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Ofcom opens complaint about BT Group and alleged margin squeeze
Thursday 02 May 2013 10:24:04 by Andrew Ferguson

It appears that the annual complaints from TalkTalk over the pricing of the BT Retail Infinity products in comparison to the wholesale costs has escalted this year, as Ofcom has now opened a complaint about an 'alleged margin squeeze in superfast broadband pricing'.

The issue is that the TalkTalk Group believes that the retail price for BT Infinity products is so close to the wholesale costs that it is very difficult for TalkTalk (and others) to undercut the BT Retail products and still make some profit.

Back in the days when Ofcom was Oftel the regulator operated a margin squeeze test, which then operated on the BT Wholesale pricing and was thus unpopular with many smaller providers, and ultimately it led to the introduction of the current charging system which meant charging for speed was abandoned by BT Wholesale. Interestingly with the launch of FTTC and FTTP services by Openreach speed based charging has made a come back.

If Ofcom finds in favour of TalkTalk we might see BT Retail forced to increase the price of the Infinity products, or alternatively Openreach reducing their prices, while BT Retail is required to keep its product prices fixed.

We should not expect a conclusion rapidly, as when Freeserve over a decade ago was complaining about BT Retail when a basic ADSL service was retailing at £39.99 (plus voice line rental) having an unfair advantage the issue ran on and on with changes in the wholesale market largely solving the issue.

Seven years ago Carphone Warehouse really got the LLU market going with its full LLU service, that sold broadband, with calls and voice line rental for £20.99, given the disparity of numbers of FTTC customers between TalkTalk and the BT Retail Infinity it may take a similar gutsy move to upset the apple cart again.

Comments

Posted by Dixinormous over 4 years ago
My only surprise here is that it took them so long to launch this investigation.

It'll be interesting to see what effect upcoming 95th percentile charging at the wholesale layer influences this.
Posted by acpsd775 over 4 years ago
in one way i see were their coming from BT infinity is cheaper than most and do probably take a hit on things like install chargers compared to TT + SKY you might some times get free install but they make up in that cost being bit more expensive,
Posted by acpsd775 over 4 years ago
continued
But then in the other way look at plus.net their fibre unlimited is 19.99 (17.50 if you agree to an extra 6 months)they do free install if you take their line which is cheaper than BT line rental and its still a BTW line so it wont be hard to move away later where as both sky+TT lines are hard to get away from, So my point is if plusnet can go that cheap i dont see how talktalk a bigger company can moan so much
Posted by farrina over 4 years ago
"if plusnet can go that cheap"

It may be a complete red herring on my part but I thougth that BT owned Plusnet ....
Posted by herdwick over 4 years ago
Both TT and BTW consume Openreach FTTC product, so is the debate about the wholesale add-on to that rather than the Openreach bit - reducing the GEA FTTC price would benefit both BT Wholesale/Retail and T-T equally surely ?
Posted by JNeuhoff over 4 years ago
TalkTalk's complaint is somewhat futile, because BTS separation into fake companies like BT Wholesale or BT Openreach is a joke. They are owned by BT Group anyway. What's needed is a complete separate network company, not a fake BT Openreach!
Posted by andrew (Favicon staff member) over 4 years ago
Reduced openreach price alone, would mean lower BT Wholesale and thus lower BT Retail, and all other 60 or so selling GEA-FTTC products.
Posted by mabibby over 4 years ago
@herdwick
The wholesale cost to BT Retail is purely an academic exercise, wooden dollars as they say, changing the wholesale price doesn't affect the profit the BT Group makes out of a retail broadband customer.

I must admit I can't see a lot coming from this, the government has never been able to regulate energy prices, let alone broadband prices!
Posted by andrew (Favicon staff member) over 4 years ago
Setting up a separate company now would mean a decade or more of building a new loop across UK. If you are not in an early phase do you want to wait?

