Review of the wholesale local access market - Statement
1.1 Broadband is increasingly central to the lives of UK consumers and the success of businesses. It allows consumers to access and interact with a wide range of content and services and allows businesses to exploit new market opportunities and more efficient operating models. Competition has driven the success of the current generation of broadband services. This has been shaped by regulation and the availability of local loop unbundling, which has allowed communications providers to compete using regulated, wholesale inputs from BT. The result has been greater choice, innovation, lower prices and high levels of broadband adoption.
1.2 The increase in the number of consumers using their broadband connections for activities such as downloading or streaming videos and music is, however, beginning to test the limits of current broadband networks. Equally, businesses and service providers are looking to deliver a wider range of content, applications and services over broadband. Super-fast broadband will have a key role in addressing these requirements and thereby delivering significant benefits to UK consumers and businesses.
1.3 One of the main challenges facing Ofcom is to adapt the existing regulatory framework to reflect the emergence of super-fast broadband. Over the past two years commercial investments in next generation access ("NGA") networks have resulted in super-fast broadband being made available to nearly half of all UK households. However, competition in the provision of super-fast broadband services remains in its infancy. To support the future development of the market, it is essential that there should be a clear regulatory framework designed both to promote competition and to support continued investment and innovation.
1.4 This document sets out the conclusions of our review of the UK market for Wholesale Local Access ("WLA") and is intended to establish such a framework. We have found that BT continues to have significant market power ("SMP") in the UK market for WLA services , and concluded that access to BT's local access network remains critical for those companies seeking to compete in the delivery of downstream services such as broadband and traditional voice services. On the basis of that finding, we have imposed a number of regulatory obligations on BT, designed to support investment and competition in super-fast broadband, as well as in current generation services.
1.5 The new regulatory model rests on the following core elements:
- Virtual Unbundled Local Access ("VULA"), which will allow competitors to deliver services over BT's new NGA network, with a degree of control that is similar to that achieved when taking over the physical line to the customer;
- Physical Infrastructure Access ("PIA"), which will allow competitors to deploy their own NGA infrastructure between the customer and the local exchange, using BT's duct and pole infrastructure, to provide broadband and telephony; and
- Local Loop Unbundling ("LLU") which we expect will continue to provide a basis for competition in current generation services, allowing competitors to physically take over (or share) BT's copper lines between the customer and the local exchange.
1.6 We expect the new regulatory remedies (VULA and PIA) to be used in different circumstances: VULA is likely to be the most attractive for communications providers ("CPs") where BT has already upgraded its local access network; PIA will be attractive to companies wishing to address market opportunities in advance of BT and may also be of particular interest to companies wishing to provide service in locations which may be in receipt of public funding support.
1.7 These remedies will be complemented by other measures such as Sub-loop Unbundling ("SLU"), charge controls for LLU but greater freedom for BT in the pricing of VULA services designed to promote competition, protect customers and also balance the incentives for companies facing what remain risky investments.
1.8 Finally, we have extended the remit of the Office of the Telecommunications Adjudicator ("OTA") to include both of the new remedies, VULA and PIA. The OTA's contribution proved particularly important in facilitating the emergence of competition in current generation broadband and we anticipate that it will play an equally important role in respect of super-fast broadband.
1.9 We consider that the decisions we are taking today, and the regulatory products that will be available to BT's competitors as a result, are consistent with the Government's approach to encouraging the roll-out of next generation broadband. PIA and SLU have the potential to be used to extend the reach of super-fast broadband, potentially in combination with public funding at a UK or EU level. This would support the Government's aim to introduce superfast broadband in remote areas at the same time as in more densely populated areas.
1.10 The Government is currently consulting on the implementation of the new EU telecommunications framework, which amongst other things will give Ofcom additional powers to encourage the sharing of telecommunications infrastructure. The Government is also consulting on the scope for infrastructure-sharing by non-telecommunications utilities (e.g., sewage, gas and electricity). We believe the introduction of the PIA remedy will complement any initiatives that flow from these developments.
