UK Competition Regulator to Examine BT’s Superfast Broadband Prices

Opposing appeals by both BT and TalkTalk against the approach taken last year by Ofcom’s new “margin squeeze” test, which is designed to keep the incumbent operator’s FTTC “fibre broadband” prices under control, have today been referred to the Competition and Markets Authority.

The situation originally began in 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 [VULA]) services to rival ISPs by conducting an “abusive margin squeeze” in superfast broadband pricing (here).

However BT completely refuted the claim and Ofcom officially rejected it (here), although the regulator still felt the need to impose a new Significant Market Power (SMP) requirement upon BT to ensure they didn’t “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).

The test also factored other aspects of BT’s retail pricing, such as how it bundles in free BTSport (TV) content with broadband, although the European Commission later cautioned Ofcom (here), in a non-binding comment, that its approach “lacks the necessary flexibility“. 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.

Naturally TalkTalk felt as if Ofcom didn’t go far enough and at the same time BT viewed the new SMP requirement as being unnecessary. On 22nd May 2015 both BT and TalkTalk formally tabled appeals with the Competition Appeals Tribunal (here), which incidentally both included Sky UK (Sky Broadband) as an intervening party.

Short Summary of TalkTalk’s Appeal

1. (Ground 1) Portfolio test alone is insufficient: OFCOM erred in concluding that a product level test (based either on individual products or groups of related products) to complement its portfolio test is unnecessary and therefore disproportionate. A portfolio based margin test alone does not preclude BT from applying a margin squeeze to individual market segments or operators, thereby distorting competition. It is therefore insufficient to achieve OFCOM’s regulatory aim, materially undermining its objectives.

2. (Provisional Ground 2) Failure to adjust for differences in call revenues: OFCOM may have erred in not adjusting for the apparent fact that BT benefits from higher call revenues that cannot be replicated by a competitor. Further or alternatively, OFCOM may have erred in not investigating this issue sufficiently and/or in failing to provide sufficient reasons for concluding that an adjustment was not appropriate.

Short Summary of BT’s Appeal

1. The market analysis on which the reasoning of the Decision rests in manifestly inadequate and wrong in principle, rendering the Decision unlawful.

2. The design of the Condition is defective in applying a rigid monthly test, including in particular the recovery of fixed costs of sports content on a ‘bright-line’ basis.

3. Both the above defects reflect a serious failure to take “utmost account” of the views of the European Commission (the “Commission”), contrary to the obligations of the United Kingdom and OFCOM under Articles 7(7), 15(3) and 19(2) of Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services.

4. Further, the amendments made in the Decision, constituting OFCOM’s response to the Commission’s specific request to revisit the design of the test, aggravated rather than mitigated the defects in OFCOM’s approach and rendered the application of the Condition wholly unpredictable in its intended operation, contrary to the general principles of EU law including legal certainty and transparency.

Several months of hearings followed and today the CAT has announced that both appeals will be referred to the Competition and Markets Authority, which is what they are required to do when such gripes include a price control matter. The CAT has permitted Sky UK and TalkTalk to be interveners in the appeal brought by BT, and BT to be an intervener in the appeal brought by TalkTalk.

The CMA’s final determination (they have a maximum of 6 months to reach a conclusion) will be made by a group of independent panel members supported by a case team of CMA staff. After that the CMA’s decision will then be sent back to CAT for inclusion in its judgement.

Meanwhile Ofcom are preparing their preliminary proposals as part of the on-going Strategic Review, which could potentially complicate the above case(s) or render them useless.