Review of the wholesale broadband access markets 2006/07

Overview and Summary

Overview

Introduction

1.1 The importance of broadband continues to grow. It plays a central role in communications used by many consumers and businesses to keep in touch, access information and conduct business. Over the last few years the market has seen rapid improvements in availability, take-up, speeds and prices and this has put the UK near the top of international best practice. In line with its legal duties, Ofcom aims to ensure that we build on this significant progress.

1.2 Competition has an important role to play in delivering what consumers and businesses need. Increased competition in certain parts of the retail market for broadband has led to a fall in prices and internet service providers (ISPs) have looked to offer different speeds and product bundles to attract customers. As a result take-up has grown, reaching more than 12 million broadband connections.

1.3 Competition at the retail level depends on ISPs having access to wholesale broadband services or local loop unbundling (LLU) to build their services. Ofcom has identified that competition between networks based on LLU, rather than just at the retail level based on wholesale broadband products, is crucial to maintaining the UK's broadband progress. Promoting competition based on LLU continues to be central to Ofcom’s approach in making sure that consumers can access the services they demand. There are now more than 850,000 unbundled lines in the UK and there is the prospect of further competition.

1.4 It is essential that regulation keeps pace with and anticipates these changes. This will form the key objective for Ofcom’s wholesale broadband access market review which starts with this consultation.

1.5 Ofcom must ensure that regulation continues to protect consumers in areas where competition is limited. Simple economics mean that in some geographic areas competition between broadband networks is not possible and consumers cannot directly get the choice and benefits that competition between networks brings.

1.6 Where competition is delivering what consumers need, Ofcom must seek to remove unnecessary regulation so that operators are not constrained in their ability to serve their customers.

1.7 Ofcom’s wholesale broadband access market review will assess levels of competition and how these differ for different areas across the UK. Regulation needs to adapt to variations rather than offering a ‘one size fits all’ approach. The review will identify areas where wholesale regulation continues to have an essential role and whether, in other areas, regulation might be removed.

1.8 Sustainable competition is only one element necessary for an effective broadband market. As with all market reviews, Ofcom's wholesale broadband access market review has a specific focus on this element. However, we recognise that competition is not the only issue for broadband customers and are working to address other important issues relating to broadband separately.

1.9 We have seen examples where consumers have been unable to easily switch between ISPs so denying them the choice that competition promises. In August 2006 Ofcom published the broadband migrations review which is focussed on ensuring that consumers can easily switch ISPs.

1.10 Ofcom is also looking at ways to ensure that consumers have the information they need to consider broadband options available to them. This could cover access to comparative pricing information and access to quality of service metrics. The latter is currently available for fixed telephony under the TopComm initiative.

1.11 As broadband in the UK continues to develop legitimate questions will be raised about whether the existing scope of Universal Service Obligations (USO) should be extended from narrowband services. A USO would require one or more operators to offer certain broadband services to all customers. Changes to the scope of USO are matters for Government and the European Commission (the Commission) and are therefore outside Ofcom's remit. However, Ofcom nevertheless has a direct interest in encouraging the availability of affordable quality broadband services in rural areas. This issue is being considered by Ofcom as part of its digital inclusion work, which will look specifically at understanding the market, technological options available for rural broadband supply, incentives on providers, the importance of service for social inclusion and the role of Ofcom and other public bodies.

1.12 The wholesale broadband access market review therefore represents one tightly defined element of Ofcom's wide programme of work on broadband. Nevertheless the issues it raises are important and stakeholders are encouraged to participate in the consultation process. Below we describe the key elements of our proposals.

Summary of market review proposals

1.13 This consultation, the wholesale broadband access market review, assesses the continuing need for regulation on BT and Kingston Communications (Kingston) in the Hull area, to offer wholesale broadband services to other operators. This overview describes the key elements and implications of the review.

1.14 Based on the last review carried out in 2003/2004, BT (and Kingston in the Hull area) are currently obliged to provide wholesale broadband products to other ISPs which in turn allows them to offer competing retail services. These obligations were necessary to ensure competition for consumers by ensuring that ISPs can access wholesale broadband services to allow them to develop their own competitive retail offerings.