The market review
1.11 This document sets out our analysis of the state of competition in the Wholesale Local Access (WLA) market, and the measures that we are taking to promote competition in that market. We published our proposals on these issues in March 2010 ("the consultation document") .
1.12 These decisions will have significant implications for consumers. While the WLA market directly concerns services provided between different CPs, decisions taken in the context of this market review will ultimately affect the prices, choice and availability of critically important services in the retail market, such as current generation broadband and traditional voice services. Our decisions also matter because they are intended to promote competition and investment in new super-fast broadband networks, in the important early development stages of those networks.
1.13 The WLA market concerns fixed telecommunications infrastructure - the physical connection between a consumer's premises and the local telephone exchange. This connection is needed to support fixed line services such as voice calls and broadband internet access. The cost of this connection therefore affects the prices that consumers pay for those services. Also, if this connection fails then consumers' services will fail. The WLA market is therefore critical to all fixed line services.
1.14 In reviewing this market we have assessed the extent of competition in the supply of fixed telecommunications connections. The ultimate goal of this review is to protect consumers' interests by using regulation to promote competition and choice in the delivery of fixed line telecommunications services. This will help to ensure that consumers do not have to pay excessive prices for those services, and that they benefit from innovation and investment.
1.15 We periodically review various markets in accordance with 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 SMP, which in simple terms means the power to influence markets to a significant degree in a way that could harm consumers . Then, if any CPs have SMP, we assess which regulatory remedies might need to be imposed to address that SMP.
1.16 In tandem with this WLA market review, we are currently reviewing the related Wholesale Broadband Access ("WBA") market, and have now published two consultation documents on that market . Our WLA decisions should be viewed in conjunction with those in the WBA review in order to understand the overall impact on consumers.
1.17 The WBA market concerns the wholesale broadband services which are used by CPs to provide retail broadband services to business and residential consumers. The WBA market therefore sits between the WLA market and the retail broadband market. Regulation in the WBA market takes into account how much infrastructure competition exists (including as a result of regulation of the WLA market). Effective and sustainable infrastructure competition tends to give rise to the greatest benefits in terms of the mix of lower prices and faster innovation. This is why we have been reviewing these markets at the same time. The conclusions we reach in the WBA market review will take account of the decisions set out in this document.
Summary of decisions
1.18 We conclude that the WLA services within this market are those based on copper loops, cable networks and optical fibre, at a fixed location. We conclude that the market excludes WLA services based on mobile, fixed wireless and satellite technologies. We also conclude that WLA services for business and residential use are in the same market.
1.19 We conclude that there are two separate geographic WLA markets:
- The UK excluding the Hull area; and
- The Hull area.
Market power assessment
1.20 Our SMP findings in the WLA market are as follows:
- BT has SMP in the UK excluding the Hull area; and
- KCOM has SMP in the Hull area.
1.21 One of the key reasons why we have concluded that BT has SMP is its high market share, which is 84 per cent . As we have concluded that the WLA market currently encompasses both current generation access ("CGA") and NGA networks, Virgin Media's earlier NGA deployment does not in itself radically change its market share. Market shares are based on take-up, not deployment (although the two are obviously related).
1.22 As we consider that there is SMP in both of these markets, we have decided to impose regulatory requirements on BT and KCOM to address the identified competition problems. Under the legal framework governing our proposals, it is only possible to impose obligations on those CPs that have SMP in the relevant market. We therefore are not imposing regulatory obligations on any other CPs in these markets including Virgin Media.