Would outcome be cheaper and/or better?
Posted by scotiaman over 4 years ago
Who cares if these tuppence ha'penny outfits can't make a profit - I don't. If they think BT Retail price is too low then let them build their own networks THEN we'll see how their pricing goes !
Posted by undecidedadrian over 4 years ago
To be honest I haven't seen one TT FTTC advert at all.

Perhaps rather than QQ-ing to Ofcom perhaps they should go and actually sell their wares.
Posted by JNeuhoff over 4 years ago
@andrew: No reason why BT Group can't be split up into completely different companies, the independent network company would inherit Openreach's assets. Then any service provider won't have to compete on equal terms, and this single network company could be more easily controlled by a proper regulator (though Ofcom is a joke, needs to be replaced by a proper regulator!)
Posted by Dixinormous over 4 years ago
'Posted by scotiaman 17 minutes ago
Who cares if these tuppence ha'penny outfits can't make a profit - I don't'

I would start caring - if BT were the only operator they would charge whatever the like at the retail level, prices would go up, service levels down.

I presume you'd be fine with a single monopoly for gas and electricity, others can build their own distribution networks after all.
Posted by herdwick over 4 years ago
So what is extra cost to TT to add GEA FTTC onto a full MPF LLU line ?
Posted by Dixinormous over 4 years ago
Just wondering why people are discussing Openreach here by the way?

This is nothing to do with Openreach, this is about BT's retail arms selling products bought from BT Wholesale at levels others can't compete with because they are part of the same group.

They have a pretty good point too when you compare the BT Wholesale price lists to the Plusnet unlimited package's pricing.

Are those who think there's nothing dodgy going on aware that the BT Wholesale price of 80Mb/20Mb, just the rental, no bandwidth charges, including VAT is 19.20/month?
Posted by Dixinormous over 4 years ago
While we're at it broadband networks on the whole are running at about 200kbit/s. On the BT Wholesale pricing 200kbit/s per customer is a further 9.60/customer/month - again I include VAT as we're talking the retail prices.

Baseline price across a userbase whose average use is 200kbit/s for an 80/20Mb FTTC customer, to deliver that customer to the ISP's own network, nothing more, 28.80/month.

Tricky to see how that fits into the Plusnet broadband only charges...
Posted by ian72 over 4 years ago
@dixi are you sure you are looking at the right prices? FTTC prices here http://www.openreach.co.uk/orpg/home/products/pricing/loadProductPriceDetails.do?data=yzq%2FQaGYa3hVgsB2ZYfjHxzfISuq3px%2FWFtgATP2kPRZ6rNZujnCs99NbIKJZPD9hXYmiijxH6wr%0ACQm97GZMyQ%3D%3D suggest 9.95 per month+VAT for the line? That leaves plusnet about £8 / month to do everything else (and BT about £14 per month).
Posted by Dixinormous over 4 years ago
Yes - hence why I said 'BT Wholesale' not 'Openreach'.

Openreach sell to BT Wholesale, BT Wholesale sell to retail, there's supposed to be adequate margin at all levels.
Posted by ian72 over 4 years ago
So are you saying that openreach sell at £11.94/m and that is marked up to £19.60/m by wholesale? Seems a large markup (I can't easily find the BTW prices).
Posted by ian72 over 4 years ago
Just found the prices. That is a fairly big markup. Agree that it does seem odd that Plusnet can sell it at the price they do.
Posted by ian72 over 4 years ago
Do ISPs buy from BTW rather than BTO? Is it not the BTW supplies companies etc with lines and BTO supply ISPs? So, essentially BTW are the business version of BTR and both BTW and BTR buy from BTO?
Posted by andrew (Favicon staff member) over 4 years ago
@ian72 ISP like Zen, Plusnet and BT Retail buy from BT Wholesale, the extra markup covers the cost of linking to the GEA service at the various exchanges, and you add the bandwidth charging.

With TalkTalk and Sky they pick up the GEA product direct at the exchange.

BTW is NOT the business version of BTR
Posted by Dixinormous over 4 years ago
All ISPs apart from LLU operators buy from BTW. If you aren't on an ISP that is either an LLU operator or is reselling LLU you're being served by BT Wholesale.

