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UPDATE Ofcom Propose Big Price Cuts for BT’s UK Wholesale Leased Lines

Friday, June 12th, 2015 (8:07 am) - Score 1,860
BT major fibre optic cable junction telephone exchange uk

The national telecoms regulator has today proposed a raft of “significant real-terms price reductions” for mobile operators, broadband ISPs, public sector organisations and businesses that buy BT’s high-speed wholesale Leased Line links, which form part of a market worth £2bn across the United Kingdom.

The update is part of Ofcom’s Business Connectivity Market Review 2016, which last month also proposed that BT’s rivals (ISPs and mobile operators) should be granted access to harness the operators national Dark Fibre network (except in central London and Hull). A new minimum Quality of Service performance requirement was also imposed in order to speed up related installations (here).

But Ofcom also wants to bring down the cost for some of BT’s other wholesale leased lines (over a three-year period), specifically their older services using Traditional Interface technology (bandwidths up to 8Mbps) and newer lines based on the faster Ethernet standard for sending data at very high speeds over networks (bandwidths up to 1Gbps).

As usual the new price controls have been linked to inflation based on the Consumer Price Index (CPI), which Ofcom believes will provide “an incentive for BT to make efficiency gains“. We suspect they may see things differently.

Traditional Interface Leased Lines

Ofcom is proposing an overall basket cap of between CPI – 6.25% and CPI – 14.25%, with a central estimate of CPI – 12.25%. This will mean prices will come down using those formulas each year, for three years from April 2016.

Ethernet Leased Lines

Ofcom is proposing an overall basket cap of between CPI – 9.75% and CPI – 17.75%, with a central estimate of CPI – 13.75%. Again, prices will come down using those formulas each year, for three years from April 2016.

Ofcom’s latest consultation also includes a forecast of Ethernet circuit volumes, which shows that there has been “significant growth” over the period from 2007/08 to 2013/14, and that this trend is expected to continue to 2018/1.

ethernet circuit volumes 2015

On the flip side BT’s Traditional Interface services are already in steady decline as customers swap to faster / cheaper solutions (e.g. EFM, FTTC etc.) and the operator ends support for their PDH platform that supports sub-2Mbps services, which is largely due to obsolescence of the equipment.

But the regulator predicts that their controversial Dark Fibre changes will cannibalise some active circuits forecast in the next review period, with the prediction suggesting 50% cannibalisation of new connections (and associated rentals) for EAD, EAD LA and OSA circuits at 1Gbps and above in the second year of the control (the first year that the proposed dark fibre remedy will be commercially available).

Furthermore it’s noted that this cannibalisation could even hit 100% in the final year of the control (i.e. no new connections), although we must not forget that BT would be selling a new Dark Fibre related solution in order to replace those services. At least they will if Ofcom can reach an agreement, which will require a difficult engagement between BT and its rivals; hence we probably won’t see anything being imposed until April 2017.

BT has already claimed that Ofcom’s Dark Fibre proposals will “undermine investment and it would also increase costs, divert resources and add more complexity just when we’re beginning to make progress on improving service.” Ofcom’s last review in 2012 even agreed with this assessment, with the regulator saying it would “carry significant risks of worse outcomes, both for consumers and for effective competition, including adding costs and encouraging inefficient entry.” How times have changed.

Ofcom last month proposed that the price of Dark Fibre access should be based on BT’s existing 1Gbps Ethernet products, for which BT provides the electronics, minus the cost of those electronics. Today’s consultation also provides guidance on how Ofcom would expect those costs to be calculated, but otherwise there’s nothing special to report.

Curiously Ofcom’s press release states that today’s consultation will remain open until 31st July 2015, although their website actually states 7th August 2015. In any case Ofcom anticipates that they’ll be able to publish the final decisions during Q1 2016 and the price adjustments (except on Dark Fibre) would then take effect from 1st April 2016.

UPDATE 9:29am

Now we have BT’s reaction.

A BT Spokesperson told ISPreview.co.uk:

These are proposals for discussion, so we’ll be making our views known to Ofcom. We don’t expect a final decision for some time.

We believe there should be less regulation in this market, not more, as businesses already have diverse and growing choice amongst a large number of providers.

More regulation could discourage future investment in the UK’s telecoms infrastructure.”

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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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2 Responses
  1. Avatar MikeW

    How on earth would a cost control manage to incentivise BT to make efficiency savings for “traditional” interfaces?

    Surely these are legacy services, using legacy equipment. There’s no opportunity to make things cheaper through new equipment, new procedures, new access – because they’re all additional, unnecessary costs. Any investment surely heads towards the modern, ethernet-based interfaces.

    Don’t “efficiency gains” usually come as you expand a service beyond the initial early adopters?

    On a declining service, costs are likely to increase … but a cost control that causes prices to reduce will act as a disincentive for customers to move service … and make it more likely that BT just pulls the plug on the service entirely.

    • Avatar Steve Jones

      If very tight price controls are placed on OR on leased circuits (and, therefore dark fibre if that goes through), then it’s going to he a huge disincentive for alternative operators to install fibre themselves, at least in new areas. It could further entrench OR in those regions.

      I’m also wondering if BT will continue to be allowed freedom of pricing in metropolitan areas. The issue might be that Ofcom will seek to apply some margin squeeze test to allow alternative operators to compete in installing fibre in those areas.

      In all, this is a very interventionist exercise by Ofcom. I really don’t see any sign that Ofcom want to lighten the regulation load. Very much the reverse.

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