Fixed Narrowband Retail Services Markets - Identification of markets and determination of market power

Statement published 15|09|09

Introduction

1.1 On 19 March 2009, we published a consultation document setting out the initial findings of our review of the state of competition in the retail narrowband telephony markets, which cover analogue and digital (ISDN) telephone lines, and calls for consumers ^(-1-) and businesses (the March Consultation). ^(-2-)

1.2 We have now completed our review. Our conclusions are that most of the UK retail markets, with the exception of Hull, are now effectively competitive and, specifically, BT no longer has significant market power (SMP) in the provision of retail fixed narrowband analogue access and retail calls markets in either the residential or business sectors. While we consider that BT still has SMP in the retail ISDN2 market, we consider that it is appropriate to rely solely on wholesale remedies in this market as the existing retail remedies no longer offer additional benefits to the downstream competitive process. We have decided that we need to undertake a further review of the ISDN30 market before we conclude on whether or not this remains an appropriately defined market and, if so, whether it is effectively competitive.

1.3 These decisions represent the next stage in a process of deregulation at the retail level, which has been supported by changes to the regulation of BTs wholesale services. In 2006, we lifted retail price controls, given the improvement in competition in the market.

1.4 We consider that this deregulation will lead to a further increase in competition in these retail markets. BT will be able to more freely compete in the supply of bundles of services which include fixed telephony together with other telecommunications service such as mobile communications, broadband and television. This should ensure that competition will continue to lead to enhancement in services and greater value for money for consumers.

1.5 Our decisions do not, however, affect BTs continued universal service obligations under the Universal Service Order (USO) to provide basic telephony services (including access) . Equally, Ofcom will continue to regulate the retail activities of BT, on an equal basis with other Communications Providers, through other sector regulations ^(-3-). We will continue to monitor consumers experience of these services and will intervene, if appropriate.

Background

1.6 When we last reviewed these market in 2003 ^(-4-), we found that BT had SMP in almost all the fixed narrowband markets in the UK (excluding Hull)), while Kingston Communications had SMP in all the fixed narrowband retail services markets in the Hull area ^(-5-). We decided that SMP remedies were essential to ensure that BT and Kingston could not use their SMP to the disadvantage of other Communications Providers, consumers or both. As a result, we set retail controls for BT and Kingston (now KCOM) ^(-6-).

1.7 Since the 2003 review, Ofcom has instigated a number of measures to enhance competition in the retail markets. The aim has been to encourage real competition for the benefit of consumers and businesses; and a reduction in BT and KCOMs market power in retail and wholesale services. This has included:

• the development of a set of appropriately priced wholesale narrowband services;
• agreement with BT of a set of Undertakings ^(-7-) which included the creation of Openreach (the functional separate organisation within BT providing wholesale access services); and
• the development of equivalence of inputs for the wholesales services for both BT and other Communications Providers, supporting the delivery of services to households and businesses.

1.8 As a result of these developments and the improved state of competition they supported, we decided to remove the retail price controls on BT in 2006 ^(-8-). The following year, we relaxed retail access remedies for businesses with telecoms spend over 1M pa on the basis other Communications Providers could compete with BT on an equal footing using wholesale line rental (WLR). ^(-9-)

Lack of SMP for BT in the retail analogue access and calls markets

1.9 Several of BTs competitors argued against our proposals. In summary, they argued BT continued to have SMP for the following reasons:

• BT maintains high market shares in these markets;
• BTs competitors face continued barriers to entry and growth;
• BTs profitability suggests continued significant market power;
• switching activity has slowed;
• BT has introduced new automatic roll-over contract terms for their residential customers that could inhibit consumer switching ^(-10-) going forward; and
• potential changes to migration processes currently being discussed could inhibit switching.

1.10 We are fully aware of the importance of these matters. Our proposals in the March Consultation took them into account and we have closely looked at them again in light of the responses received. However, we still consider that the empirical evidence demonstrates that ease of competitive entry, lack of barriers to growth, access to wholesale services and customer awareness of choice has substantially changed the nature of retail competition in these markets in the last few years.

1.11 Our overall analysis of the economic characteristics of these retail markets is therefore that BT no longer has SMP in any of them. Accordingly, we have concluded that these markets are effectively competitive already at this stage. In carrying out our regulatory task for these market analyses prospectively, we also consider that on a forward looking basis BTs position in these markets will be further affected by the increased competition that we anticipate will take place, with the result of its market power continuing to decline to a material degree.

1.12 We are required under the EU regulatory framework to carry out regulatory tasks, such as market analysis, to achieve the policy objectives set out in Article 8 of the Framework Directive, such as to promote competition. We note that, in addition to an overall assessment of the above-mentioned factors (economically, factually and legally), there is evidence that continued regulation provides little benefit to consumers and may now be constraining competition. BTs competitors may have so far benefited from apparent restrictions in BTs ability to compete in retail markets.

1.13 For residential customers these restrictions have stopped BT from being able to freely price product bundles which include both SMP and non SMP services.

1.14 For business customers, these restrictions did not allow the development of tailored service packages.

1.15 With most ^(-11-) of these restrictions now removed, competition for customers should intensify.

Competition in Hull

1.16 We have concluded that KCOM still has SMP in all the narrowband retail markets in Hull. However, we consider that there are grounds for future further review of the application of the remedies we have imposed on KCOM, for both the residential and business markets.

