Ofcom moves to contain BT's ambitions

Ofcom has announced proposals to introduce new rules to force BT to maintain a minimum margin between its wholesale and retail fibre network charges. The move comes as BT is in talks with the owners of EE to acquire the UK’s largest mobile operator in a bid to become the dominant player in the entire UK telecoms market with a quad-play offering of fixed, mobile, broadband and TV services.

The UK regulator said it has notified the European Commission (EC) of a draft decision on new pricing rules, which it claimed will promote competition and investment within the ‘superfast’ broadband market. BT, which owns and operates the UK’s largest fibre broadband network, is currently required to allow other service providers access to it under a process known as ‘virtual unbundled local access’ (VULA).

Under the new rules, BT would be obliged to maintain a “sufficient” (as Ofcom put it) margin between wholesale VULA and retail fibre broadband charges. The competition body said this is to ensure other providers can profitably match prices.

Ofcom also stated its assessment has taken into account BT Sport, which is free to all of the telco’s fibre broadband customers, saying this potentially skews the market in BT’s favour.

Following complaints, such as a grievance from TalkTalk last year, Ofcom has introduced a six-monthly test to assess whether BT’s tactics pose a margin squeeze on competitors. Ofcom said its current assessment is that the former state monopoly is maintaining a sufficient margin, so no action needs to be taken by BT right now and the proposed pricing rules would act as a safeguarding measure for future.

“We are concerned that BT could distort the development of competition in superfast broadband by setting an insufficient margin between its wholesale VULA and retail superfast broadband prices,” Ofcom said in a statement.

According to the regulator, there were less than 100,000 fibre broadband connections on BT’s network when the VULA requirement was first introduced. Since then the number has risen to 3.4 million, and Ofcom claimed the new rules are needed to safeguard future investment to upgrade the network.

“Today’s draft decisions are aimed at ensuring that different operators can compete in the developing broadband market in years to come, so that consumers benefit from competitive prices, network investment and high-quality, innovative services,” Ofcom said.

However, TalkTalk expressed continuing disappointment over the regulator’s actions. “Ofcom’s statement is misconceived but not unexpected as it largely confirms the approach they outlined last year,” a TalkTalk spokesperson said in a statement to Telecoms.com. “We will now consider our response, which may include an appeal.”

BT said that while it doesn’t oppose the test from Ofcom, it objects to its sports offering being part of any assessment. “We’re not opposed to the principle of a test,” a BT spokesperson said in a statement to Telecoms.com.

“In fact, we passed the standard Competition Act test recently and Ofcom has said our current prices will also pass this new test when it comes into force. However, we do not think our sports costs should be part of any assessment and we reject the notion that Sky and TalkTalk require further regulatory assistance. They have more than 40% of the broadband market between them compared to BT’s 31%.

“BT is trying to ensure real competition in pay TV sports for the first time in 25 years. Yet the UK’s lop-sided regulatory regime means Sky remains largely unregulated, while further hurdles are proposed for us, the pay TV challenger.”

But Sky said it found Ofcom’s actions a positive move. “Ofcom’s action is welcome recognition of the competition problems that can prevent customers from getting the best choice and value in superfast broadband,” a spokesperson told Telecoms.com. “As with any complex and untested regulation, Ofcom will need to be continually vigilant to ensure the remedy is effective when put into practice in a fast-moving market.”

Regulation expert from uSwitch.com, Richard Neudegg, also welcomed Ofcom’s plans. He said: “Assuming the European Commission agrees to Ofcom’s changes, it should make the market more competitive for other broadband providers, without impacting BT’s incentive to continue rolling out superfast broadband in the UK.

“These potential changes are unlikely to have any immediate impact on pricing. However, in the long run, this raises questions over whether BT can continue to offer BT Sport for free as part of its superfast broadband packages, which could make other providers more attractive to consumers.”

The measures proposed are now subject to the EC’s review, and Ofcom said it expects to publish a final statement next month. If accepted by the EC, the conditions would commence in March and remain in place until the end of the current regulatory review period, which ends in March 2017.

It hardly looks like a coincidence Ofcom is seeking to implement new restrictions shortly after BT’s intentions to acquire EE were confirmed. The regulator was always unlikely to allow such an aggressive acquisition go through without some strings attached. If BT reaches an agreement with Orange and Deutsche Telekom to acquire EE, the UK’s largest MNO, we are most likely to see more conditions from Ofcom, and this could be just the first of a raft of measured designed to contain an increasingly ambitious BT.