Ofcom has finally moved to define the policy to ensure that BT Consumer division does not operate with so low margins over the wholesale products that competitors cannot undercut BT Retail. This is the conclusion of round two of the decade old rules that paved the way for TalkTalk to launch its massively popular full LLU ADSL2+ service in 2006, and are now aimed at trying to ensure that the market share for fibre based broadband does not sit solely in the hands of BT Consumer. The market fear being that BT Consumer, BT Wholesale and Openreach could if allowed operate more like the many vertical operators across Europe.
BT Consumer does have the lions share of the 3.4 million GEA-FTTC connections in the UK (and all but a handful of GEA-FTTP ones), but is running second place compared to the size of Virgin Media with their fibre based broadband services.
"BT is currently the largest retail provider of fibre broadband services over its network, but is required to allow other operators to use its network to sell superfast broadband to consumers under a process known as ‘virtual unbundled local access’ (VULA).
The draft regulatory condition notified by Ofcom to the Commission would require BT to ensure that the margin between its wholesale VULA charges and its retail superfast broadband prices is sufficient for rival operators to compete and make a profit."Extract from Ofcom statement
The new rules which require BT Consumer to maintain a sufficient margin should ensure that Sky and TalkTalk will remain able to offer FTTC services below the cost of BT Consumer where they choose to do so. If anyone is worrying whether this means price rises at BT, don't panic the initial assessment from Ofcom is that BT is maintaining sufficient margin on its pricing for new customers.
A major part of the assessment was the inclusion of various value-adds such as BT Sport. The more than 700,000 PlusNet have been considered, and the PlusNet fibre pricing is considered in the VULA margin.
2015 is set to be an interesting year with the roll-out of the CityFibre/Sky/TalkTalk FTTP service in York, and Ofcom has actively decided to NOT apply the VULA margin test for GEA-FTTP (due to the small number of customers), which could make for an interesting price war in York if the two competing FTTP networks overlap. Another factor behind why GEA-FTTP was not considered is that TalkTalk and Sky do not utilise GEA-FTTP even though the backhaul links and Ethernet interfaces operate identically.
So what for the future? Well the market practice of weekly changes to the incentives for signing up will continue, and with a little more certainty we might see even more aggressive offers from TalkTalk and Sky, with BT Consumer continuing its portfolio of full feature products at a higher price and using PlusNet to price match competitors as closely as possible without breaking the new rules.