Skip Navigation

Ofcom moves to ensure Sky and TalkTalk fibre can undercut BT Consumer
Thursday 15 January 2015 11:11:26 by Andrew Ferguson

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.


Posted by flippery over 2 years ago
And the option for Market 1 exchange is, higher costs maybe
Posted by andrew (Favicon staff member) over 2 years ago
Market 1 does not exist, its Market A or B.

Openreach charge same price across all exchanges irrespective of exchange.

When calculating margin and including BT Wholesale costs for BT Consumer it does come into the equation.
Posted by gillsbay over 2 years ago
Why do Ofcom not force Virgin Media to provide VULA?
Posted by Dixinormous over 2 years ago
Virgin Media aren't considered to have Significant Market Power.
Posted by professor973 over 2 years ago
So BT build the network, are ordered to keep prices high so they can be undercut. Does not seem fair to me and that is coming from someone that would not go back to BT. The days of forcing BT high in price to allow competition to establish are long gone.

Posted by CaptainW over 2 years ago
@professor973 - clearly not ;)
Posted by ValueforMoney over 2 years ago
This attempt at a regulatory magic bullet will slow convergence and investment down.
Why not acknowledge investment was not as promised (£1.3bn not £2.5bn - well cheaper than expected and less FTTP) and adjust VULA accordingly, adjust FLAMR cost recovery so FTTx investment can be targetted. Left as is BT might just increase VULA -(slowing superfast uptake for all and focus on EE) keeping the content ticking over. No winners there as SKY and Talk slow their moves to FTTC and keep ADSL assets going.
Posted by ValueforMoney over 2 years ago
This proposal as it stands.
1) Punishes BT retails efforts at converegence of which more is needed and
2) Rewards BT group for misleading parliament and governments on its NGA costs and investments.
The VULA deal should be re-negotiated using the FLAMR cost recovery to provide investment incentives if needed. This points to a lower VULA. I doubt BT have smp in retail converged services so let it develop.
This sort of abstract regulatory construct has not been tested. Too important to get this wrong.
Posted by Gadget over 2 years ago
VFM - doesn't your statement re £1.3bn v £2.5bn fail to take into account Opex and only look at BT Capex?
Posted by themanstan over 2 years ago
I think VFM value is based on reported expenditure. Because it's being reported year on year, we only see fractions of the commercial build in annual reports. Not all the annual reports have given dedicated amounts of spend on commercial roll-out, there are 3 that i know of that state £400-500m spent. So i guess this is what he's stating as the spend. OpEx should not be included, capitalised labour should, but such is the murky nature of annual accounts that there is insufficient detail.
I believe more has been spent as there are several years of build that have no value of expenditure.
Posted by TheEulerID over 2 years ago

Whilst opex should not be counted towards the investment (for obvious reasons), it clearly has to be taken into account for evaluating business decisions.

To put it in perspective, there were about 2.2m FTTC connections in q4 2013 (about 11.5% of non cable). Even if that doubles (22%), GEA-FTTC wholesale revenues would only be about £400m per year. Given there's opex to take off, payback time will be lengthy.
Posted by TheEulerID over 2 years ago
I should add that if take up reached much higher levels, the numbers change radically. However, if that did happen, then I think there would intervention to reduce wholesale pricing.

I should add that I used a GEA-FTTC rental of about £90 per year - although it depends on speed of course. There are also installation charges, but they are largely activity cost driven.
Posted by ValueforMoney over 2 years ago
@Gadget The number from a BT slide provided to analysts. Ian Livingstone on his shareholder calls said 18 months ahead (18,months less of capital labour which c60%of the £1.3bn) and comfortably under.
How many years operational costs do you think are in £2.5bn?
In each of the SEP, they reference a reducing BT commercial footprint- East Sussex, Suffolk, all of them in fact
Posted by ValueforMoney over 2 years ago
Also - how much of c£1.3bn was incrmental to what BT would normally invest?
But more importanly it looks like all this regulatory kluge does is provide a window for Sky and Talk Talk to catch up and it may not even do that.
It slows convergence props, BT would not invest more at this stage but focus on EE integration if that comes to pass.
A big push on passives through BCMR might force more action on FTTP and squeeze BT that way.
Using a retail minus measure to contain WLA-GEA in this manner acts as a big brake on the evolution of the market.
Posted by andrew (Favicon staff member) over 2 years ago
Commercial roll-out of FTTC started in 2009 and it still going on though at a lower scale than previously.

