Impact of the Strategic Review of Telecoms
1.1 In September 2005 Ofcom concluded its Strategic Review of Telecommunications (TSR). The objective of the TSR was to ensure the development of a competitive communications market that is capable of providing consumers, both residential and business, with a range of narrowband based services, widespread broadband availability, and value for money and choice across a range of high quality and innovative services.
1.2 The TSRs central conclusion was that in order to achieve this competitive goal, it would be necessary to address the long-standing barriers to competition and investment that we had identified, by providing communications providers with equality of access to the parts of BTs network that represented a bottleneck.
1.3 The response to the TSRs conclusions led to a fundamental change in regulation in the form of legally binding undertakings that were given by BT Group plc (BT) to Ofcom under the Enterprise Act 2002 on 22 September 2005 (the Undertakings) in lieu of a reference to the Competition Commission. These Undertakings set the terms by which BT would deliver the comprehensive solution to the competition concerns that we identified in the TSR.
1.4 The two pillars supporting that comprehensive solution in the delivery of equality of access include equality in the provision of inputs (Equivalence of Inputs or EOI) and functional separation. Specifically, BT is required to separate its delivery and systems functions to ensure that certain wholesale products and services are delivered by BT on an EOI basis. To meet the separation requirement, BT created a new organisation, Openreach that is intended to be operationally distinct from the rest of the BT Group and which provides most of the wholesale EOI products. Importantly, where BT delivers a specified wholesale offering of EOI network products, it must do so to the same timescales, terms and conditions and using the same systems and processes in providing such services to both BTs downstream businesses and to other communications providers. This is to ensure that downstream competitors use a common and equivalent set of inputs when offering competing services to residential and business customers.
1.5 This is our third TSR evaluation report. Since our last review, and nearly four years on since the Undertakings were given, our annual evaluation continues to indicate that the net effect of the Undertakings to date, both for competition and consumers has been positive. We also observe that since the Undertakings came into effect a lot has changed in terms of the structure of the market, the expectations of end users, the needs of BTs wholesale customers and, more recently, the advent of challenges in the economic climate. We also find ourselves at a critical juncture where next generation technologies (core and access) are closer to becoming reality. It is our view that the Undertakings continue to remain an effective mechanism for addressing competition concerns. Nevertheless, through our strategic work on NGAs and NGNs, we will continue to consider whether the models of competition and product equivalence as envisaged in the Undertakings continue to remain valid.
1.6 This report assesses the impact the Undertakings have had on residential and business end users. It then provides an overview of industry developments, including the take-up of wholesale products by BTs customers, levels of investment and innovation and the progress Ofcom has made in deregulating. Finally it provides an assessment of the progress BT has made in implementing the Undertakings.
1.7 While not the sole contributing factor to benefits experienced by consumers and businesses, we consider that the Undertakings have played a role in bringing about greater choice and take-up of services, choice of suppliers, products and packages and increased value for money. Competition has played an important factor in the take-up of fixed telecommunications services. Benefits include:
- Increased take-up of new services and packages: Fixed broadband adoption has continued its growth reaching over 60% of UK households at the end of 2008 from 41% at the end of 2005. Over 5.5 million broadband connections at the end of 2008 were provided by operators other than BT who have deployed infrastructure at BTs local exchanges. The percentage of the UK population which has access to broadband services today is in the high nineties. The range and choice of bundled propositions continues to grow with some 40% of households today taking a bundle of a minimum of two services by the end of March 2008. Use of data services in the corporate market has also continued to increase since 2005, with the increase between 2005 and 2007 being dominated by demand for Ethernet and IP VPN networking services.
- Greater affordability: Competition between 2005 and 2007 led to a fall in the cost of a basket of residential fixed voice services on average by 10.5% in real terms each year. Within that basket residential broadband services decreasing on average by 16.3% per annum, while at the same time average speeds have increased. The average cost of a fixed line voice call has fallen by some 10.2% each year in real terms over the same period. Similarly, while the indicative price for an 8 Mbit/s service was as much as 30 per month in 2006, the same speed of service could be obtained for as little as 5.99 per month in early 2009.
