTalk complained that BT was “abusing a dominant position” in its wholesale supply of superfast broadband (i.e. up to 80Mbps capable FTTC Virtual Unbundled Local Access) services to rival ISPs by conducting an “abusive margin squeeze” in superfast broadband pricing (here). BT completely refuted the claim and Ofcom later rejected it (here).

But the regulator did agree to take a closer look at the margin question and at the start of this year they 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” (here).

As part of this 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. However BT described the test as “misconceived” and said that its sports costs should not be part of any assessment.

Shortly after that the European Commission warned Ofcom (here), in a non-binding comment, that its approach “lacks the necessary flexibility“. In particular it highlighted how Ofcom had considered that the costs of BTSport should be spread over 5 years, while the EC suggested that BT needed to be given the benefit of recovering those costs over a longer period of time.

The EC also noted that Ofcom’s proposal could result in BT increasing their retail prices and reducing their costs for BTSport. As a result of that Ofcom’s final statement on its new SMP requirement has been tweaked so that, when assessing BT’s compliance with the rule, it will take account of “changes to how BT distributes and charges for sport content, such as Champions League football“. Otherwise not a lot has changed.

Ofcoms Response to the EC

The VULA margin condition aims to address the concerns that BT might use its SMP in the WLA market and applies to that market. Regulating the margin inevitably affects the downstream provision of retail bundles that rely on WLA – indeed the purpose of the measure is preventing a distortion of retail competition. The VULA margin regulation could thus to some extent affect BT’s behaviour in relation to premium sports content (or indeed, any other product that BT chooses to bundle with superfast broadband).

However, as explained in above, our approach to assessing the VULA margin reflects BT’s current commercial strategy to bundle BT Sport with broadband, which, in turn, relies on the supply of WLA (in which BT possesses SMP). Therefore BT’s SMP in the WLA market does play a role in broadband markets. Similarly, just because including other components of BT’s superfast broadband bundles (e.g. supermarket vouchers) within the VULA margin assessment potentially changes BT’s incentive to continue to supply those components does not imply that their inclusion is inappropriate.

Furthermore, we are satisfied that the imposition of our VULA margin condition does not produce adverse effects which are disproportionate to our regulatory aim.

Given the circumstances we currently face in the UK, as explained above, we consider that our approach is appropriate and proportionate, even though it may affect BT’s conduct at the retail level where there is no finding that BT has SMP.

However, we agree with the European Commission about the importance of remaining vigilant to guard against adverse unintended effects. … If there is a material change in circumstances we may need to take this into account in any future assessment. Further, we will revisit our VULA margin regulation in the next fixed access market review (which will relate to the period after March 2017).

The first run of Ofcom’s new margin test, using older data, found that BT’s prices were fair and proposed no change. But BT fears that future runs using more current data might create problems and constrain their development. 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, the latter of which is also being looked at by the competition regulator (here).

A TalkTalk Spokesperson told ISPreview.co.uk:

We welcome Ofcom’s confirmation that fibre will be a price regulated product. It is an essential step towards creating a more competitive market that better serves consumers and businesses. We doubt whether this will initially lead to lower prices for consumers, so we look forward to seeing the first compliance report when it is submitted to Ofcom before June, and hope that that will create the necessary pressure to make the market more competitive.

This kind of regulation remains complex and costly, and its effectiveness should form part Ofcom’s full strategic review, as we believe full separation of Openreach is more likely to create an effective regulatory regime and a market that will lead to increased investment, healthier competition and lower prices over the next decade.”

The new regulatory condition will now apply from 1st April 2015 and no doubt TalkTalk, Sky Broadband and some of BT’s other rivals will be hoping that its introduction helps to keep the incumbents prices in fair balance. But naturally BT aren’t happy about it.

A BT Spokesperson told ISPreview.co.uk:

Ofcom have made changes to the way they will apply their margin squeeze test. This follows an unprecedented intervention by the EC who said BT should be allowed more flexibility to recover its sports costs over a longer period.

The amendments announced today do not adequately address our concerns nor those raised by the Commission. We will now consider our options. We are not opposed to the principle of a margin squeeze test – and in fact Ofcom has confirmed that we currently pass the test.

The proposed test is however flawed and, among other things, fails to recognise that BT is a new entrant in the Pay TV market. The effect is to provide unwarranted regulatory protection to the likes of TalkTalk and Sky.

UK regulation remains worryingly lopsided. The UK telecoms market is the most heavily regulated in the world yet there has been little action to address Sky’s continuing dominance of the Pay TV market. This imbalance needs to be addressed if customers aren’t to lose out in what is an increasingly converged marketplace.”

The first run of the test using more current data should be completed by the end of this spring, although we’ll be watching closely to see if BT’s lawyers don’t stick a spanner in the works.

Ofcom’s Approach to the VULA Margin – Final Statement
http://stakeholders.ofcom.org.uk/binaries/../VULA_margin_final_statement.pdf

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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