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

Thursday, March 19th, 2015 (7:53 am) - Score 1,666
broadband and phone prices pound sign

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

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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 Twitter, , Facebook and Linkedin.
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23 Responses
  1. Be interesting to see how this one pans out. BT is, in my view, clearly taking full advantage of (aka “abusing”) its market position in bundling BT Sport for free, whilst making other ISPs pay handsomely for the content.

    Am also intrigued by the EC – “The EC also noted that Ofcom’s proposal could result in BT increasing their retail prices and reducing their costs for BTSport”. Well, duh!?! Surely that is the whole point of the margin squeeze test! It gives me the impression that the EC has a very blinkered view on life in that it thinks that the only acceptable remedy for a margin squeeze should be the wholesale price of VULA coming down.

    I find this pretty bizarre given that the EU has explicitly stated that it wishes to allow operators wholesale pricing freedom so as to let them assess for themselves the required returns on investment. Such freedom thus means that the operators concerned must be able to increase their retail prices if this is necessary to provide the required margin whilst permitting suitable ROI on the wholesale element.

  2. DTMark

    “or some other slight commercial drawback relative to BT..”

    Every other operator has a commercial drawback relative to BT. They are not the infrastructure owner and have to pay the Wholesale price. BT does not have to pay the Wholesale price. They pay the cost price. This is “built in” to the vertical monopoly model and is an inevitable feature of such a model.

    “[BT must] maintain a sufficient margin between its wholesale and retail superfast broadband charges”

    What is the definition of “sufficient margin”?

    • Steve Jones

      That’s really quite silly. If BT consumer and OR were separate, the latter would make money on the wholesale margin over cost whilst the former would make its money from the difference between the retail price and its costs including, of course, the OR wholesale charges. Combined, they make the same profit on a company which is the sum of the parts. If the same parts were owned separately by the same shareholders it would mean, all other things being equal, the same profits for the same value.

      In reality, OR’s costs would go up which would be reflected in higher wholesale costs as those would have to be included in the Ofcom calculations. Also, OR would be liable for the great majority of the BT pension deficit for the simple reason the vast majority of BT pensioners were from the network side (in the 1980s, there really wasn’t much more than the basic phone network business). For OR to carry the great majority of that liability would adversely impact investment planning. OR itself only turns over about £5bn, and if those who favour stripping it of higher value products get there way (so it’s only dark fibre), then that will collapse further.

      There is an argument to be made about investment priorities as a group, but the argument that BT are somehow only paying cost for basic network access is not one of those. BT shareholders own those assets. If Ofcom choose to regulate them tightly in the public interest, then they are entitled to a fair return.

      Of course the alternative operators will make the case to break up BT as it would cripple a major competitor. BT Consumer’s investments have been made in the light of it being part of a group, and would undoubtedly look different in other circumstances. It would, at the very least, cause enormous disruption and uncertainty.

      Despite your wishes, it’s simply not ethical (or legal) to play fast-and-loose with the private interests of shareholders without their legitimate interests being taken into account. If a regulatory regime could be produced where it was mutually beneficial to split the company, no doubt it would happen. As it is, this is not on offer.

    • DTMark

      Oh, the pension scheme again. Hence the expression (not mine originally) “BT is a pension scheme with an old phone company hanging off of it.”

      Nobody except BT staff and pensioners gives two hoots about BT staff pensions.

      In short: when BT voluntarily surrenders the Crown Guarantee on the pension scheme, attitudes might change.

    • Steve Jones

      @DTMark
      “Nobody except BT staff and pensioners gives two hoots about BT staff pensions”

      As it happens, BT staff and pensioners will not be particularly concerned about the BT pension scheme (or at least those on the final salary pension schemes), as those are ultimately guaranteed by the government (which has been confirmed in court).

      http://www.btpensions.net/56/277/crown-guarantee-update

      However, those that should be concerned are shareholders, regulators, tax payers and anybody reliant on BT or OR services. That’s because, despite your airy dismissal of the whole thing, it’s a legal obligation and would have to be taken account of in any split of the company. From what I last recall, the BT pension scheme (which has 340,000 pensioners, either current or deferred) had a deficit of about £7bn, despite assets somewhere around £40bn.

      Of course, it would take a long time for BT to actually go bankrupt, but if all the free csh flow had to go into propping up the pension scheme, then that don’t inspect much in the way of investment. Further, I suspect the government won’t want to get landed with the liability (as they have with the Post Office scheme).

      It’s not actually in the UK’s interest to have a weakened BT unable to meet contractual requirements and unable to invest.

    • Steve Jones

      Incidentally, it’s not in BT’s power to “give up the Crown guarantee”. That’s a guarantee to pensioners, and only comes into play if BT ceased to exist and hence of no value to the company as, by definition, it would have ceased to exist if it came into play.