1.15 Since 2004, when the market was last reviewed, there have been significant changes in the wholesale market. BT has rolled out its broadband network to over 99.8% of the UK (excluding the Hull area) and Kingston covers the whole of the Hull area. Cable now offers broadband services in around 50% of the UK. The most significant change though has been the entry of LLU operators who have used local loop unbundling to offer retail and wholesale broadband services.

1.16 LLU operators have focussed their initial network deployments in more densely populated areas where the commercial case is strongest. Further roll-out is planned over the next year. This will result in competitive conditions differing between areas. By January next year, we estimate that at one extreme an area of over half of the UK population will be served by four or more operators. At the other extreme a quarter of the population will only be served by BT.

1.17 Regulation of this market must adapt to these changes in order to continue to ensure effective competition in the retail market. In particular, we need to avoid a ‘one size fits all’ approach to regulation that treats all these areas the same.

1.18 Accordingly, in our economic analysis we have found that there are sub-national, or local, geographic markets reflecting the different competitive conditions. The relevant wholesale geographic markets and their population coverage based on January 2007 forecasts that we have identified are:

• exchanges where Kingston is the only operator (“the Hull area”) which covers 0.7% of the UK population;
• exchanges where BT is the only operator (“Market 1”) which covers 24% population;
• exchanges where there are 2 or 3 operators (inc BT and ntl:Telewest) AND exchanges where there are 4 or more operators (inc BT and ntl:Telewest) but where the exchange serves less than 10,000 homes and businesses (“Market 2”) which covers 21% population; and
• exchanges where there are 4 or more operators (inc BT and ntl:Telewest) and where the exchange serves 10,000 or more homes and businesses (“Market 3”) which covers 54% population.

1.19 In three of these markets where competitive pressures are weaker (the Hull area, Market 1 and Market 2) we consider that BT (in Market 1 and Market 2) and Kingston (in the Hull area) have significant market power (SMP). An operator with SMP is one who is not sufficiently constrained by competition to prevent them from acting to the detriment of consumers by, for instance, limiting choice and availability.

1.20 The limited competition in these markets means that we are proposing to continue with comparable regulation to that imposed in the previous market review. Ofcom is also proposing to update these regulatory rules to reflect changing technology. Broadly, the proposed regulations would require BT and Kingston to provide a wholesale broadband access service on reasonable terms in order to allow other ISPs to offer competing retail broadband services. We are not proposing any price controls on BT or Kingston at this time since we believe that, given the dynamic nature of the market, on-going innovation and investment, it is premature for regulation to set prices.

1.21 In Market 3 the competitive conditions are changing very rapidly, with a significant proportion of this change forecast to take place over the next 12 to 18 months. In this consultation document Ofcom has set-out the current situation in this market and has made projections about how this may change in the future. However, because these are projections and given that Ofcom is planning a second consultation document, Ofcom does not believe that it is appropriate or necessary to reach a firm conclusion on whether, or not, BT would hold a position of SMP in this market. Ofcom will make this assessment in the second consultation document, planned for around May 2007.

1.22 If BT is found to have SMP in this market, then Ofcom will propose appropriate regulatory remedies. Conversely, if no-SMP is found, then Ofcom will not be able to impose any remedies. However in this case it may be necessary to allow operators an appropriate period of notice before removing regulation in order to avoid consumer detriment in the short term.

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Summary

Summary of proposals

2.1 Significant developments have taken place in the wholesale broadband access markets since Ofcom concluded its previous review in May 2004. Between May 2004 and October 2006, the total number of broadband subscribers has increased from c.4 million to c.12 million. At the same time, LLU has developed from a low volume niche product to one that allows Communications Providers to bypass the incumbent’s wholesale offerings and to instead provide their own. Increased competitive pressure, particularly from LLU, has resulted in BT geographically de-averaging its wholesale broadband prices and in providers offering retail prices and products that vary by geography.

2.2 Ofcom has attempted to capture these developments in its approach to reviewing the wholesale broadband access market and to propose regulatory remedies that are appropriate to the prevailing market conditions. This consultation document sets this approach out in detail and Ofcom is keen to hear the views of all interested parties. Ofcom has followed the procedure under the regulatory framework of defining markets, assessing competitive conditions and considering remedies in reaching the conclusions set out in this document. A summary of Ofcom’s findings and proposals in these areas is given below.