Remedies for market power
1.23 To address BT's SMP, we are imposing a number of complementary regulatory obligations (SMP remedies). BT will be required to provide other CPs ("OCPs") with access to its network in the following ways:
- Local Loop Unbundling (LLU): a successful remedy that is already in place, this allows OCPs to physically take over (or share) BT's existing copper lines between the local telephone exchanges and the customer premises;
- Virtual Unbundled Local Access (VULA): this will have to be provided by BT wherever it deploys its NGA network. VULA is intended to provide access to the NGA network in a way that is similar to how LLU provides access on the CGA network. However, rather than providing a physical line, VULA will provide a virtual connection that gives OCPs a dedicated link to their customers and substantial control over the services provided; and
- Physical infrastructure access (PIA): like VULA, this is a new remedy. It will allow OCPs to deploy fibre in the access network using BT's ducts and poles - either to support deployment of fibre-to-the-premises ("FTTP") technology, or to support deployment of fibre-to-the-cabinet ("FTTC") technology (by enabling a 'backhaul' connection between street cabinets and the OCP's network). BT has to produce a draft reference offer ("RO") for duct and pole access by mid-January 2011, with a view to launching a product by the middle of that year. BT will be obliged to provide PIA services for the purposes of deploying of NGA networks to support services such as broadband, telephony and cable TV, but not, at this stage, leased lines. Further consideration will be given to extending the scope of the remedy to include leased lines in the next business connectivity market review, which is due for completion in 2012.
1.24 In addition, we have decided to continue a requirement on BT to provide SLU. Whilst this is an existing remedy, it has so far only been used in very limited situations. It allows OCPs to physically take over (or share) the part of BT's existing copper lines between a street cabinet and the customer premises. This remedy will allow OCPs to deploy FTTC technology where they consider this to be economic.
1.25 Based on these specific access products, OCPs will be able to use BT's network infrastructure to develop their own services to offer to consumers, thereby lowering barriers to entry and investment. VULA should also support competition in (downstream) broadband and voice markets by providing BT and OCPs with an equivalent input for developing those services. We expect BT's downstream businesses to use VULA as an input when providing downstream services.
1.26 At this point, we consider that VULA is likely to be the main basis for NGA competition over BT's network, to supplement the continuing effectiveness of LLU, over at least the next four years. Our economic analysis suggests that VULA is very likely to be the most cost-effective NGA remedy and the remedy most likely to emulate the level of competition currently delivered by LLU. However, we think that access to BT's ducts and poles, and to a lesser extent SLU, could also play a part in supporting competition, as well as investment in NGA. Partly, this is because VULA will only be available where BT deploys its NGA network.
1.27 We have concluded that prices for LLU, PIA and SLU must be related to the cost of providing them . However, we have decided not to regulate the prices of the product(s) that BT provides under its VULA obligation. We consider that this approach will give BT the flexibility to price its VULA services according to emerging information on the demand for, and supply costs of, NGA services. At the same time, the prices of these services will be constrained by the availability of current generation broadband services and by competition from services provided over cable TV network infrastructure.
1.28 In addition to requiring the specific products referred to above, we have imposed a set of general access remedies on BT, all of which apply to it currently in this market. These include a requirement to provide network access, an obligation to not discriminate unduly when providing services, various transparency measures, and a requirement to keep separate accounts for different services (to support effective regulation). For VULA, we have decided to apply a strict interpretation of the no undue discrimination obligation, to reflect VULA's importance for competition and because, as a new product, it should be possible to provide VULA in a non-discriminatory manner without incurring inefficiencies.
1.29 For KCOM, we have decided to maintain the general access remedies which currently apply to it in this market . These include a general requirement to provide network access and a no undue discrimination obligation. We have also introduced a new general requirement for KCOM to publish guidelines on its process for handling requests for new network access. This new obligation is intended to provide greater transparency and information to OCPs who are considering entering the market in Hull. However, we are not at this stage requiring KCOM to provide any specific access products, such as access to its duct and pole infrastructure. This reflects the continuing limited interest among CPs in competing in the Hull area. In these circumstances, we do not consider that it would proportionate to require KCOM to develop such products, the costs of which would need to be recovered through higher prices for KCOM's customers.
