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Virgin Media, KC and BT Join Forces to Resist Opening their UK Dark Fibre

Tuesday, March 31st, 2015 (8:34 am) - Score 2,923

Three of the biggest UK telecoms and broadband giants, including BT, Virgin Media and KC (KCOM), have jointly written a new letter to the national communications regulator in an attempt to dissuade Ofcom from making any changes that might require them to provide access to their Dark Fibre Optic lines.

The regulator is currently conducting a major Business Connectivity Market Review 2016 (here) and on top of that they’ve just announced a huge new Strategic Review into the country’s digital communications market (here).

At the same time BT has moved to gobble the United Kingdom’s largest mobile network operator, EE, which has triggered a wave of concern from rivals like Vodafone, Cityfibre, TalkTalk and Sky Broadband etc. (examples here and here). In particular the rivals fear that BT might gain an unfair competitive advantage because they could leverage their vast fixed line network in order to lower the costs of mobile provision.

As a result of all this BT’s rivals have almost universally been calling upon Ofcom to balance the scales by forcing BT into offering Dark Fibre access at a regulated price (i.e. fibre optic cables that have been laid with provision for future capacity, but which are not yet fully utilised) and or making their cable ducts / poles available for business use.

The idea is something that Ofcom has always resisted and in their last 2012 business connectivity review they said that such an approach, which is described as being one of several so-called Passive Remedies, would “carry significant risks of worse outcomes, both for consumers and for effective competition, including adding costs and encouraging inefficient entry“. Instead the regulator has preferred to continue their approach of light touch regulation, but the 2016 review may change that.

Naturally BT has previously described such an approach as being “unnecessary, intrusive and bad for customers“. Meanwhile Virgin Media, which has recently announced plans to expand their cable broadband network to cover around 60% of the UK (here), are concerned that any change in strategy by Ofcom towards BT might also force them into making a similar change. It’s also a feeling shared by KC (KCOM), which is the incumbent operator for Hull in East Yorkshire.

The recent responses given by BT and Virgin Media to Ofcom’s on-going 2016 Business Connectivity Review can help to shed some additional light on their concerns.

Virgin Media’s Reply to the BCR2016

Virgin Media notes that Ofcom was concerned that introducing passive remedies would mean ignoring the costs already incurred by other CPs in building alternative infrastructure. The creation of widespread infrastructure access through passive remedies could, if structured in an inappropriate manner undermine genuine network investment. Virgin Media notes that during the Appeal before the CAT, Colt suggested that there was little scope for further network expansion; Virgin Media do not share this view.

Ofcom would also need to consider whether any passive remedy may only lead to the cherry picking of areas with the most commercial opportunity. These areas are the least in need of regulatory driven competition, often with existing infrastructure competition in place. The introduction of a passive remedy that only rolled out in these “competitive” areas would undermine investment in network infrastructure, and thus run entirely counter to the benefit that [Physical Infrastructure Access] is intended to bring.”

It’s worth pointing out that Virgin Media don’t entirely oppose Passive Remedies and indeed they also suggest that a more targeted approach could be taken, potentially applying a geographically differentiated approach to the implementation of the remedy (i.e. not deploying such rules in areas where infrastructure competition is already strong).

Obviously this works in Virgin’s favour since they only tend to cover urban areas and there’s usually more than one operator in those. By comparison BT would be more vulnerable because they’re also required to cover many rural and suburban areas, where infrastructure level competition is often either low to non-existent. On the other hand it’s not cheap to deploy in those locations, but then BT still only run copper to a lot of the most rural areas.

BT’s Reply to the BCR2016

We are concerned that Ofcom appears to take as a starting point for its analysis an assumption that passive remedies would be beneficial, leaping to questions about common cost recovery and the types of passive remedies that could be imposed, and the issues that could be encountered in implementing them. This is the wrong starting point: Ofcom should instead start by assessing whether there are issues of lack of effective competition or of lack of effective regulation, and only if there are, then consider the proportionate remedies, including whether the relevant issues would be best resolved by changing the existing active remedies before considering introducing new passive remedies.

Our analysis shows that far from delivering significant incremental benefits, passive remedies would have a number of serious drawbacks. In particular, cherry picking by CPs using passive remedies would force BT to recover common costs elsewhere, to the detriment of end-users of the affected products, and CPs’ incentives to invest in their own networks would be reduced. Further, the use of currently unallocated passive capacity by other CPs would negatively impact on BT’s ability to use this capacity for future growth. This would violate the principle of allowing BT a “fair bet” on its investments.

It is also unclear how passive remedies could be restricted to business connectivity markets where BT has SMP, and this casts doubt on their proportionality and justification under the legal framework: it would be perverse to introduce such an intrusive remedy in markets where, for example, Ofcom saw no need to impose charge controls in the last BCMR.”

In that sense it’s no surprise to read in the FT this week that BT, Virgin Media and KC have now joined forces by writing a letter to Ofcom that clearly campaigns against any attempt to open up their business broadband and Ethernet infrastructure for use by rivals.

The letter warns that such a change could result in higher prices and “significant regulatory uncertainty, undermining the return on sunk investments and therefore disincentivising future infrastructure investments“. It also states that “allowing multiple operators to tamper with the physical network will cause service faults for customers“. The letter concludes by saying that the operators are “very concerned by recent calls from some quarters for Ofcom to abandon” the current regulatory approach.

On top of all that there are also calls for Openreach to be completely separated from the BT group, although in our view this seems unlikely to happen (the pros must first out-way the cons much more decisively and Ofcom would need to prove that) and it would probably require some strong direction / agreement from the Government first, which is something that we haven’t seen yet. Breaking up BT would make returning Network Rail to public ownership look like child’s play, but that’s not to say it isn’t an option.

Ultimately much may depend upon what the Competition and Markets Authority (CMA) says about BT’s gobble of EE later this year. Meanwhile Ofcom’s Strategic Review isn’t likely to reach any preliminary findings until the end of 2015. We expect this debate to continue cropping up until Ofcom reaches a decision.

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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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