The only FTTC services not reselling BT Wholesale are Sky and TalkTalk.
Posted by chrysalis over 4 years ago
What I find amusing is plusnet is cheaper than infinity and that has no mention. Sky is also similiar priced and has no mention, I am no fan of BT but this complaint if upheld doesnt seem justice to me, since BT are the ones who spent billions on FTTC it does seem fair that they can undercut other isp's. Also I like the fact we now see speed differential pricing again, its long overdue and the lack of it on adsl max for me was aweful.
Posted by chrysalis over 4 years ago
If the complaint is upheld and then talktalk udnercut BT, cant BT launch their own complaint on the same grounds? not allowed to undercut talk talk. This to me highlights the joke of the current artificial competition, as the way I see it there is nothing stopping talktalk building their own local loop to bypass BT.
Posted by chrysalis over 4 years ago
Finally wasnt TT the ones to trash the adsl market? I believe they heavily did loss leading to gain their initial customers and brought adsl prices tumbling down.
Posted by ian72 over 4 years ago
So how do Plusnet make any profit if they are paying £19.20 for the FTTC rental and charging £19.99 for the service? Very odd business model (and that ignores offers that have it half price for the first 6 months).
Posted by Dixinormous over 4 years ago
@Chrysalis - BT already have regulatory concessions over FTTC, they've been allowed to not consume SLU like everyone else would have to.

TT was a 'loss leader' - these packages seem to be loss making at retail level full stop. There was never anything stopping BT Retail from deploying its own LLU network they made a business decision to continue consuming BT Wholesale products.

Sky are consuming different products to BT Retail, not comparable.

What you call trashing the market millions call commoditising. Feel free to use AAISP if you aren't keen on commodity products.
Posted by Dixinormous over 4 years ago
Just to clarify the SLU comment it is absolutely impossible for any other operator to deploy FTTC with the available Openreach products in an economically viable way.

Openreach are supposed to be structurally separate from the rest of the business, hence Openreach investment made available to all operators on an equivalent basis. This is the price BT pay for being given a natural monopoly on the local loop.

In turn Wholesale are supposed to purchase from Openreach on the same terms as everyone else and sell to Retail on the same terms. Cross-subsidy isn't supposed to happen.
Posted by themanstan over 4 years ago
@Dix

But because of this pricing regime it makes it difficult for other operators to compete on the scale that BT Retail does or offer their own cross-subsidised products.... which maybe why TT are bleating.
Posted by andrew (Favicon staff member) over 4 years ago
Can you get plusnet fttc withoutva calls line rental pckage?
Posted by acpsd775 over 4 years ago
@andrew yes you can youd have to pay the 50 quid activation if you don't take calls and lose out on any discounts
Posted by GMAN99 over 4 years ago
So Talktalk can't compete because they don't have decent supplementary products to sell? How is that anyone else's problem?

I don't see Sky complaining, they are doing great!
Posted by Naws over 4 years ago
I used to be a Tiscali Customer. Then Talk-Talk bought them out. Total train-wreck. Poor customer service, constant cold calls from VERY pushy sales people. Slow internet.

Now on BT infinity, might be more expensive, but I get what I pay for. Talk Talk can go walk, or go bust. I would not take one of their packages if it was free.

Posted by chrysalis over 4 years ago
dixi, you still dont get it, its no longer a priority in my view to have cheap LLU competitors, whats most important is to make the market as favourable to bT as possible to justify FTTx investment. If that makes talktalk unhappy then so be it. Sky are in the same position as talktalk yet are clearly not struggling to get customers, the evidence is out in the open that talktalk are not in a impossible position, plus to add talktalk themselves are a huge isp they dont need regulatory protection.
Posted by GMAN99 over 4 years ago
Totally agree chrysalis, its taken BT an age to have the guts/money to invest in FTTC on the understanding that Ofcom would allow them to make money back on their investment. If the OR prices are lowered that investment takes longer to pay off and more worryingly why would they hurry to bring fibre closer (to the pole or premise) if this is what they are faced with.