1.17 With respect to the residential markets we are concerned that, in the absence of competition, residents of Hull will not have access to emerging trends in bundled services, allowing both savings through the purchase of multiple products and future innovation in service offerings.

1.18 We propose to discuss with KCOM options for the development of new bundled services, subject to controls commensurate with the SMP KCOM continues to hold.

1.19 With respect to the business markets, we accept that there is some evidence that the access of larger businesses to narrowband services provided through leased lines may mean that KCOM has market power in this segment of the market has reduced. We propose to undertake further examination of this market segment to determine whether it is appropriate to modify or suspend the application of some of KCOM SMP conditions for a sub-group of their business customers.

Impact assessment

1.20 We have undertaken impact and equality assessments in our review, the results of which we set out in the March Consultation. In light of our market power determinations that BT no longer has SMP in most retail markets, we have no option but to withdraw all regulatory SMP obligations applying to BT in those markets. As pointed out in the March Consultation, there should be a net benefit to consumers as a result of the changes we are implementing. The only significant risk identified is that BT will discriminate against its less active customers. However, we consider BT would find it difficult to substantially exploit this customer group as such customers are not confined to one specific social, economic or demographic grouping.

1.21 Also, changes to BTs SMP status and to the SMP remedies in these markets have no impact on BTs universal service obligations, which ensure universal access and the protection of vulnerable consumers. ^(-12-)

1.22 As regards to BTs SMP in the retail ISDN2 market and KCOMs SMP in its retail markets, we refer to our impact assessment set out in the March Consultation and updated section 7 of this Statement that takes into account the relevant consultation responses.

Summary of conclusions

1.23 We conclude that BT (in the UK (excluding Hull)) no longer has SMP in the supply of:

• retail fixed narrowband analogue telephone lines for businesses and consumers;
• retail fixed narrowband calls for business and consumers.

1.24 We have concluded that BT still has SMP in the supply of ISDN2 lines. However, we consider that the current retail remedies are no longer effective and are potentially counterproductive to the development of downstream competition. We have concluded, therefore, that it is appropriate to rely solely on the wholesale remedies for this market.

1.25 We have reviewed the retail markets in Hull and concluded that KCOM retains SMP in all retail narrowband markets and that the existing retail remedies should be retained, that is:

• No undue discrimination in the pricing and provision of services;
• Price publication for all services.

1.26 However, the application of these remedies in Hull may be subject to further review.

1.27 We have not included our final determination on the ISDN30 market within this statement as we are still reviewing evidence provided on market definition and the competition for both the retail and wholesale markets. We will be consulting further on both the ISDN30 retail and wholesale markets later this year.

Structure of this document

1.28 This Statement should be read in conjunction with the March Consultation for the full reasoning of Ofcom's final decisions on the market definitions, market power determinations and the setting of SMP conditions. This is because our conclusions in this Statement are drawn from the analysis and reasons given in the March Consultation and the further consideration we have afforded to each issue after carefully considering each and every response we received to our consultation. This Statement does not therefore repeat all our reasoning, together with related evidence, data and other information, but instead focuses on issues arising following the consultation and, where appropriate, it presents updated (or revised) data.

1.29 The rest of the document is structured as follows:

• Section 2 explains the purpose of this market review and its relationship with the related wholesale review and other projects; it also introduces the regulatory framework for undertaking this review;
• Section 3 discusses the market and regulatory developments;
• Section 4 sets out our conclusions on the definition of the relevant markets;
• Section 5 sets out our conclusions on the market power analysis for access markets;
• Section 6 sets out our conclusions on the market power analysis for calls markets;
• Section 7 sets out our conclusions and comments on regulatory remedies and the impact assessment raised by stakeholders in their consultation responses; and
• Section 8 summarises our conclusions on market definitions, market power determinations and remedies in light of our duties and the legal tests.

Footnotes:

  1.- Throughout the document we will normally use consumers to refer to residential consumers

  2.-http://www.ofcom.org.uk/consult/condocs/retail_markets/fnrsm_condoc.pdf

  3.- Communications Act general conditions and general consumer protection legislation / regulations,

  4.- Fixed Narrowband Retail Services Market (http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/fix_narrow_retail0803.pdf)

  5.- The exception was BT was not found to have SMP for international business calls

  6.- Kingston Communications is now operating as KCOM Ltd, though trades in Hull as Kingston Communications.

  7.- Strategic Review of Telecommunications (http://www.ofcom.org.uk/consult/condocs/statement_tsr/)

  8.- Retail Price Control (http://www.ofcom.org.uk/consult/condocs/retail/prc.pdf)

  9.- Wholesale line rental (WLR) is a regulated wholesale service provided by BT which allows other communications providers to offer telephone line access.

  10.- BT have had automatic roll-over contracts for businesses for some time.

  11.- BT will still be subject to universal service obligations and some of the wholesale provision by necessity impact on the retail environment.

  12.- We will shortly reviewing of the current USO. We intend to consider whether changes to it are required. We will include an assessment of the extent to which the USO results in a significant net burden upon BT and KCOM, the universal service providers, and the case for alternative funding and procurement models to ensure that USO provision is both effective and proportionate.

The full document is available below