Home > Consultations > Consultation Documents > Wholesale broadband access 06/07 > Summary

Summary

Introduction

1.1 Broadband plays a central role in communications. It is now used by many consumers and businesses to keep in touch, access information and conduct business. Developments in technology have seen broadband reaching the majority of households and businesses in the UK and this has been reflected in widespread take-up (there are now more than 14.5 million broadband connections in the UK). Competition, meanwhile, has seen service providers differentiating in terms of price, speed, quality and in terms of product bundles. For instance, some providers sell broadband in conjunction with basic telephony and/or television services. A healthy retail market is however dependent on a competitive wholesale market or regulation where competition is not yet sufficient. Ofcom needs to ensure therefore that the regulatory framework at the wholesale level is appropriate given the prevailing conditions. This review aims to do that.

1.2 Competition in the provision of retail broadband services depends on service providers having access to wholesale broadband services or local loop unbundling (LLU) to build their own services. Ofcom has identified that competition between networks based on LLU, rather than competition based on wholesale broadband products, is crucial to maintaining the UK's broadband progress. Promoting competition based on LLU continues to be central to Ofcom’s approach in making sure that consumers can access the services they demand.

1.3 LLU is not, however, economically viable on a national basis. This means that in some geographic areas there will not be direct competition between broadband networks. In these areas regulation at the wholesale level is necessary to ensure that consumers can choose between differing retail offers. Conversely, in areas which benefit from competition between networks, Ofcom must seek to remove unnecessary regulation.

The November consultation

1.4 On 21 November 2006, Ofcom published the consultation document entitled Review of the wholesale broadband access markets 2006/07 (“the November consultation”) in which it set out its initial views in relation to the definition of the relevant product and geographic markets, the existence of significant market power (“SMP”) within those markets, and the regulatory remedies that should apply.

1.5 Ofcom’s initial view was that the relevant product market could be defined as:

• asymmetric broadband access and any backhaul as necessary to allow interconnection with other Communications Providers which provides an always on capability, allows both voice and data services to be used simultaneously and provides data at speeds greater than a dial-up connection. This market includes both business and residential customers.

1.6 In terms of the geographic market, Ofcom considered that there were four distinct geographic markets in which competitive conditions within each were broadly similar. The competitive conditions between the markets were, however, distinct. The four markets were:

1. those geographic areas covered by exchanges where KCOM is the only operator (“the Hull area”);
2. those geographic areas covered by exchanges where BT is the only operator (“Market 1”);
3. those geographic areas covered by exchanges where there are 2 or 3 Principal Operators AND exchanges where there are 4 or more Principal Operators but where the exchange serves less than 10,000 premises (“Market 2”); and
4. those geographic areas covered by exchanges where there are 4 or more Principal Operators and where the exchange serves 10,000 or more premises (“Market 3”).

1.7 In terms of its SMP assessment, Ofcom considered that KCOM had SMP in the Hull area and that BT had SMP in Market 1 and, separately, in Market 2. However, in light of the rapidly changing competitive conditions and given the fact that Ofcom was planning a second consultation Ofcom did not believe that it was appropriate or necessary to reach a firm conclusion on the existence or otherwise of SMP in Market 3.

1.8 As a result of its SMP assessment in relation to the Hull area, Market 1 and, separately, Market 2 Ofcom proposed to impose the following regulatory remedies in each market:

• requirement to provide Network Access on reasonable request;
• requirement not to discriminate unduly;
• requirement to publish a reference offer;
• requirement to notify terms and conditions;
• requirement to publish technical information; and
• requirement to have accounting separation.

1.9 Ofcom invited comments on its views in relation to the product and geographic market definitions, its assessment of SMP, and the regulatory remedies proposed. Ofcom received 30 responses, 7 of which were confidential.

Respondents’ views

1.10 Respondents’ views were mixed. A number of respondents suggested that there was no compelling evidence that markets were sub-national and some considered that the market review was premature. Other respondents, however, were supportive of the finding of sub-national markets. There were wide-ranging views on the appropriateness of the product market definition. A number of respondents suggested that symmetric services should be included. Other respondents suggested that residential and large business customers might be in separate markets.

