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Ofcom publishes review of the wholesale broadband access market

March 2011 - IT & telecommunications. Legal Developments by SJ Berwin LLP.

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On 3 December 2010, Ofcom published its final statement setting out its analysis of the state of competition in the wholesale broadband access (WBA) market and the measures it is taking to protect consumers in situations where competition alone is insufficient. 


The WBA market sits between the wholesale local access (WLA) market (which concerns access to fixed telecommunications infrastructure between the consumer and the telecommunications network) and the retail broadband market. The WBA market relates to the wholesale broadband products that communications providers (CPs) provide for themselves and sell to each other. While the WBA market concerns services provided between different CPs, the aim of regulation in this area is to enable CPs to purchase wholesale products from the dominant providers at prices that allow them to compete effectively in the provision of retail services.


The statement follows two consultations on Ofcom’s proposals published in March 2010 and August 2010. The first consultation discussed a full set of proposals while the second consultation focused on an amended approach to the geographic market definition in the light of comments from respondents and market developments, including Orange entering into a long-term exclusive agreement with BT for the supply of WBA services, which reduced the number of principal operators on the market from seven to six. Although Ofcom adjusted the criteria for the markets it had identified in the first consultation, it did not consider that this amended approach altered its proposals on the assessment of market power and remedies. Following the end of the second consultation period and just before the publication of the statement, Talk Talk also announced its intention to unbundle a further 700 BT exchanges. Ofcom considered the implications of this market development and held that its conclusions remained appropriate.


In its statement, Ofcom confirms its findings on market definition and significant market power (SMP) as set out in its second consultation. Ofcom found that there is effective competition in almost 80% of the UK. This so-called Market 3 relates to exchanges where four or more principal operators are present or forecast and exchanges where three principal operators are present or forecast but where BT’s share is less than 50% and will therefore not be regulated. However, in just over one-fifth of the UK, Ofcom concluded that there is not sufficient competition and so has imposed a range of regulatory obligations including general access and non-discrimination requirements. Ofcom has also imposed a new charge control on BT in relation to exchanges where only BT is present. 


MARKET DEFINITION


Ofcom has concluded that the relevant WBA product market is asymmetric broadband access and any backhaul as necessary to allow interconnection with other CPs, which provides an ‘always on’ capability, allows both voice and data services to be used simultaneously, and provides data at speeds greater than dial-up connection. This market includes both business and residential customers. 


This means that services provided via copper, cable and fibre access networks are within the same market. Broadband services of all speeds, including super-fast broadband services, are also included in the market. However, broadband access provided via mobile, wireless and satellite networks are outside the relevant product market.


Ofcom also concluded that the relevant geographic markets are:


  1. The Hull area (0.7% of UK premises). 

  2. Market 1: exchanges where only BT is present or forecast to be present (11.7% of premises). 

  3. Market 2: exchanges where two principal operators are present or forecast and exchanges where three principal operators are present or forecast but where BT’s share is greater than or equal to 50% (10.0% of premises).

  4. Market 3: exchanges where four or more principal operators are present or forecast and exchanges where three principal operators are present or forecast but where BT’s share is less than 50% (77.6% of premises).


MARKET POWER ASSESSMENT


Ofcom examined the position of the CPs in each of the relevant geographic markets set out above and concluded that:


  • BT holds a position of SMP in the provision of WBA services in Market 1 (due to its near monopoly position, barriers to entry and the absence of countervailing buyer power);

  • BT holds a position of SMP in the provision of WBA services in Market 2 (due to its near monopoly position, barriers to entry and the absence of countervailing buyer power);

  • no operator holds a position of SMP in the provision of WBA services in Market 3 (because no operator has a significant market share and there are low barriers to entry); and

  • KCOM holds a position of SMP in the provision of WBA services in the Hull area (due to KCOM’s monopoly position and barriers to entry).


REMEDIES


In relation to Market 1, Ofcom concluded that there are limited prospects in the near future of any wholesale competition, and therefore is imposing general access and non-discrimination obligations on BT, together with a requirement that charges should be based on the costs of provision. Other obligations that Ofcom is imposing on BT include accounting separation and cost accounting obligations to provide transparency of financial information. In addition, Ofcom has decided that BT's services in Market 1 will be subject to a charge control, aimed at ensuring that BT does not set excessive prices, which would ultimately be passed on to consumers. This is the first time that Ofcom has imposed a charge control in the WBA market.

In relation to Market 2, BT will also be subject to general access, non-discrimination, transparency, accounting separation and cost accounting obligations. Ofcom has also decided to impose a cost orientation obligation on BT as a safeguard against the risk of excessive price rises while allowing BT a greater degree of pricing freedom. The reason that Ofcom has taken a different approach in Market 2 compared to Market 1 is mainly due to its assessment of the likely constraint on BT’s pricing arising from current and future investment by other operators.


In relation to the Hull area, Ofcom has decided to impose general access, non-discrimination and transparency obligations on KCOM, including an accounting separation obligation. Ofcom has not imposed any pricing regulation or a cost accounting obligation on KCOM. 


NEXT STEPS


The obligations set out in the statement have been implemented immediately except for the charge control in Market 1, the accounting separation and cost accounting obligations in Market 1 and Market 2, and the accounting separation obligation in the Hull area. On 20 January 2011, Ofcom issued a consultation paper that discusses its approach to the charge control in Market 1. The consultation period runs until 31 March 2011. Ofcom will shortly publish a consultation on BT’s and KCOM’s regulatory reporting obligations, which will include proposals on how BT should meet its accounting separation and cost accounting obligations in Market 1 and Market 2, and how KCOM should meet its accounting separation obligation in the Hull area. 


The coalition government promises to introduce measures to ensure the rapid roll-out of superfast broadband across the country, and ensure that BT and other infrastructure providers allow the use of their assets to deliver such broadband. Although Ofcom has concluded that current generation and next generation broadband services are currently in the same market as the deployment of next generation access networks develops, they recognise that it may become appropriate to reflect this evolution through a different approach. Given the potential impact of developments in this market over the next few years, Ofcom will closely monitor the WBA market and consider the timing of the next market review accordingly. 


By Neil Davies, associate, and Emma Radcliffe, associate,
EU and competition group,
SJ Berwin LLP.


E-mail: neil.davies@sjberwin.com;
emma.radcliffe@sjberwin.com