So if 18 months refers to £1.3bn then a lot of other months/quarters/years need to be taken into account.
Posted by Michael_Chare over 2 years ago
It appears that Ofcom include the cost of BT Sport to make their case that BT Retail operates on a low margin. See:
Posted by ValueforMoney over 2 years ago
@Andrew c£1.3bn - was accumulated from 2009/10.
If you divide 19m/approx 350 premises average= 54k cabs and suggest about £24-£25k a cab/fibre path and contribution to HO.
Finishing 18 months early points to the 18 months of capitalised costs saved so £2.5bn capital would be reduced at least by that amount + plus savings from changing to mostly FTTC.
Posted by andrew (Favicon staff member) over 2 years ago
So if £1.3bn just from 2009/2010, then surely there is 2011, 2012, 2013 and 2014 to add to that.

Certainly the commercial roll-out WAS NOT finished by the end of 2010. The plans may largely have been announced but actual work and thus expenditure covers a lot longer period.
Posted by ValueforMoney over 2 years ago
@Andrew to clarify the £1.3bn is the sum of that investment cycle, 9/10, through to April 2014.
Posted by AndyCZ over 2 years ago
@ ValueforMoney - What you've claimed conflicts with what's in their financial statements and details given to analysts.

Posted by ValueforMoney over 2 years ago
AndyCZ refs please. Mine is from analyst Slide 76 showing capex for NGA run dropping from £300-£400m to 'tens' from 2014.
Posted by Tacitus over 2 years ago
The sensible thing to do would be to force BT to flog off OpenReach. BT retail could then do what it liked with sport or whatever.
Posted by TheEulerID over 2 years ago

There is no legal basis by which BT can be forced to dispose of OpenReach. Ofcom certainly don't have the powers. What Ofcom could do is make a referral to the monopolies commission, but the outcome is unpredictable and is unlikely to succeed in that aim.

Of course Parliament have more powers, but there are some extremely messy issues such as how would the pension liability? Where would the debt go? What would happen to BT Wholesale?
Posted by AndyCZ over 2 years ago
ValueforMoney - It's all in the annual accounts and subsequent analyst briefings.

BT has said that its £2.5bn is an investment to bring fibre to 2/3 of the country. It has never stated the £2.5bn would be solely capital expenditure.
Posted by ValueforMoney over 2 years ago
AndyCZ - its expressly not in the accounts and not audited. I would like to see your references. Happy to be wrong. It is part of the financial PR but not in the accounts.
Posted by ValueforMoney over 2 years ago
More interesting is that Ofcom do not have to be over zealous to reach a cross sectional bandwidth cost of £5.59 per Mbit/s (I assume per month) p.157. e.g It permits each SF use .5mbit/s each (indicative)across the network which is an amazing engineering achievement.
So why would in this measure Ofcom slow or risk BT raising FTTC-GEA wholesale just to permit Sky and Talk Talk catch up time?
Posted by ValueforMoney over 2 years ago
I may be mis-reading it but the incentive for Openreach to create an even more efficient world class data transport infrastructure is taking a back seat.
Posted by AndyCZ over 2 years ago
ValueforMoney - Read the accounts, year by-year and the subsequent comments at the analyst briefings. You cannot state that you've allocated £2.5bn for a 5 year NGA investment, spend half of it and then have a blackhole of the other half. Everything that is allocated,

The accounts are consolidated. You will never get a breakdown £ by £ of exactly what money went where. There are express statements though about how much of the £2.5bn investment has been made in each annual statement.
Posted by AndyCZ over 2 years ago
The latest analyst briefing - "Just a couple of things, so we are spending between £300m and £400mn a year on fibre. The fibre roll out for BDUK ends back end of 2015 start of 2016. We have never said that this capital is going to drop off so it gives us an envelope in terms of what we need to do. So if we need to flex that envelope upwards, we can do that and maintain it still within our overall capital envelope."

The is not PR - this is what they are spending. The specific breakdown will not be given, but we know to roll out fibre, this is what it is costing them.
Posted by AndyCZ over 2 years ago
It's easy to criticise BT, but no one else stepped forward to put up the capital to build a fibre network across the UK.