1.11 Respondents also disagreed about the competitive conditions in Market 3. A number stated that BT retained SMP in the market and that it should be required to provide wholesale broadband services. They argued that the withdrawal of regulatory obligations might prove detrimental to the retail broadband market. BT, on the other hand, stated that the market was competitive on a forward-looking basis and that no one possessed SMP in Market 3. BT stated that regulation should therefore be removed.

1.12 In terms of Markets 1 and 2, there was broad agreement that BT retained SMP. There was not, however, broad agreement on the regulatory remedies proposed. A number of respondents stated that price controls and/or cost orientation requirements should be imposed. BT took the opposite view.

1.13 Ofcom’s assessment of the geographic nature of the market in Hull or the existence of SMP was not questioned. KCOM accepted that both the market definition and SMP assessment were appropriate. It did not consider, however, that the regulatory remedies proposed were appropriate. It argued that the threat of entry acted as a sufficient constraint on its activities and that, in any case, it provided good quality broadband service at competitive prices. Ofcom did, however, receive a number of responses from residents of the Hull area who expressed dissatisfaction that their choice of broadband supplier was limited, unlike the rest of the UK.

The Hull area, Market 1 and Market 2

1.14 Ofcom has not made any fundamental changes to the proposals set out in the November consultation in relation to the Hull area, Market 1 and Market 2. Some exchanges have, however, moved between Markets due to the fact that Ofcom based its geographic analysis on the most recent data sets and on a new forecast date. The effect of this is material only to the exchanges that have moved to or from Market 3 which, as explained below, Ofcom considers to be a market in which no operator has SMP. Ofcom has, however, decided that it is appropriate to propose an additional SMP services condition in the Hull area, Market 1 and Market 2 in relation to the transparency as to the quality of service of Network Access.

Revocation of SMP regulation in Market 3

1.15 Ofcom has now assessed SMP in Market 3 and, as explained in Section 4, considers that no operator has SMP in the market on a forward-looking basis. Ofcom will therefore be required to revoke existing SMP regulation in Market 3. However, in order to ensure that disruptive effects do not occur on the relevant market, Ofcom is required by Article 16(3) of the Framework Directive to provide those affected by the revocation of sector-specific regulation with a period of notice. Ofcom considers that a period of notice of 12 months following the final statement is appropriate to this end and proposes to maintain the existing obligation to supply network access to existing customers of wholesale broadband access in place in Market 3 for this period.

BT’s commitments

1.16 Separate to this review BT has made certain pricing commitments to the industry and Ofcom. These commitments are set out in two letters, dated 10 November 2006, which were sent to Ofcom. These letters are available on Ofcom’s web site.

1.17 One of these commitment letters relates to ceilings for future broadband pricing and in this letter BT commits to reducing the price of its wholesale broadband services, in all parts of the UK, year-on-year until the end of 2010. Also in this letter BT commits to supply wholesale broadband services and to not unduly discriminate, in all parts of the UK, until the end of 2008.

1.18 The other commitment letter relates to floors for future broadband pricing and in this letter BT commits to providing a period of stability to LLU by not introducing geographically targeted reductions, below a certain level, to its wholesale broadband prices.

Period covered by this review

1.19 When reviewing a market Ofcom is required to be forward looking and to consider likely future developments. In doing this Ofcom needs to decide the period that the review is expected to cover. Given the ongoing developments in this market and the time period covered by BT’s ceiling pricing commitment Ofcom believes that this review should cover the period up to the end of 2010. Of course, if unexpected market developments occur which render the prevailing regulatory regime inappropriate then Ofcom has a duty to re-review the market at that time.

Consultation and market review timetable

1.20 Comments are sought on the proposals set out in this consultation document and the draft Notifications, which are set out at Annex 1, by 7 February 2008. Ofcom then intends to publish a statement with its final conclusions in June 2008.

Notification to the Commission

1.21 The formal Notification of Ofcom’s proposals in relation to the relevant markets, the designation of SMP, and the regulatory remedies proposed is set out at Annex 1.

1.22 This document, including the Notification set out at Annex 1, has been sent to the European Commission in accordance with Article 7 of the Framework Directive and section 50 of the Act.

• Review of the wholesale broadband access markets 2006/07 [pdf]
  Consultation Published 15 November 2007

Back to top