Review of the wholesale broadband access markets

Summary

Summary

Purpose of this document

1.1 This document is a consultation on our analysis of the state of competition in the Wholesale Broadband Access ("WBA") market, and the measures that we are proposing to address concerns over the degree of competition in that market. These proposals are aimed at supporting effective competition in the provision of retail broadband services. It is important for consumers because effective competition - or effective regulation where sufficient competition does not exist - in the WBA market underpins the choice in retail broadband offers available to consumers.

1.2 Today, we are also publishing a review of the Wholesale Local Access (WLA) market. These two markets are closely linked and, taken together, our proposals in the two markets are intended to ensure consumers in the UK continue to have access to a wide choice of products from a range of suppliers.

The context for our proposals

1.3 Access to the Internet plays an increasingly important role for consumers and citizens in the UK. Almost three quarters of all households and nine in ten businesses have access to the Internet. The great majority of these consumers connect to the Internet using a broadband connection. There are now approximately 18 million broadband lines in the UK.

1.4 Consumers have benefited from competition in the provision of broadband services through choice of provider, lower prices and product innovation. As well as price, providers compete by differentiating their broadband products in terms of the features of the product (such as maximum speed and download limits) and by bundling broadband products with other services, notably fixed and mobile telephony and television services.

1.5 Competition in the provision of these retail services depends on effective competition at the wholesale level, or, where this is not occurring, effective regulation.

1.6 Competition at the deepest level at which it is likely to be effective and sustainable, based on investment by competitors in their own infrastructure, is likely to give the greatest benefits in terms of the mix of lower prices and faster innovation that residential and business consumers want. The WLA market concerns access to this fixed telecommunications infrastructure the connection between the consumer and the telecommunications network. It is therefore critical for all fixed line services.

1.7 The WBA market sits between the WLA market and the retail broadband market. The WBA market relates to the wholesale broadband products communications providers (CPs) provide for themselves and sell to each other. It is important for consumers because these services are one of the building blocks of the retail broadband offers that consumers buy.

1.8 As effective and sustainable competition based on investment in infrastructure develops, further regulation of wholesale broadband services may become unnecessary. However, the market is not yet effectively competitive everywhere and so additional regulation is required.

1.9 A characteristic of market analyses is that they are carried out on a forward-looking basis, with relevant markets defined prospectively. The market is evaluated based on existing market conditions, taking into account past performance and data. In light of such evaluation, we consider whether any lack of effective competition is durable, by taking into account expected or foreseeable market developments over the course of a reasonable period. The actual period used should reflect the specific characteristics of the market and the expected timing for the next review.

1.10 The next stage of the evolution of the UK broadband market will be based on new super-fast broadband services that support higher speeds than have been experienced so far by UK consumers. Super-fast broadband services are generally considered to be those that run at over 24Mb/s. BT has recently launched its Infinity product, based on the Next Generation Access (NGA) network it is in the process of rolling out. Virgin Media offers super-fast broadband services over its cable network.

1.11 The current market uncertainty about the extent and timing of NGA investment makes it difficult to foresee how the existing competitive conditions may be materially affected over the next few years. It is possible that the WBA market may change quickly in the future, for example as the NGA deployment develops. However, based on past data and the information before us, we are of the view that competitive and technological developments are not expected to materially affect our proposed market definitions within a four year period. Further, the specific characteristics of the UK markets and the need for regulatory certainty to incentivise investment justify a four year forward look.

1.12 However, given the fast pace of development in this market, it will be particularly important to keep it under close review going forward. We must also consider the new procedures and timeframes introduced by the amendments to the EU regulatory framework, which will apply from 26 May 2011.

The market review process

1.13 We periodically review various markets, according to both European and domestic legal requirements, including the Communications Act 2003 ("the Act"). The market review process is divided into three parts. First, we define the scope of the market that we are assessing (both the products in the market and its geographic scope). Then we assess whether any CPs have a position of significant market power ("SMP"), which essentially means power to influence markets to a significant degree in a way that could harm consumers. Then, if any CPs have SMP, we assess the regulatory remedies that need to be imposed to address the SMP that exists.

1.14 In this document, we review the WBA market and make proposals relating to market definition, SMP and the remedies we think are needed to address this market power. As discussed above, the WBA market is closely related the WLA market. Regulation in the WLA market aims to provide access to the network infrastructure that provides the connection to individual consumers. This encourages the effective and sustainable competition, based on investment by competitors in their own infrastructure, that we believe provides the greatest benefits to consumers to develop. As such, we need to take into account the competition, and any regulatory remedies, in the WLA market when we consider the WBA market.

1.15 We have therefore reviewed both markets at the same time. We have published a separate consultation on the WLA market today.

The 2008 market review

1.16 We last reviewed the WBA market in May 2008. In that review we concluded that in some parts of the country, competition had developed to a point where regulation in the WBA market was no longer required. In other parts of the country, some competition existed but this was not at a sufficient level. There were parts of the country where there was no competition at all.

1.17 We therefore defined four separate geographic markets:

• The Hull area (covering 0.7% of UK premises): those areas covered by exchanges where KCOM is the only operator.
  
• Market 1 (covering 16.4% of UK premises): those areas covered by exchanges where BT is the only operator.
  
• Market 2 (covering 13.7% of UK premises): those areas covered by exchanges where there are 2 or 3 operators.
  