Greedy non investing ISP's don't help infrastructure investment. If they can't make a profit on FTTC (I don't believe that for a second) whilst others like Sky can well... tough
Posted by GMAN99 over 4 years ago
Although I don't agree on making the market more favorable for BT, just that they can be allowed to make good on their investment without squeezers like TalkTalk messing things up.
Posted by bcs over 4 years ago
HAHA - Sorry Talk Talk but this is a position of your own making. You started the race to the bottom, adopted poor practice and (in my view) are a substantial cause to most of the Industy problems because you mis-use Openreach tools and resource. With your corner cutting you've priced yourself out of future investment.
Posted by diggsy over 4 years ago
"Free Broadband Forever" © C Dunstone April 2006
Posted by Somerset over 4 years ago
@bcs - As in £3.25 for unlimited ADSL for 12 months.
Posted by BTfanboy over 4 years ago
Is the world ending?
vvvv
Although I don't agree on making the market more favorable for BT,
Posted by chrysalis over 4 years ago
not necessarily more favourable than it is now, my point was more in saying if BT are able to do what they doing to undercut a LLU CP I dont have a big issue with it. People have raised the point here about a large margin that seems apparent on BTw, of course TT are bypassing BTw been LLU so the likes of aaisp and zen have more justification in moaning than talktalk.
Posted by chrysalis over 4 years ago
so basically BT could reduce BTw by £1 a month eg. to keep ofcom happy and not touch their retail, talktalk then lose because suddenly it helps the BTw based competitors but not TT themselves, I think they are been idiots.
Posted by roph over 4 years ago
OFCOM should enforce a Naked DSL offering already.

I will not use BT Infinity or any other VDSL products so long as I am forced to pay for phone service that I will never, ever use.
Posted by snadge over 4 years ago
Can see where Chrysalis is coming from and I kinda feel for BT, they brought us the backbone for FTTC, if ofcom allows ISPs like TT to dig their heels in cos they aren't happy (when the likes of Sky can manage) then they are gunna be less likely to be in a rush to push out Vectored-VDSL & FTTP later if this is what they are faced with.

so is Plusnet (being wholly BTW supplied) selling at a loss? sounds like it?...or being another 'BT Group' owned investment do the "wooden dollars" come into play..?
Posted by snadge over 4 years ago
also, ive heard sky FTTC is available in non-LLu areas so it sounds like sky may be buying BTW FTTC products too, as well as GEA hookup to LLU.
Posted by Spectre_01 over 4 years ago
Wow the sense of entitlement coming from TalkTalk.

*rubs thumb & index finger together* <-- you know what that is?

Its the worlds smallest violin playing for the big undercutting ISP who's suddenly unable to out price one of its competitors and is crying for regulator help.
Posted by andrew (Favicon staff member) over 4 years ago
Because gea fttc is often connected to.a larger exchange that has llu Sky can offer it. If they want.

The telephone would just be a wlr in those cases
Posted by ian72 over 4 years ago
@roph naked DSL has been discussed many times here. General concensus is that it would cost almost exactly the same as DSL+landline. If a supplier offered you naked DSL at the same price as DSL+landline but just didn't enable voice would you buy it?
Posted by andrew (Favicon staff member) over 4 years ago
Will run a naked dsl poll next week and if support for it pass onto Ofcom and others
Posted by ian72 over 4 years ago
@andrew - be interested to see how you ask the question. Will that include "if naked DSL was available for the same price as DSL+Landline"?
Posted by GMAN99 over 4 years ago
Surely even with naked DSL you will still have to pay line rental? Does the voice element really cost the customer that much?
Posted by Dixinormous over 4 years ago
These comments completely lose me. It's not actually about the Openreach FTTC investment, that's still in a regulatory holiday.

The issue is the difference between the wholesale price and their own retail price. This is nothing to do with recovering the Openreach investment.