- Increasing customer engagement with fixed telecommunications services: Consumers continue to become more actively engaged with fixed line and broadband markets with the proportion of customers stated to be engaged and interested in fixed line and broadband services increasing from 50% to 61% and 43% and 64% respectively between 2006 and 2008.
- Growing levels of switching in broadband: In Q3 2008 some 30% of customers had at one time or another switched broadband provider compared to 21% of internet customers changing internet provider (narrowband and / or broadband) in Q2 2006.
- High levels of satisfaction: The overall level of residential satisfaction with fixed telecommunications services remains high with nearly nine out of ten customers being either satisfied or very satisfied. While that level has dropped slightly since 2006, the proportion of customers that were very satisfied with the service they received increased by over a third between 2006 and 2008. We acknowledge that an area where consumers are less satisfied is around the transparency of broadband quality of service / speeds that their provider is offering. There is a lack of robust information available on the actual speeds that consumers receive and how these relate to both the maximum line speeds and the advertised up to broadband speeds they pay for. Ofcom has implemented a number of measures to ensure that consumers are better informed about the broadband speeds they can expect to receive and are aware of what they can do if they are unhappy with their broadband performance. This has involved us introducing a new code of practice for broadband ISPs, publishing a consumer guide to broadband speeds and conducting consumer research in partnership with broadband monitoring specialists SamKnows to identify the actual broadband speeds and quality of connection which consumers across the UK receive.
1.8 For the buyers of business communications services, levels of relative satisfaction with fixed communications services have in general remained constant between 2006 and 2008. Over the same period, levels of buyer satisfaction in relation to perceived value for money have fallen. This could in part be explained by the degree of consolidation that has happened in the business telecommunications market.
1.9 Ofcom acknowledges that while business users have benefited from the introduction of product level equivalence, the benefits do not seem to have been as broadly based as for consumers. For this reason, we are placing more emphasis on business users in our work over the coming year. We are also supportive of Openreachs plans to further evolve its Ethernet product set in response to customer demand.
1.10 In a market that is as dynamic as the UK telecommunications market, it is inevitable that there continue to be some issues with migrations processes particularly for broadband. However, over the past year the situation has improved as a result of our work on migrations and the attention that the OTA has given to its programme designed to improve the operational processes for migrations. Ofcom continues to be engaged with industry in trying to encourage further improvements in migration processes. We also recognise that as customers begin to move to NGN and NGA products, complexity in the market place will increase and there will, therefore, continue to be a need for industry to ensure that customers are able to migrate between providers and services easily and seamlessly.
1.11 Residential and business consumer outcomes in downstream markets are directly linked to the competitive developments that take place in the upstream markets. For this reason, our report looks at how the supplier market is evolving and in particular:
- Product take-up by communications providers of EOI wholesale products that either Openreach or BT Wholesale must supply;
- Investment that communications providers have made in deploying their own networks in competition with BT;
- The evolution of the UK fixed telecoms industry in terms of overall market size and market shares of different suppliers; and
- Progress Ofcom has made in the de-regulation of communications markets.
- Product take-up
1.12 In the fixed voice market, use of Wholesale Line Rental (WLR) by BTs wholesale customers has increased and now represents 16% of all fixed lines in the UK. This is in contrast with Carrier Pre-Selection (CPS) that has declined and now represents 13% of all fixed lines in the UK.
1.13 LLU, which enables a communications provider to use the physical connection between the customer and the local exchange to supply services directly, is offered by Openreach in two variants, full LLU (MPF) and shared LLU (SMPF). The take-up of these services has grown from less than 200,000 lines in Q3 2005 to over 5.5 million lines at the end of December 2008, equating to approximately 32 per cent of all (cable and ADSL) fixed broadband connections.
