It’s no wonder Virgin’s pleased with Ofcom’s pro-wholesale stance on NGA

By Giles Cottle

The publication of Ofcom’s next-generation-access statement last month provided yet more evidence of Europe’s national regulatory authorities’ approach to regulating next-generation broadband networks. The UK regulator seems to have bypassed the thorny issues of risk premiums and rates of return by following what can be best described as a laissez-faire approach to NGA pricing. It plans to allow Openreach, BT’s network arm, to charge what it wishes to service providers that want to have wholesale access to the company’s £1.5 billion (US$2.1 billion) NGA network.

Some proclaimed the agreement a victory for BT and its unremitting campaign to be granted NGA regulatory concessions in view of difficult economic circumstances. But it was a course of action Ofcom had been considering long before the UK found itself in the throes of a recession. The regulator believes that uncertainty about the future of NGA means it might be too difficult to set an accurate rate of return for investors today. Since NGA operators are the ones taking the risk and know how much their networks will cost to build and run, they should be able to judge the prices they will have to set to attract enough interest from service providers, Ofcom says.

It does not believe that BT will abuse this pricing freedom. Openreach’s business case for building the network relies on other operators using its network. They will not do so if the price they pay Openreach stops them from setting a retail price that can be competitive in Britain’s commoditized, cutthroat broadband market.

Ofcom’s approach is unconventional but has won praise from some unlikely quarters. The European Commission, which has strongly advocated setting a narrow band of risk-premium pricing, concedes that Ofcom’s wholesale stance is an “innovative approach to NGN regulation.”

Cable operator Virgin has also praised the stance, claiming it will encourage alternative-operator investment in next-generation networks. But Virgin’s eulogizing has not been prompted by the prospect of multiple UK operators offering an array of NGA products and services. Rather, it is recognition of the fact that Ofcom’s approach appears to means the end of meaningful infrastructure competition on both BT’s legacy and next-generation networks.

Ofcom has always been blunt about the fact that NGA-infrastructure competition would be difficult to implement in the UK. Sub-loop unbundling is economically unviable for most operators and in most areas. The results of the regulator’s long-awaited duct survey also show that duct sharing will be difficult to achieve on a mass scale. There are few areas where there is a clear run of usable, sharable ducts between an exchange and a street cabinet, a prerequisite for duct sharing.

And Openreach’s Generic Ethernet Access product, which the operator plans to use to offer wholesale services, will not be the same as the wholesale of old. Ofcom and BT stress that operators using GEA will be able to do much more with it than they could with DSL bitstream or any other wholesale 1.0 product. The legally binding undertakings Openreach agreed to following BT’s functional separation – separation of its networks and services divisions – also dictate that it must treat BT Retail on the same basis as any other operator that wants to access the network.

But Ofcom admits that it still has misgivings about GEA. Respondents to its consultation pointed out that GEA did not include multicast functionality, a network characteristic required to efficiently serve content such as online video to multiple users. Ofcom also says that GEA only partially meets security and quality-of-service requirements. The regulator’s NGA statement contains a veiled threat that it will consider passive infrastructure competition more closely if BT does not resolve these problems.

But even a fully functioning GEA product will not completely level the telecoms playing field, despite claims of parity between BT and alternative operators. BT has years of experience in rolling out infrastructure that its competitors simply don’t have. It also has the relationships with local councils and other authorities needed to get planning permission to dig up the road and lay the network. The other operators have neither this expertise nor these relationships, and are not likely to be able to roll out at the same pace as a result.

Ofcom’s regulatory stance effectively spells the end of local-loop unbundling – in which the UK’s alternative operators have invested millions of pounds – and will give BT the uplift in its wholesale share that it has been craving.

Virgin also benefits from this aversion to mass alternative-operator infrastructure competition. But it has an added bonus in that Openreach now has little or no incentive to further upgrade its NGA network. If Openreach can get enough operators to use its FTTC network, there is no financial reason for it to offer higher speeds or upgrade to FTTH, as long as it remains the monopoly telecoms-infrastructure operator.

The only feasible reason for it to do so would be if Virgin were to offer speeds greater than 50Mbps over its DOCSIS 3.0 network. Virgin, in the meantime, can sit pretty, safe in the knowledge that the speeds it offers over DOCSIS 3.0 are likely to remain unchallenged. Any increases in speeds it implements will come as a result of its own undertakings rather than competitive pressure.

Ofcom will argue that this is an example of the “market-led” approach that it wants. But effectively allowing a cable operator to single-handedly dictate the pace and scale of a country’s broadband network is a risky strategy. Few consumers need speeds higher than 50Mbps today, but they almost certainly will in the future. Ofcom’s approach, while lowering some of the barriers to entry of NGA competition, is compromising heavily on the future speeds that British broadband users will be able to access.