Fixed Narrowband Retail Services Markets

Summary

Summary

Introduction

1.1 This review considers the state of competition in the retail narrowband telephony markets, that is, analogue and digital (ISDN) telephone lines and calls for consumers and businesses. Our aim is to determine whether there is effective competition in these markets and, if not, how best to regulate the behaviour of any companies that we find have significant market power (SMP - in other words, companies that have the power to behave sufficiently independently in a market in a way which could be to the detriment of consumers).

1.2 We are proposing that the UK retail markets, with the exception of Hull, are now largely competitive. This is a significant milestone in the history of Ofcom. For the first time since the creation of Ofcoms predecessor, Oftel, we are proposing to remove all company specific retail regulations on BT intended to enhance competition in analogue telephony. This is due to increased competition in these markets, which, we believe, is a direct result of the changes to the regulation of BTs wholesale services due to our Telecommunications Strategic Review (TSR) . The main effect will be to increase competition in these retail markets by allowing BT to freely bundle fixed narrowband products with broadband and TV services.

1.3 Our proposals do not affect the Universal Service Order (USO) regulations which ensure that BT offers a universal service at a uniform price. Equally, Ofcom will continue to regulate the retail activities of BT, on an equal basis with other Communications Providers, through sector regulations . We will continue to monitor consumers experience of these services and will intervene if appropriate.

Background

1.4 When we last reviewed these market in 2003 , we found that BT (UK excluding Hull) and Kingston Communications (in Hull) had SMP in almost all the fixed narrowband retail services markets . We decided regulations 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 KCOM.

1.5 Since the 2003 review, Ofcom has concentrated on measures to enhance competition in the retail markets. The aim being encouraging real competition for the benefit of consumers and businesses, and a reduction in BT and KCOMs market power.

1.6 In the 2005 TSR, Ofcom set out seven principles for the regulation of telecoms markets, including that Ofcom should:

• focus regulation on the deepest levels of infrastructure where competition will be effective and sustainable;
• ensure equality of access at those levels; and
• as soon as competitive conditions allow, withdraw from regulation at other levels.

1.7 The key outcomes of the TSR, were the Undertakings by BT , the creation of Openreach (the functional separate organisation within BT providing wholesale access services) and the development of equivalence of inputs for both BT and other Communications Providers in 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 . 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).

Our proposals

1.9 Our assessment of the current state of competition in the retail market confirms the trends we have seen since the last review. There is compelling evidence that most of these markets are now competitive. For example, in the residential market, 14 new retail narrowband providers have entered the market since 2005 (12 based on WLR plus two based on full LLU). BT market share has been reduced substantially. In residential access this is now 66%, and in business at 57% market share. While we recognise that BT still has a relatively high residential market share, we expect this to fall substantially further over the review period.

1.10 Our analysis suggests that BT (in the UK excluding Hull) no longer has SMP in:

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

1.11 We think this finding and the consequent removal of remaining SMP regulations will have a positive effect on residential consumers and businesses. We expect increased competition for the provision of retail telephony services from BT, since BT will be able to bundle these services with other services, e.g. broadband.

1.12 We are aware of the risk that customers that are uninterested in changing providers are most likely remain with BT. However, we consider that BT could not readily exploit this fact as these consumers are not confined to one specific social, economic or demographic group.. Also changes to SMP status and remedies have no impact on BTs universal service obligations which ensure universal access and the protection of vulnerable consumers.

1.13 While we consider that BT still has SMP in ISDN2 and ISDN30 lines we think that the current retail remedies are no longer effective and are even potentially counterproductive in the development of enhanced competition. We consider that it is preferable to rely solely on the proposed wholesale remedies for those markets.

1.14 We have reviewed the retail markets in Hull. We have found no significant change in KCOMs position, so we conclude that KCOM retains SMP in all retail narrowband markets.