    • DTMark

      I have a feeling that we’re close to agreeing that BT is not an appropriate company to take the country forward technologically because of the pensions burden 😉

  3. GNewton

    @Steve Jones: While your loving concern for the BT shareholders is admirable, most people couldn’t care less.

    Openreach needs to become a completely independent company, not being part of BT Group. The intial shareholders of this new company will also have BT shares, true, after this splitup. But over time, probably sooner than later, the number shareholder engaged in both BT and an independent Openreach will decrease, shares are being purchased or sold all the time.

    If this new Openreach goes bankrupt because of the pension burden, so what? Hardly anybody cares. Dodgy pension schemes come and go all the time.

    The last thing to do is to rescue BT with taxpayer money. BT is not a charity!

    • Steve Jones

      The government would care as they are legally obliged to cover the deficit in the even BT went insolvent.

      http://www.btpensions.net/56/277/crown-guarantee-update

    • GNewton

      It also says this:

      “It is possible that the Trustee, BT and the Government all decide to take steps to appeal the judgment to the Supreme Court, the final appeal court in the UK. It is important to remember that the Crown Guarantee is only relevant in the highly remote circumstances that BT was to become insolvent.”

      Either BT is a real company, or it isn’t. If it isn’t, then it should really be subject to a much stricter regulation to the effect that it will be forced to do proper telecom services first before embarking on other cross-subsidised adventures the BT Sports, EE, etc.

    • TheFacts

      Please define proper telecom services.

    • Steve Jones

      @GNewton

      BT are already subject to an extremely intrusive regulatory regime which goes way beyond what competition law dictates. For instance, the VULA margin squeeze test (and that applied for other products) are not simply about predatory pricing, they are explicitly set to guarantee competitors a profit margin, even if their own costs are higher.

      Once state bodies are engaged in intrusive regulation, they have to act so as not to be unreasonably prejudicial to legitimate shareholder interests, or it would be liable to legal action,

    • GNewton

      @SteveJones: “they have to act so as not to be unreasonably prejudicial to legitimate shareholder interests, or it would be liable to legal action,”

      No, it wouldn’t, the shareholders would have no chance. The shareholders took the risk, and they know that BT is not a normal commercial company.

      As I said, much more stricter regulation is needed, Ofcom in its current form is a failure. Openreach has to becone a completely separate company, the pension burden can be split between BT and the independent Openreach company, in proportion to the share values.

      The pension burden is not a valid reason for the lack of investment in fibre telecom services.

    • fastman2

      openreach is equivalent and supports service providers at an equivalent basis — not sure what your issue is with that

      FYI so you likle to go back to 1984 who only one choice then woudl you

    • GNewton

      @fastman2: All are equal, but some are more equal than others 🙂

      Seriously, BT Group owns both OpenReach, Wholesale, Consumer, and other companies and/or divisions. Therefore, along with all the taxpayer’s support, it will always have an advantage over its competitors. How do they get all the money for adventures like free BT Sports etc?

      On the other hand, there is no point in building multiple competing last-mile network infrastructures, one independent company (e.g. Openreach, subject to strict regulations) is enough for this. If if can’t do build fibre networks for certain regions, take away the telecom license for it, and let someone else do the job then.

    • TheFacts

      What ‘telecom licence for it’? Do you mean Code Powers which over 100 companies have to allow them to compete with each other and dig up the roads?

      There is no business case for FTTP in many areas, if there was surely we would see it happening.

    • FibreFred

      “How do they get all the money for adventures like free BT Sports etc?”

      Check their accounts they are in the public domain

      “If if can’t do build fibre networks for certain regions, take away the telecom license for it, and let someone else do the job then”

      lol, BT can provide fibre circuits all over the UK, they can and have done for many years, take away their license? 🙂 based on what your gripes??

    • GNewton

      @TheFacts: “There is no business case for FTTP in many areas, if there was surely we would see it happening.”

      Seriously, why do you care? You don’t even know how tom use Google or to do your own research. Besides, you have already posted your proposal of a government funded nationwide fibre rollout sone weeks ago! Have you changed nyour mind now?

  4. fastman2

    so what about the 2,5 bn commerical and addition circa 1bn as part of match funding in BDUK

    • DTMark

      BT has been privatised for 31 years.

      The “investment” is absolutely peanuts and would never have come about were it not for the dangling of taxpayer’s money.

      Oh, for those halcyon days where every property had one telephone line, only wanted a phone service, could be guaranteed to take it, and would almost always pay their bills.

      Odd how communism/socialism becomes so appealing when pensions are involved, yet would not be tolerated in any other area or enterprise.

    • FibreFred

      Their commercial rollout ( and investment ) started long before bduk was even dreamt up , so no “dangling” back then

  5. danny

    make`s no difference if its “fair or not” either way they bang it on line rental instead to put the price up. It is lousy Britain

    • GNewton

      The money for BTs non-telecom adventures like BT Sports etc has to come from somewhere! There is no such thing as a free lunch.

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