Developments since the consultation document
1.30 In response to our proposals, we received substantive inputs from a number of stakeholders. Most stakeholders agreed with our market definition and SMP proposals. The key issues raised concerned the detailed nature of the remedies on BT, especially the design of VULA and PIA and the speed with which they will be implemented.
1.31 Since the publication of the consultation document, there have also been a number of other developments, including modifications to the access products proposed by BT. These developments have largely reinforced the case for the proposals set out in the consultation document. They include:
- The higher targets announced by BT for its NGA deployment, to 2015. We consider that the main impact of this change on SMP remedies is likely to be a greater level of interest in using VULA relative to other remedies. However, each of the remedies that we are imposing will still have a role, for example because PIA (and SLU) could be used in any given area before BT deploys NGA there;
- The improvements made by BT to its Generic Ethernet Access ("GEA") NGA wholesale products for CPs, through which it intends to comply with its VULA obligations. For the FTTC variant, Openreach has agreed to trial a CP-installed product in the near future. For the FTTP version, Openreach will now adopt an 'open ATA' approach , which should be more pro-competitive as it will give interconnecting CPs a greater degree of control over the voice services that can be provided using GEA;
- Positive steps in the development of access to BT's local network infrastructure. BT committed to offering access to its duct and pole network, and began detailed discussions with OCPs to define their requirements and develop its RO. In addition, BT has held a number of discussions with OCPs in response to a recent Statement of Requirements for SLU services;
- The publication by the European Commission ("the Commission") of its final Recommendation on regulated access to NGA networks ("the NGA Recommendation"), which is highly relevant to our decisions on SMP remedies . We have been monitoring the evolution of the Recommendation for some time, and have taken utmost account of the final version in reaching our conclusions; and
- The incoming Government's announcement of measures to encourage roll-out of next generation broadband in the UK. It is currently consulting on the scope for non-telecommunications infrastructure to be shared to facilitate broadband network deployment . It has also indicated that it will seek to introduce super-fast broadband in remote areas at the same time as in more populated areas (which may involve both fixed and wireless access solutions). We consider that our decision to require PIA is consistent with these objectives and that (together with developments in SLU) it will make it easier for OCPs to deploy their own NGA networks where BT has not yet done so, or may not intend to do so.
1.32 In most respects, our decisions reflect the proposals set out in the consultation document. We would, however, highlight two noteworthy changes, which take account of the responses received:
- PIA: we have brought forward the deadline for the draft RO for pole access, from six months to just over three months, harmonising the timescale with the duct access RO;
- VULA pricing: we provide some further details about how we would expect to approach any concerns that are raised about the margin between BT's prices for VULA and its prices for retail services based on VULA.
1.33 There are a number of important practical issues to consider in relation to the implementation of the new VULA and PIA remedies. On VULA, we have set out a number of high-level characteristics, and we will need to be reassured that BT's VULA-based product set is fully compliant with them. In terms of product specification and implementation, further cross-industry discussion is required to identify clearly the requirements.
1.34 Further industry discussion is also needed on the details of the PIA products that BT should offer. The obligation requires BT to produce an initial RO for duct and pole access, describing the services to be made available, within just over three months from the publication of this statement. Significant OCP involvement will be needed, to take BT's proposal forward.
1.35 This detailed implementation work will benefit greatly from the participation of the OTA. We have therefore extended the OTA's remit to include PIA and VULA, so allowing it to take a view of BT's developments across all WLA remedies. Building on the OTA's successful role in promoting the development of LLU, we believe that this will help clarify requirements and planning for all stakeholders and help promote vibrant and effective competition in the development of new super-fast broadband services.
1.36 Beyond implementing the obligations in this market review, we will continue our work to improve the environment for competition and investment in NGA networks. In the near future, we expect to issue updated guidance on the regulation of new build fibre developments. We may also look more broadly at the scope for extending infrastructure access to other networks, under powers contained in the recent update to the new EU Communications Framework, which is due for implementation in the UK by May 2011.