If you allow BT to play games with retail pricing due to Openreach spend we may as well say that BT should Wholesale completely, then Openreach will invest more.
Posted by Dixinormous over 4 years ago
That should have been stop offering a wholesale product completely.

The regulations are all there for a good reason, without them we'd be in the same situation parts of the USA are where there's the choice of the telco's overpriced, underpowered product or the telco's overpriced, underpowered product.
Posted by GMAN99 over 4 years ago
Dixi, I think the openreach comments are in reply to this from the main article:-

"BT Retail forced to increase the price of the Infinity products, or alternatively Openreach reducing their prices"
Posted by herdwick over 4 years ago
"Just wondering why people are discussing Openreach here by the way?" - because TT buy Openreach products as do BTW. So the "margin squeeze" has to occur between the FTTC cost and the retail selling price, doesn't it ?

If TT argue that the FTTC price to them is to high then it would also be too high to everyone else, and dropping that wouldn't change the margin.
Posted by herdwick over 4 years ago
"Just to clarify the SLU comment it is absolutely impossible for any other operator to deploy FTTC with the available Openreach products in an economically viable way."

not impossible in not-spots, there are a few about. In fact one of them has deterred Openreach from adding FTTC to the same cab.
Posted by AndrueC over 4 years ago
So TT buy GEA services from BTor? So are they saying that:

BTor + GEA is too expensive compared to BTor + GEA + BTw? And that BTr is in any case charging too little (it being sat on top of BTw)?

That sounds weird put like that. How can removing BTw from the occasion make it harder for TT to make a profit?
Posted by Dixinormous over 4 years ago
'Specifically, TTG alleges that BT has failed to maintain a sufficient margin between its upstream costs and downstream prices'

As I understand it the complaint is that BT don't have sufficient margin between Wholesale and Retail pricing, not Openreach and Wholesale, hence upstream costs (from Wholesale to Retail) to downstream prices (what customers pay Retail).

FTTC line rental at 80Mb/20Mb, including VAT, is 19.20/month from BTW, bandwidth 48/Mbps/month. Compare that to Plusnet / Infinity uncapped, unshaped retail pricing.
Posted by ryant704 over 4 years ago
Snadge, I can confirm on that. I cannot order LLU Broadband from Sky but I can order FTTC over BTW from Sky.
Posted by herdwick over 4 years ago
https://docs.google.com/spreadsheet/ccc?key=0Avrz3P5AJBUZdHpJLUdVOTFWTjFSNTEycEJmZUpjd1E&usp=sharing looks at the 40/10 product. BT and Plusnet are indeed running at low margins (that's called "competing", isn't it ?)
Posted by Dixinormous over 4 years ago
Not when you're a vertically integrated, regulated provider buying services from themselves.

Section 18 of the Competition Act 1988 and Article 102 on the TFEU deal with this.

BT are quite literally not permitted to operate at a loss at the retail level. They usually work around it through some playing with numbers and claiming customers use no bandwidth.
Posted by herdwick over 4 years ago
yep, knock a fiver a month off WBC FTTC and BT Group keep the same margin but the retail margin gets towards that of Talk Talk
Posted by herdwick over 4 years ago
http://forums.thinkbroadband.com/fibre/t/4235277-margin-squeeze.html for forum users
Posted by herdwick over 4 years ago
http://www.thinkbroadband.com/news/5217-talktalk-raises-concerns-over-bt-fibre-pricing.html Annual event ?
Posted by themanstan over 4 years ago
The real question is what is TalkTalk's current business model? It's been low margin products, then cut costs (2011 back office job cuts and merginf of divisions)and as I see it there is nothing left but to do a Supermarket job, which is try to make the supplier reduce prices.
Posted by chrysalis over 4 years ago
dixi infinity is £26 month. £7 over that wholesale cost you posted. So it actually isnt that close, not as close as plusnet.
Posted by chrysalis over 4 years ago
also why would BTr pay BTw VAT? the BTw cost should be excluding vat?
Posted by themanstan over 4 years ago
The transactions between BTr and BTw are not internal trades, so the transactions attract VAT.
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