Ofcom proposes new rules to ensure competition exists in fibre market

The central pillar of UK telecom regulation for some thirty years has been
to increase competition and regulate the pricing that BT charges, either at the
wholesale or retail level. A large degree of freedom was afforded to the BT
Group and Openreach when the fibre based broadband roll-outs started in 2009
and the price of the FTTC services or equivalent products in the areas where
FTTP is the native option has pretty much remained static, while the retail
pricing has slowly crept down, offset in part by the increases in voice line
rental.

Now that fibre based services are popular to the extent of some 2.7 million
connections on the Openreach network Ofcom is making moves to ensure that the BT
Group does not manipulate pricing so that competitors cannot compete.
Effectively what we will see is the price of BT Retail fibre based services
kept high so that TalkTalk and Sky can undercut them.

Today’s proposals preserve that pricing flexibility, while seeking to ensure
that BT does not set prices in such a way that prevents other operators from
competing profitably for superfast broadband customers. In May, Ofcom announced
its intention to set out proposals on this issue.

Ofcom is proposing to put in place a regulatory condition requiring 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 announcement

There is to be a ten week consultation period where Ofcom will listen to
stakeholders input on how the margin between wholesale and retail pricing
should be handled for fibre based broadband products. This is not purely a
paper based exercise for Ofcom, since it needs to carry out these squeeze tests
to ensure compliance with EU telecoms regulation.

The investment from BT Retail in acquiring content for its BT Sport channel
is a key part of the margin test, the problem for Ofcom at present is
identifying the precise costs with different stakeholders proposing different
solutions. The fact that BT Sport is available to both ADSL2+ and fibre based
customers for free complicates the calculations, and one has to question is
this cost is to be accounted for, then what about other inclusive parts of the
large bundles that BT Retail offers e.g. how much is the free WiFi access
worth?

With the almost weekly news on new alternate fibre roll-outs we doubt that
the large competitors to BT Retail would welcome decreases in the wholesale
price of fibre based services from Openreach, but would rather push for the
margin to BT Retail to be increased. In the comparison Ofcom made in April
2014, BT Retail was the most expensive for an unlimited fibre service at
£39.14/m, with TalkTalk the cheapest at £29.45 (this takes into account voice
line rental).

The balancing act Ofcom is attempting is a delicate one, particular at a
time when the focus is on getting superfast services rolled out to as many
people as possible and there are signs in the commercial market of an
increasing willingness to invest in full fibre roll-outs. If for example Sky
can create some momentum behind a FTTH roll-out it may pose more of a threat to
Virgin Media than BT Retail or the Openreach network. A big name provider
offering Gigabit speeds to half a million homes or more would rob Virgin Media
of its prized fastest broadband punch line.

Openreach may have priced its Fibre on Demand product for the SME and
subsidised voucher market for now, but by 2017 when its FTTC network will reach
almost 95% of UK homes (almost because some will have FTTP as the native
option) if the local loop operator is seeing strong competition from pure fibre
connections it may decide to reduce fibre on demand pricing bringing it back
into the reach of home workers and those who want the best connection without
sacrificing the food shopping budget.

In short, while the Ofcom margin testing may be seen to be tinkering at the
edges, it is possible that the UK may see lots of FTTH connections without the
billions of public money that Germany is sinking into rolling it out in the
larger cities. The progress of CityFibre in York, the Sky Basingstoke trials
and the wider roll-outs from Hyperoptic are the key rather than grand hand
waving schemes from the politicians.