Where were Sky/Virgin/Talk Talk/EE/O2 etc. during the BDUK bidding?
Posted by Gadget over 2 years ago
AndyCZ - also because of their listing on NYSE they are subject to Sarbanes Oxley reporting rules.
Posted by ValueforMoney over 2 years ago
AndyCZ - not critising big BT just seeking the facts, given the subsidies for rural should only be a proportion of incremental costs.
Subsidies in the form of milestone payments are equalling c£46k a cab - it includes USC premiums etc.
More up front transpatency on the costs would I believe have led to a better resourced plan and a deeper rollout.
BT is only one with a rural fixed network so it was only option in most cases.
Posted by ValueforMoney over 2 years ago
AndyCZ -Of the 300-400m a year 60% was capitalised labour. £2.5m includes x years of operational cost and future envelope! Ok But every briefing says BT has invested £2.5bn - including Ofcoms infrastructure report.
Q2 BT received £96m cash for BDUK activities and can bill £120m-£200m CASH for each of the next 8 quarters.
If this was portrayed as a loan you would pay back, fine, but it is supposed to be gap funding a proportion of the incremental cost.
Posted by TheEulerID over 2 years ago

I've no idea why you have an issue with capitalising labour. It's the appropriate thing to do where labour is used in capital projects. In the context of broadband, labour includes such things is planning, surveying, designing, installation, project management, installing fibre, initial configuring and much else.
Posted by AndyCZ over 2 years ago
ValueforMoney - You're looking at what BT spend vs receive, but this is irrelevant. BT is a publicly listed company, so its focus is to generate the maximum returns for its shareholders. If the government/local authorities pay BT too much for the rollout, then this is their mistake and not BT's.

Other telecoms companies could have built fibre networks across the UK. The likes of Hyperoptic/Cityfibre have shown it can be done economically from scratch. The 'big 5' have chosen not to get involved though.
Posted by ValueforMoney over 2 years ago
AndyCZ - over paying state aid is a huge issue.
40k properties a week x 12 weeks x £200= £96m is close to 100% of BT capacity to deliver NGA. It leaves no room for BT's capital contribution.
But why should BT retail ambition be curtailed in a margin squeeze test, when the altenative is to re-assess wholesale GEA, given the new conditions of moe state invetsment and less BT investment includinga re-positioning of FTTP.
Posted by ValueforMoney over 2 years ago
@The EulerID - capitalised labour is referenced for two reasons. 1) It is the highest rate of any telco in Europe, 2) and it shows BT cash investment was c£40m a quater in NGA at its peak. It is now receiving £96m in cash from the state. £40m cash provides a pointer to external costs for kit duct fibre and contractors. It's cheap.
Posted by TheEulerID over 2 years ago

You keep quoting this stuff on the highest in Europe (or even where the 40% comes from, although it's not unusual in major infrastructure projects, especially in countries where labour costs are high).
In any event, capitalised labour requires cash too.
As for your assertion that 40k/week lines leaves no room for BT capex, how do you know what the total cost/line is, especially in more remote areas?
Posted by ValueforMoney over 2 years ago
TheEulerID we can be adsosltuely confident that getting to 90% ish as the NI project costs £16m state aid paid for 1,268 cabinets and 70% of these were outside greater Belfast - all a matter of public record.
We are now paying average £46k now - which is also a matter of public record, as the £96m divided by the homes passed and cabinets for a quarter delivered points to that number.
Serving Derry or Blackpool should not be that different.
Caoitalised labour needs paid for the process of calculating it and allocating it provides BT some discretion.
Posted by ValueforMoney over 2 years ago
VULA Magin Squeeze looks the wrong measure. It slows convergence and could slow the uptake of superfast.

The alternative is to have a drains up on VULA wholesale given the level of state investment and the less than expected investment from BT.

This may lead to more state monies but the cost transparency and lower wholesale prices would benefit all, leaving BT retail to set its own course.
Posted by AndyCZ over 2 years ago
Less than expected investment from BT? They have stated how much they are investing and have reached that investment. Where does the less come from?

You see aggrieved by BT's capitalised labour costs, but it's up to BT how to spend its money. BT bid for the BDUK contracts - the local authorities accepted them plain and simple. If BT make or lose money on those contracts, you have no right to complain because they were won in a fair process.
Posted by AndyCZ over 2 years ago
If the NGA rollout in the UK was such a lucrative money opportunity, why have we seen no competition?

