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UK Competition Regulator to Examine BT’s Superfast Broadband Prices

Wednesday, January 6th, 2016 (2:36 pm) - Score 1,324

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 FTTCfibre 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.

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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.
Leave a Comment
5 Responses
  1. wirelesspacman says:

    In my view, TalkTalk has already well and truly shot itself in the foot over this one as it seems happy to effectively give away superfast copper broadband for nothing for the first 12 months of (I assume) a 2 year contract, and then only charge £10 per month for the second 12 months. How on earth can they hope to moan about a margin squeeze when they themselves give it away for nothing?? 🙂

    1. Paul says:

      good point!

    2. Darren says:

      I’ve written a book for some reason, don’t feel obliged to read, it’s mostly ramblings.

      A lot of the cost is hidden in the line rental, as it makes it sound cheaper. Line rental
      cost to TalkTalk is 90 pounds per annum. Retails for 191 Pounds including VAT. Or revenue to talktalk of 160 without VAT from line rental. That’s 6 pounds markup a month. 6 pounds a month for 18 months = 108 pounds. 6 months at 8.30 pounds a month = 50. 190 pound total received by Talktalk over 18 months after paying line rental to openreach, 10.5 monthly. BT charge 6.90 a month for access to FTTC 40Mbps. So 10.5-6.90= 3.60 left over a month to cover talktalks costs. They will make a slim profit if they keep costs very low and if customers make a handful of phone calls/other extras. Unlikely to be many customers, but it’s not as bad as you make out. Considering the large amount that will stay on at the higher 10 pounds + line rental charge, that deal will still be profitable over the years.

      I still think BT charging 17.30 a month for access to 40Mbps+line rental is a little high considering all the other costs still left to provide broadband. I payed 22.50 total a month for 30Mbits with virgin for 3 years up until July. You couldn’t operate that price point using BT services. Anyway this complaint of talktalk is to do with the fact BT are allegedly diverting funds from openreach to BT retail, covering the cost by BT sport. In that BT retail on it’s own couldn’t afford BT sport, which gives them an unfair advantage over independent providers.

    3. TheManStan says:

      Not really going to hold any water, as the 2015 operating profit for BT Consumer was £813M and the operating profits of the other divisions (excluding Openreach) were £1.7BN for £2.5BN… Yes Openreach makes £1.2BN on it’s own… and the year before the groups excluding Openreach made £2.2BN… come on that’s shed loads of cash…

    4. Ignition says:

      What Openreach and other divisions make is irrelevant.

      Not to mention that a number of Wholesale and Openreach prices are regulated. Ofcom can control these already. The NGA stuff is not, however the difference between wholesale and retail pricing is the issue, not the wholesale pricing itself.

      I’ve an idea – how about if Sky and TalkTalk hate BT so much they do a little more than a few thousand premises in York in the case of both and some scattered trials in the case of Sky? If BT are so lousy and their wholesale products so expensive surely there’s an opportunity there?

      I did have some sympathy for Sky and TalkTalk but Sky increasingly are coming across as parasitic. TalkTalk have always been that way but unlike Sky can’t afford to do anything else as they dragged pricing across the board down to gain market share and don’t have call revenues to compensate anymore.

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