1.14 LLU adoption has grown in importance, while use of wholesale broadband or Bitstream products has levelled off slightly in absolute terms but reduced as a proportion of all broadband connections. Bitstream accounted for 47% of all broadband connectivity at the end of 2008 compared to 69% at the end of 2006.
1.15 Increasingly, we are seeing a shift from shared LLU towards full LLU as operators look to provide an increased range of bundled voice, broadband and even triple-play services over their own infrastructure.
1.16 Over the past two years, we have also seen significant growth in Ethernet access and backhaul products which are used by communications providers to supply connectivity solutions to businesses or to link a communications providers network to a BT exchange. In our previous review we had stated a concern that BTs competitors were relying more on end-to-end Ethernet connectivity products rather that disaggregated access and backhaul products and that this had led to backhaul competition not developing sufficiently. Since then, adoption of access only products has grown faster than for end-to-end products. Further, in the latter half of 2008 Openreach launched a new set of Ethernet backhaul products that allows for greater levels of backhaul traffic aggregation and hence offers the prospect of more backhaul competition in the market.
1.17 Communications providers have continued to make significant investment in delivering LLU based services, with the number of operators investing increasing threefold between 2005 and 2008. There was a twofold increase in the number of LLU enabled exchanges between the end of 2005 and September 2008, at which point some 1902 exchanges had been LLU enabled. Over the same period the percentage of households with access to at least one LLU operator increased from 40% to 83%.
1.18 At the same time, BT has been investing in its next generation core network (NGN) 21CN. The focus of this investment programme has recently shifted away from moving its legacy voice telephony customers onto a Voice over Internet Protocol (VoIP) network, but BT continues to invest in its next generation data network. BTs NGN based broadband services were launched in mid 2008 and are currently available in 548 exchanges which equates to coverage of approximately 40% of the population. By April 2010 BT expects these services to reach 55% of the population.
1.19 BT also announced in July 2008 that it intended to invest 1.5 billion deploying next generation access (NGA) services which will deliver up to 40 Mbit/s to 40% of UK homes by the end of 2012, and in May 2009 BT announced that it was examining doubling the pace of this deployment. Virgin Media has also launched a 50 Mbit/s product which is expected to be available across its network later this year. There are also a wide range of other smaller scale investments in NGA, including H2Os use of sewers to build high performance new access networks in Bournemouth and Dundee.
1.20 NGN and NGA developments are changing the products being offered to both wholesale and retail consumers. As these evolve over time, it is important to ensure that they are able to support competition where it is effective and sustainable. Ofcom continues to engage with BT and industry on these issues.
The evolution of the UK fixed telecoms competitive landscape
1.21 In 2007, the UK had one of the lowest incumbent market shares for fixed voice volumes in the OECD with BTs market share being around 51% (-1-). BTs share of fixed call volumes has continued to fall over the course of the following year and stood at 47% in 2008. Similarly, over the same period, BTs share of total exchange lines has fallen from around 67% in 2007 to 63% in 2008.
1.22 BTs retail share of (residential and SME) broadband connections stood at around 27 per cent at the end of 2007 which is one of the lowest incumbent operator market shares in the OECD, with the exception of North America.
1.23 BTs share of wholesale broadband access (ADSL and cable) fell from 71% at the end of 2005 to 47% at the end of 2008.
1.24 The TSR recognised the importance of establishing a regulatory framework that ensured equality of access to enduring economic bottlenecks but at the same time outlined our broader bias in approach to removing regulation that was no longer required.
1.25 During 2008, we have continued to progress our deregulatory agenda which has resulted in us lifting BTs Significant Market Power (SMP) status in:
- wholesale broadband access within certain sub-national geographic markets (i.e. those areas covered by BT exchanges where there are four or more operators);
- wholesale Ethernet terminating segments above 1 Gbit/s; and
- some geographies (the newly defined Central and East London Area) for 34/45 Mbit/s and 155 Mbit/s Partial Private Circuits (PPCs).