Posted by ValueforMoney over 2 years ago
AndyCZ - BT have not reached £1.3bn of the £2.5bn guidance estimate and evidence of the £1bn extra capital for rural is also guidance.
There was a process which BT won. There is also an NAO report and two PAC hearings, 300+ Parliamentary questions which suggests the institution of Government do not share the 'happy' sentiment.
And why no others? The Comms Act 2003 exist due to BT's enduring monopoly in areas not served by Virgin.
Posted by ValueforMoney over 2 years ago
And why a competition? State aid approval required a competitive dialogue.
There is every right to complain if the milestone payments are not aligned to BT incremental costs as required by the state aid measure. The 3x increase in subsidy suggest this has occurred.
Posted by AndyCZ over 2 years ago
BT have not reached £1.3bn of the £2.5bn guidance estimate - where are you seeing this?

From what I can see, BT will have spent nearly the full £2.5bn come the end of their commercial fibre deployment this financial year.
Posted by ValueforMoney over 2 years ago
@AndyCZ - same 2 guidance on 300-400m showed this stopping in early 2014 and becoming 'tens' as BDUK monies kick in. This is consistent with q2 showing £96m in state aid.

It will be good to see the breakdown of the £2.5bn envelope created, the operational costs etc, how much was incremental, although their is no obligation to report explicitly and guidance is just that.

Posted by andrew (Favicon staff member) over 2 years ago
@ValueForMoney I thought based on your posts you had all of this, so raises a question as to how you are arriving at the various figures that you place so much weight on.
Posted by ValueforMoney over 2 years ago
@andrew The guidance to analsysts which I have points to £1.3bn ish which is what I am proclaiming
There is no recorded formal breakdown of the £2.5bn which I am disputing and has a material impact on the level of subsidies claimed.
I am unsure how those believing the £2.5bn can accept it where there is no written record of its composition.
But I am happy to be wrong if that evidence is forthcoming.
The £2.5bn investment was relied upon in the VULA Margin Squeeze submissions to Ofcom, so maybe there is more evidence supporting it.
Is there a specific number you are concerned with?
Posted by andrew (Favicon staff member) over 2 years ago
Openreach Capital Expenditure as Reported in Annual Reports

2009 £951m
2010 £907m
2011 £1078m
2012 £1075m
2013 £1144m
2014 £1049m

Also 2014 report has the following "invested £1.0bn (2012/13: £1.1bn) in our copper and fibre networks to extend coverage, improve service and increase functionality"

Posted by ValueforMoney over 2 years ago
@andrew of which NGA is a proportion. All the total shows is that NGA is not incrmental.
The number for NGA is not reported discretely and us unlikely to be, so we are relying on snippets when they appear.
Thanks for your efforts.
Posted by andrew (Favicon staff member) over 2 years ago
So which secret snippets are you using to arrive at £1.3bn from the £6bn I listed? They talk of £2bn in 2012/13/14 to extend network etc in the post I made?

Are the quotes of £5k for the physical cabinet delivered on the back of a lorry extrapolations or a definitive source?
Posted by ValueforMoney over 2 years ago
@Amdrew - slide 76 to BT analsyst showing £300-£400 a years for from 09/10-13/14 and reductions to 'tens' supports £1.3bn - Redfern support 60% capitalisation, BT PR provides the operational costs. BT submission on VULA excludes vectoring and FTTrn from £2.5bn. That plus bottom up costing plus VDSL budgets in other EU projects.
Posted by ValueforMoney over 2 years ago
@andrew - £8k county sum is easy, just ask three suppliers for a budget of 600 cabinets (fully equipped) average and you will get there.

£5k for national is not far a stretch, but is available to NAO to verify if the appetite is there to do so.

Not secret by any means. So I suppose more is possible, but I am not objecting 10-15% contingency.

By the way the £100k per cab subsidy was paid in Digital Region so as a BT target it has precedence. BDUK are paying £46k and will get below £30k, but my shares are protected at £15k subsidy to reach 90%.
Posted by ValueforMoney over 2 years ago
On the 90% plus if you examine the evidence given tot the HOL you will find Rory Stewarts constituents quoting £90k for 3 instances of ELO copper re-arrangements which were considered outlayers. So some evidence is very much there in the public domain.
Posted by andrew (Favicon staff member) over 2 years ago
So if £5k for physical cab, then seems to suggest that bulk of the cost is labour/civils/ducting which would be needed in much larger amounts for a FTTP roll-out, i.e. to match current footprint rather than fibre blown to ~61,000 locations, it would fibre blown to ~21 million.

