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.