Identification of relevant markets

2.3 There are two dimensions to the definition of relevant market: the product dimension and the geographic dimension.

2.4 With respect to the definition of the relevant product market, Ofcom considers that the relevant wholesale broadband access product is:

• asymmetric broadband access and any backhaul as necessary to allow interconnection with other Communications Providers which provides an always-on capability, allows both voice and data service to be used simultaneously and provides data at speeds greater than a dial-up connection. This market includes both business and residential customers in the UK.

2.5 With respect to the definition of the relevant geographic market, Ofcom considers that there are four distinct areas in the UK where the competitive conditions within each area are sufficiently homogeneous but where the competitive conditions between each area are heterogeneous.

2.6 Ofcom considers that the following geographic markets may be identified:

1. exchanges where Kingston is the only operator (“the Hull area”);
2. exchanges where BT is the only operator (“Market 1”);
3. exchanges where there are 2 or 3 operators (including BT and ntl:Telewest) AND exchanges where there are 4 or more operators (including BT and ntl:Telewest) where the exchange serves less than 10,000 homes and businesses (“Market 2”); and
4. exchanges where there are 4 or more operators (including BT and ntl:Telewest) where the exchange serves 10,000 or more homes and businesses (“Market 3”).

2.7 The detail of the definition of these markets and the approach taken by Ofcom when identifying them is contained in Section 4 and Annexes 3 and 4. Ofcom is aware that these definitions are based on a complex analysis and is keen to hear stakeholder views on the approach proposed by Ofcom and the rationale behind it.

Assessment of market power

2.8 Based on the evidence currently available Ofcom considers that Kingston has SMP in the Hull area and BT has SMP in each of Market 1 and Market 2.

2.9 Within this consultation document Ofcom has not made a proposal in relation to the market power assessment for Market 3. This is because Market 3 is expected to undergo significant change over the next few months as LLU operators rollout their services and grow their customer bases. Ofcom therefore believes that it is better to allow these changes to take place before conducting a full assessment, which will be included in its second consultation document.

Proposed regulatory remedies

2.10 Ofcom proposes the following remedies on Kingston in relation to the market for wholesale broadband access in the Hull area:

• requirement to provide Network Access on reasonable request;
• requirement not to discriminate unduly;
• requirement to publish a reference offer;
• requirement to notify terms and conditions;
• requirement to publish technical information; and
• requirement to have accounting separation.

2.11 Ofcom proposes the following remedies on BT in relation to the market for wholesale broadband access in Market 1:

• requirement to provide Network Access on reasonable request;
• requirement not to discriminate unduly;
• requirement to publish a reference offer;
• requirement to notify terms and conditions;
• requirement to publish technical information; and
• requirement to have accounting separation.

2.12 Ofcom proposes the following remedies on BT in relation to the market for wholesale broadband access in Market 2:

• requirement to provide Network Access on reasonable request;
• requirement not to discriminate unduly;
• requirement to publish a reference offer;
• requirement to notify terms and conditions;
• requirement to publish technical information; and
• requirement to have accounting separation.

2.13 If Ofcom finds BT to have SMP in Market 3, it would consider similar remedies to those proposed in Market 1 and Market 2. If, however, Ofcom finds that BT does not have SMP then it will not be able to impose any remedies. In such an event it may be important to allow operators an appropriate period of notice before removing regulation in order to avoid consumer detriment in the short term.

2.14 Ofcom has not set out the detail of the SMP services conditions that it proposes to impose on Kingston and BT in this consultation document. Ofcom's formal Notification to the Commission of its intended approach will be included in the second consultation document.

Consultation and market review timetable

2.15 Ofcom is seeking comments on the proposals set out in this consultation document by 13 February 2007. Ofcom is particularly keen to hear comments on its proposals in relation to the definitions of the relevant markets which is set out in Section 4; its assessment of SMP in relation to those markets which is set out in Section 5; and its proposals in relation to the regulatory remedies which it considers should apply to counteract SMP in the markets concerned which is set out in Section 6.

2.16 Ofcom intends to publish a second consultation document in May 2007 in which it will revise its proposals should it be necessary to do so in light of any comments that might be made in relation to this document. The second consultation document will also include Ofcom’s formal Notification of its intended approach to the Commission.

2.17 Ofcom intends to publish its final statement in which it will determine the relevant product and service markets, determine which Communications Providers – if any – have SMP, and set out the regulatory remedies which will apply in those markets thereafter.