• Market 3 (covering 69.2% of UK premises): those areas covered by exchanges where there are 4 or more operators.

1.18 We found that KCOM held a position of SMP in the Hull Area. We also found that BT held a position of SMP in Market 1 and in Market 2, but that no operator held a position of SMP in Market 3.

1.19 To address these positions of SMP, we imposed general access and non-discrimination obligations on KCOM in the Hull Area and on BT in Market 1 and Market 2. These obligations required KCOM and BT to provide products to other providers that allowed them to compete effectively in the retail market. BT was also subject to voluntary pricing commitments on its wholesale prices in Market 1 and Market 2 which set a floor and a ceiling price. The floor commitment expired on 30 June 2009 and the ceiling commitment expires on 31 December 2010.

1.20 These measures have been effective in contributing to increased availability and choice at the retail level and this competition has led to declining retail prices.

Summary of our proposals in this review

1.21 In this document we are consulting on our proposals for market definition, market power assessments and proposed remedies in the WBA market, which are:

Market Definition

1.22 We propose a single broad product market for fixed asymmetric broadband services of all speeds at the wholesale level, including residential and business products in the same market. This market includes services provided using copper, fibre and cable access networks, including super-fast broadband services.

1.23 We propose four separate geographic markets:

• The Hull area (0.7% of UK premises);
  
• Market 1: exchanges where only BT is present (14.2% of premises);
  
• Market 2: exchanges with 2 or 3 Principal Operators are present (13.8% of premises); and
  
• Market 3: exchanges with 4 or more Principal Operators present or with 4 or more forecast (71.3% of premises).

Market power assessment

1.24 We propose the following market power determinations in each of the markets described above:

• KCOM holds a position of SMP in the Hull area;
  
• BT holds a position of SMP in Market 1;
  
• BT holds a position of SMP in Market 2; and
  
• No operator holds a position of SMP in Market 3.

Remedies

1.25 In order to address the competition problems identified above we propose to impose a series of remedies designed to make sure there is a choice of provider for retail consumers wherever possible and that consumers benefit from lower retail prices.

Market 1

1.26 In Market 1 there is limited prospect in the near term of any wholesale competition. Therefore we propose to impose general access and non-discrimination obligations on BT. In addition, we propose to impose a charge control, a requirement that prices are based on costs (cost orientation) and a cost accounting obligation to provide transparency of cost data. We are proposing these additional pricing remedies because without them, once BT's voluntary commitment to not price above a ceiling cap expires, we are concerned that BT could set excessive prices which would ultimately be passed on to consumers.

1.27 We will publish a separate consultation in relation to the details of the charge control we propose in Market 1. Our current plan is to publish this separate consultation in autumn 2010.

Market 2

1.28 In Market 2, whilst BT has SMP there is already some wholesale competition and the potential for this to develop further.

1.29 In Market 2, we consider it appropriate to impose general access and non-discrimination obligations on BT to address its SMP and the concern that BT could raise its prices to an excessive level. However, there is some wholesale competition in Market 2 and a potential for this to develop further, though the extent of any such further investment is uncertain.

1.30 We consider that an approach to regulation that promotes investment where it is economic in order to provide effective and sustainable competition is appropriate in Market 2. However we also recognise that a safeguard to protect against the potential risk of prices rising to an excessive level is needed, in case this investment does not materialise. We think strict price regulation would not be appropriate to achieve this. Instead, we propose a degree of pricing freedom within a range based on a general cost orientation obligation. We also propose a cost accounting obligation to provide transparency.

1.31 The different approach we are taking in Market 2, compared to Market 1, is mainly due to our assessment of the likely level of constraint on BT's pricing of current and future investment by other operators. We have also taken account of the possible impact our regulation may have on prospects for future investment and on those providers that have already made investments in Market 2.

The Hull Area

1.32 In the Hull area we propose to impose general access and non-discrimination obligations on KCOM. We do not propose to impose any pricing regulation.

1.33 We are aware that consumers in the Hull area do not have a choice of provider because of the lack of entry into the market by providers other than KCOM. In assessing our approach to remedies, we have taken into account the absence of rollout plans of other providers. Our view is that imposing additional wholesale regulation (such as charge controls) will not encourage investment by these other providers.

1.34 This lack of competition could result in consumers in Hull paying higher prices and getting less attractive products than are available elsewhere in the UK. In that case, we would need to consider whether to impose additional regulation at the retail level (as additional wholesale regulation would not address our concerns). We have examined the retail offers available to consumers in the Hull area. This shows that whilst consumers in Hull may not have access to the best offers available in some other parts of the UK (where providers such as Sky and TalkTalk have deployed their own networks), they do have access to products that are comparable in terms of price and specification to those available to many consumers in the rest of the UK (for example, the majority of customers in the Market 1 area). We do not expect this position to change within the next four years.

1.35 Therefore, whilst we will continue to monitor the position in Hull, we do not propose to carry out a further review of the retail market at this time.

Consultation and next steps

1.36 We invite comments from interested parties on the proposals in this document. The consultation period runs for 10 weeks, to 1 June 2010. We then would expect to publish our conclusions in autumn 2010.

1.37 We will consult on our approach to the charge control we are proposing to impose on BT in Market 1. We currently also expect to publish this consultation in autumn 2010.

The full document is available below