1.26 We are also proposing to remove regulation from parts of the wholesale narrowband market as well as all remaining retail narrowband obligations on BT.
Delivery of the Undertakings
1.27 The Undertakings are underpinned by the principles of functional separation of Openreach from the rest of BT and delivery of EOI. Both these factors have contributed to the outcomes for consumers and industry, although they are not the only contributing factor. Over the last three years, BT has shown continued commitment and focus in implementing the Undertakings. Set out below is our view on the progress we consider BT has made on this front.
1.28 Openreach has now been operating as a separate organisation for over three years. Over that time period, Openreachs engagement with customers has improved as have the levels of service performance associated with its key product sets. Areas that have proved more challenging include Openreachs approach to product development and its implementation of systems separation. With respect to systems separation, we acknowledge that the task has proven more complex than originally anticipated and that demands by Openreachs customers for new functionality have placed further strain on its systems development resource. We have been monitoring these two areas closely and are launching today a consultation on a variation to, and exemptions from, the Undertakings which propose a re-prioritising of BTs systems separation milestones as well as enhanced commitments from Openreach for the delivery of new functionality to its customers. (-2-)
1.29 In validating BTs compliance with the Undertakings, we continue to believe that the role played by the Equality of Access Board (EAB)/Equality of Access Office (EAO) is effective. The EAB/EAO continues to demonstrate its independence by reporting breaches of the Undertakings when they occur.
Equivalence of inputs and other product aspects
1.30 All key Openreach products including LLU (shared and full), WLR and Ethernet are now available on an EOI basis and BT is consuming much, if not all, of that EOI product set.
1.31 Openreach has also responded positively to concerns we raised in our last review relating to the processes for allocation of space and power, the flexibility of its accommodation products and the performance of the MPF product which at the time was lagging that of SMPF.
1.32 With respect to WLR, we have remained concerned that analogue WLR3 is still not at parity with the level of functionality available on the tactical non-EOI product, WLR2. Openreach has committed to delivering the baseline feature set that will ensure near parity, within the next few months. Furthermore, BTs downstream business has faced problems in migrating its legacy customer base onto WLR3, missing the 30 per cent installed based migration interim milestone of end June 2008 by five months.
1.33 Similarly, while Openreach delivered its Undertakings obligations in launching a number of EOI Ethernet products, the design and pricing structure of those products has meant that competition in the Ethernet backhaul market had not developed to the degree that we would have expected. The recent launch of Openreachs new NGN Ethernet product is a welcome development and one we believe has the potential to drive competition in the backhaul network as it allows for greater aggregation and development of scale by BTs competitors.
1.34 Further to a concern we voiced in our last Undertakings review, that the full benefits of equivalence had not been felt in the Bitstream market as BT was using a different product to most other communications providers, we are now pleased that with last years launch of BTs new IPStream Connect product this no longer continues to be the case.
1.35 In ensuring that EOI products could be managed effectively through a common interface, Openreach developed a strategic platform called the Equivalence Management Platform (EMP). In order to deliver benefits to Openreachs customers, EMP needs to provide the requisite functionality to support the EOI products in a stable manner. In our previous TSR implementation review we raised concerns about disruptions to, stability with, and loading on the EMP, which had threatened the effective delivery of EOI products and the delivery of certain outstanding Undertakings milestones. During the course of 2008, the performance and stability of EMP improved. However, in dedicating resources to stabilise EMP, Openreach has had less resource available to develop new functionality and products on EMP. Further, Openreachs customers consider that they do not have enough visibility or certainty over the roadmap for new functionality expected to be delivered in future releases of EMP. For this reason, we have tasked the Office of the Telecommunications Adjudicator (OTA) to facilitate a process aimed at identifying priorities for new developments and ensuring that Openreach provides the necessary visibility to its customers of what can be delivered when. We have also published today a proposal for a variation to the Undertakings that will seek to formalise Openreachs development and production of a roadmap for EMP and associated change control mechanisms. (-3-)
1.36 Given the nascent state of BTs 21CN deployment at the time the Undertakings were agreed, we adopted a principles-based approach to the EOI commitments in the Undertakings that BT is obliged to adhere to in its network and product deployment. Specifically, BT is obliged to ensure that network access must not be foreclosed, must be provided on an EOI basis and that charges for SMP products are based on efficient design. BT is also obliged to ensure that communications providers are not placed at a material competitive disadvantage by BTs NGN product migration.
