Review of the wholesale broadband access markets - Second consultation on market definition, market power determinations and remedies

Summary

Purpose of this document

This document is a further consultation on our review of the wholesale broadband access (WBA) market and should be read together with our earlier consultation published on 23 March 2010 (the first consultation) ^(-1-). This further consultation considers, in particular, geographic market definition.

Background

On 23 March 2010, we published the first consultation in relation to our review of the WBA market. Within it we made a full set of proposals relating to market definition (both product and geographic), market power assessment and remedies (to address the identified market power).

At that time we identified a total of seven operators that we considered to play a significant role in the market. These operators were; BT, C&W, O2, Orange, Sky, TalkTalk Group (TTG) and Virgin Media, and we referred to them as the Principal Operators (POs).

When defining geographic market areas with reasonably homogeneous competitive conditions, we elected to use the number of POs present as a proxy for the competitive conditions in different areas. This led us to identify four separate geographic markets, as follows:

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

However, since publishing the first consultation, Orange has entered into a long-term exclusive agreement with BT for the supply of wholesale broadband access services. This agreement means that Orange will no longer play a significant role in the wholesale broadband access market considered in this review.

A reduction in the number of POs, from seven to six, will clearly have a direct impact on our identified geographic markets and in particular on the appropriateness of using different proxies to summarise the competitive conditions in this market.

Moreover, there is a broader question about whether our approach to geographic market definition remains appropriate given a number of arguments made in response to our first consultation.

In its comments letter the European Commission noted that in its view geographic delineation which is based primarily on the number of operators present is not, in itself, sufficiently detailed or robust to identify real differences in competitive conditions for the purpose of geographic market definition.

We also received extensive comments and evidence from BT in response to the first consultation. Essentially, BT believes that some parts of the proposed Market 2 have competitive conditions that are more similar to the proposed Market 3 areas. Given this, BT believes that some parts of Market 2 should be moved to Market 3 and, accordingly, de-regulated. BT proposes a number of different approaches to refine the market definition assessment we carried out in our first consultation.

As such, in addition to the implications for the analysis of the Orange agreement, this consultation also addresses the points raised by both the European Commission and BT.

Finally, in the first consultation we took account of operators broadband deployment plans although we said that, based on information we had gathered from each of the operators at the time, these were somewhat limited. We said that we would seek operators latest broadband deployment plans and factor these into the analysis for the final statement. We have now gathered these latest plans which indicate that there may be more rollout in future than the previous information showed. The effect of these updated plans is also taken into account in this consultation.

Summary of our proposals

We consider that the proposals we made in the first consultation on the product market definition remain valid. In this document we are consulting on an amended proposal for geographic market definition. We still propose to identify four separate geographic markets. However, we propose to adopt the following criteria:

• The Hull area: (0.7% of UK premises);
• Market 1: exchanges where only BT is present (11.7% of premises);
• Market 2: exchanges where two POs are present or forecast and exchanges where three POs are present or forecast but where BTs share is greater than or equal to 50 per cent (10.0% of premises); and
• Market 3: exchanges where four or more POs are present or forecast and exchanges where three POs are present or forecast but where BTs share is less than 50 per cent (77.6% of premises).

The above geographic market definitions take account of the latest confirmed broadband deployment plans of each of the POs. These updated plans are the reason for the reduction in the size of Market 1 compared to our first consultation. These plans also contribute, along with the impact of the Orange agreement and our updated approach to market definition, to the changes in the sizes of Market 2 and Market 3.

Based on this revised geographic market definition we revisit our SMP analysis. We propose that the analysis in our first consultation remains appropriate given the limited effect of the revised geographic market definition above.

Given that we propose our SMP analysis remains appropriate, we also propose that the remedies discussed in the first consultation also remain appropriate. In this consultation we therefore do not revisit our remedies assessment.

Consultation and next steps

We invite comments from interested parties on the proposals in this document. The consultation period runs for six weeks, to 1 October 2010. Following consideration of responses to the consultation we would expect to publish our conclusions by the end of 2010.

Footnotes:

  1.- Review of the wholesale broadband access markets: Consultation on market definition, market power assessment and remedies, 23 March 2010,http://stakeholders.ofcom.org.uk/consultations/wba/