Suggesting that in terms of value for money, FTTC is all we can afford at the scale demanded.
Posted by ValueforMoney over 2 years ago
@Andrew The uniformity of the PST networks tree and branch suggests there are economies of scale to be had from FTTC through to 90% premise past at least at a national level. Perhaps BT engineers can comment.
Commercial rollout points to cabs serving average c400 homes passed. BDUK Phase 1% takes us down to 150 homes passed. So the gap funding (as opposed to Milestone Payments) should release a good deal of funds.
Posted by ValueforMoney over 2 years ago
Subsides for final 30,000 - 35,000 cabs for 90% coverage cabs should not exceed £600m of the £1.2bn budget, allowing a generous amount for in-fill, and a reasonable 10%+ on FTTP.
Note Chris Townsend comments minuted at EFRA select commitee where he stated significant savings were being identified from phase1 - answer to q195.
Posted by ValueforMoney over 2 years ago
Sorry phase 1% should read Phase 1 and past should be passed and tree and branch should have structure or achitecture in the last comment but 1.
BY 10% FTTP - I mean premises within reach of a manifold on DP.
The EFRA session was on DEC 10th.
Posted by andrew (Favicon staff member) over 2 years ago
So you agree that most of the cost is in getting fibre to the cabs and other associated civil/digging/ducting type works? Not the cabinet itself?
Posted by chrysalis over 2 years ago
All this has served is to ensure BT retail customers pay more, ofcom are daft at times.
Posted by ValueforMoney over 2 years ago
@Andrew Yes, but do make special consideration of power costs. So getting to 90% - taking a total average fibrepath/cab/power/overheads of £25k where the cab is £5k is not a bad place for a discussion. This excludes operational costs.
Eircom doing more FTTP in final 20% because of power cost and operational costs. THis is also the learning in Cornwall should folk wish to share that lesson,
Posted by ValueforMoney over 2 years ago
@Andrew - BT admiitted to BBC Jane Wakefield they costed on a county basis so that cab would therefore be closer to £8k.
The issue of power costs and it long terms consequences should have been a more open debate. That ought not to be so commercially sensitive.
Posted by ValueforMoney over 2 years ago
@Chysalis - Yes several times Ofcom make clear the need to protect retail competition even if it impacts on effciencies in the short term. The arguement is repeated at least 25 times through the 500 pages of material - doc+ appendices.
It looks like a 2 year measure and then price caps on VULA kick in. Scale of BDUK investment will play a significant part in that price. So the notion of taking all we can rather the minimum gap funding needed has a heavy long pricing starting 2017.
Posted by ValueforMoney over 2 years ago
@Chrysalis - Chapter 4 of Ofcom reg fin consultation 5-12-2014 sets out VULA data collection which will support 2017 FLAMR. VULA Margin will take us to there.
Posted by andrew (Favicon staff member) over 2 years ago
The power will be commercially sensitive to the third party that supplies it of course, as will the contracting firms not want their price to be revealed.

But what you have shown is that if they had gone for FTTP heavy the cost would have been a lot higher.
Posted by ValueforMoney over 2 years ago
@chrilsalis It's chapter 5 not 4 sorry.
@Andrew Indeed, If BDUK subsidy for FTTC was reset from £200 per premise past to a range from £80-£130 then that would fix FTTC releasing a good amount for in-fill and FTTP.
On FTTP - £500 per premise - Upgrades from AGN (now) to DP where customer pays a connection is a good begining to reach 90%.
The BT Fell End projecct provides £80,000/58 premises = £1500 per premise - which is start given these are in the 5%.
Posted by ValueforMoney over 2 years ago
@Andrew to be clear or to state the obvious, FTTC is of tremendous utility, it is even more so if appreciate how efficiently it can be delivered. It should offer no financial barrier to further FTTP. This is deeply challenging to BT.
The silliness with the commercial confidentiality on rural is odd given VULA cap in 2017 is a points where costs are reconciled. The more BT take from LA the lower VULA could be.
Posted by ValueforMoney over 2 years ago
@Andrew The more efficient the BT rural roll-out, the deeper it goes with the absolute minimum subsidy, Ofcom will have less reason to move on VULA, and less need to act on passives, and BT has a bigger opportunity to remove legacy costs.
The catch us if you can mentality has a profound negative impact from 2017.
Posted by ValueforMoney over 2 years ago
Against the milestone payments paid, not one county has announced 'efficiency savings'in Phase 1 - Northampton did post survey. And each and every SEP includes a reduction in BT's commercial footprint. While you can see BT folk being rewarded for their cunning,it is counter productive in the medium term.
You must be logged in to post comments. Click here to login.