1.37 BTs 21CN deployment is still in its early stages, and following a review of its strategy, BT has recently revised the scope of this investment programme. Given these circumstances, we can only provide a limited assessment of the extent to which BT is abiding by the principles embedded in the Undertakings. For example, BT has launched one key 21CN product (Wholesale Broadband Connect) and has, following a variation, published its Consult21 Plan of Record on a regular basis. However, even following the strategy review, there continues to be little clarity over BTs plans for NGN voice services. We are concerned by the uncertainty that this is creating for BTs wholesale customers, as well as the implications for the potential for parallel or notional equivalence, where BT could be using different wholesale inputs to deliver products to end users than some of its larger competitors. Ofcom is considering this issue as part of its continued strategic work on the implications of NGNs for competition, which also includes consideration of the appropriate EOI consumption models.
1.38 Similarly, the Undertakings make no explicit provision for next generation access (NGA). However, we have published two consultations on NGA that were separate to the Undertakings. In the second of these Ofcom set out further details on our general principles for regulating NGA deployments. Our final statement was published on 3 March 2009. (-4-) On the same day, we also launched a consultation on a variation to the Undertakings which proposed to allow Openreach to control and operate the electronics associated with BTs fibre to the cabinet (FTTC) deployment. The consultation also set out specific commitments we would be seeking from BT for the delivery of both its FTTC active wholesale products as well as its passive products (i.e. products that enable other providers to locate their FTTC at or close to BTs own FTTC enabled cabinets).
1.39 In conclusion, in our last TSR implementation review we identified four broad areas of concern where we expected to see progress over the course of 2008. These included issues with: the quality associated with Openreachs service levels and transactions systems performance; the lack of effectiveness of Openreachs product development process; the slow take-up of key Ethernet products that was affecting the development of the backhaul market; and BTs NGN consultation process. We have seen positive progress on a number of the issues identified over the course of 2008. However, systems and EMP related issues remained a source of concern to us, as have aspects to the development of the NGN product set. Both issues are currently being addressed by Ofcom. The consultation we have launched today deals with the challenges around systems separation and proposes a variation to, and exemptions from, the Undertakings to allow BT to address the systems concerns in a manner that is more consistent with BTs wholesale customer priorities. (-5-) The NGN issues are being considered as part of Ofcoms strategic work on NGNs.
1.40 Given the substantial benefits the Undertakings have delivered to retail and wholesale customers to date, we continue to remain of the view that the Undertakings are an appropriate and comprehensive solution to the competition concerns that we set out in the TSR. Nevertheless it is important that we continue to review whether and how the Undertakings may need to be adapted in light of key market and technology changes. Our strategic work on NGAs and NGN will help inform this debate.
2.- Re-prioritising BTs remaining Undertakings commitment on information systems separation, Consultation, 29 May 2009, at http://www.ofcom.org.uk/telecoms/btundertakings/exemptionsandvariations/
4.- Delivering super-fast broadband in the UK Promoting investment and competition, Statement, 3 March 2009, at http://www.ofcom.org.uk/consult/condocs/nga_future_broadband/statement/statement.pdf
5.- Re-prioritising BTs remaining Undertakings commitments on information systems separation, Consultation, 29 May 2009, at http://www.ofcom.org.uk/telecoms/btundertakings/exemptionsandvariations/
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