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Review of wholesale international services markets

Summary

This consultation document

1.1 This document is a consultation on Ofcom’s proposals to identify wholesale international services markets and make market power determinations in respect of those markets.

1.2 A review of wholesale international service markets formed part of Ofcom’s programme for deregulation set out in its final statements of 22 September 2005 on the Strategic Review of Telecommunications, and undertakings in lieu of a reference under the Enterprise Act 2002. In these statements, Ofcom undertook to review and conduct further analyses of wholesale international services to ascertain whether, in the light of competitive developments in these markets, British Telecommunications plc (“BT”) and Cable & Wireless plc (“C&W”) continue to have significant market power (“SMP”) as found in an earlier review.

1.3 Ofcom has conducted its review pursuant to section 84 of the Communications Act 2003 (“the Act”) which concerns the review of services markets which have previously been identified for the purposes of making market power determinations.

The previous market review

1.4 On 18 November 2003, the Office of Telecommunications (“Oftel”) published a statement called Wholesale international services markets (the “November 2003 Statement”) in which Oftel identified 235 economic markets on a route-by-route, country-by-country, basis for wholesale international services (the conveyance of traffic to termination points outside the United Kingdom). Oftel found:

123 wholesale international services markets in which no provider had SMP;
108 wholesale international services markets in which BT had SMP; and
4 wholesale international service markets in which C&W had SMP.

1.5 For all wholesale international services markets for which Oftel concluded that BT and C&W respectively had SMP, Oftel imposed conditions requiring the provision of network access; not to unduly discriminate; the publication of a reference offer (although this was not applied to C&W); and the notification of prices. BT was also required to prepare separate accounts for its retail and wholesale businesses.

Identification of markets

1.6 Based on the analysis set out in Section 3 of this review, Ofcom proposes that the relevant services markets remain the United Kingdom (“UK”) markets for wholesale international services to network termination points in territories outside the UK identified on a route-by-route, country-to-country (e.g. UK to France, UK to US etc) , basis.

1.7 Ofcom’s review concurs with Oftel’s 2003 identification of 235 separate route-by-route economic markets on the basis of the absence of demand- and supply-side substitutability between them. In view of the quality of evidence, supply-side substitutability, in particular indirect means of routing traffic to far-end destinations, is examined at the stage of the assessment of SMP. This approach is consistent with both the European Commission’s (the “Commission’s”) market analysis guidelines and that taken previously by Oftel and set out in its November 2003 Statement.

Assessment of market power

1.8 Ofcom’s approach to the assessment of market power focuses on single firm dominance, using analysis of barriers to entry and market shares as the key indicators of the nature of competition on different routes. Ofcom has also considered other factors such as economies of scale, vertical integration, access to capital markets and countervailing buyer power. Again, this is consistent with the relevant guidelines and the previous approach.

1.9 Ofcom considers that wholesale international services to destinations, where there is competition in the supply of telecommunications services, are effectively competitive due to the accessibility of far-end termination. Barriers to entry tend to be highest where there is no competition between providers at the far-end; where only one UK provider is able to negotiate reasonably priced access to the far-end destination; and where it is not possible for providers to bypass traditional accounting-rate routing arrangements.

1.10 Ofcom has analysed a range of sources of evidence in order to assess ease of market entry on each route. This includes information produced by the International Telecommunications Union (“ITU”) on telecommunications markets and the development of competition in most countries around the world, the allocation by the ITU of International Signalling Point Codes (“ISPCs”) and the Federal Communications Commission’s (“FCCs”) list of International Simple Resale (“ISR”) approved countries.

1.11 Ofcom has assessed all 235 route-by-route markets. The above-mentioned market entry evidence confirmed that 104 of 123 markets, previously found to be effectively competitive, should remain so. But new evidence showed that entry barriers were low enough for Ofcom to propose that a further 46 of the 112 markets, in which SMP had previously been found, should now be identified as effectively competitive and regulation revoked.

1.12 Ofcom took two approaches to calculating market shares. It secured data direct from the main UK wholesale suppliers; and used third-party data provided by TeleGeography who publish annual global traffic statistics mostly sourced directly from carriers. This is a widely used publication in the field of international communications.

1.13 The market share of BT varies significantly but was only persistently greater than 50% on five routes that collectively account for less than 0.1% of all international traffic originating in the UK. C&W’s market share was persistently greater than 50% on six routes, accounting for less than 0.01% of all international traffic originating in the UK. BT was found to have a persistent share of between 40% and 50% on two further routes, on both of which it does not have a correspondent agreement. C&W was not found to have persistent market share between 40% and 50% on any routes.

1.14 Based on its analysis of this market share evidence, Ofcom has found that of the remaining 85 markets, 72 should be identified as being effectively competitive. This includes 55 markets in which either BT or C&W were previously found to have a position of SMP. Ofcom therefore proposes to revoke regulation in these markets.

1.15 Ofcom considered more detailed evidence on the availability of alternative methods for routing international traffic in the remaining 13 markets. In particular, Ofcom examined whether the current communications provider with SMP has a correspondent agreement with a provider in the destination country, whether any other communications provider has a correspondent agreement with a provider in the destination country, whether indirect routing arrangements are likely to be available to competitors on similar terms and the availability of other alternatives such as buying capacity from trading exchanges.

1.16 Based on this further analysis, Ofcom proposes that all the remaining 13 markets are identified as effectively competitive and, in respect of 11 of those 13 markets in which SMP had previously been found, that SMP conditions are revoked.

1.17 In summary, based on the above analyses, Ofcom proposes to make no finding of SMP in any of the 235 wholesale international services markets.

Revocation of SMP services conditions

1.18 Section 84(4) of the Act provides that where on, or in consequence of, a further analysis Ofcom determines that a person to whom SMP conditions apply is no longer a person with SMP in that market, they must revoke every SMP services condition applied to that person by reference to the market power determination made on the basis of the earlier analysis. Section 48 of the Act provides the procedure for revoking conditions.

1.19 Ofcom therefore proposes to revoke conditions KA1, KA2, KA3 and KA4 previously imposed on BT and set out in Schedule 3 of the Director General of Telecommunications’ (the “Director’s”) notification pursuant to Section 48(1) and Section 79 of the Act of 18 November 2003. Ofcom also proposes to modify the SMP services conditions on BT in relation to regulatory accounting in respect of various markets notified to BT on 22 July 2004 such that the wholesale international conveyance markets numbered 11 in Part 1 of Schedule 1 to that notification to which the conditions apply shall be revoked.

1.20 Ofcom proposes to revoke conditions KB1, KB2, KB3 and KB4 previously imposed on C&W and set out in Schedule 4 of the above-mentioned Director’s notification of 18 November 2003.

Effect of the proposals

1.21 Ofcom has given careful consideration to the effect of its proposals to deregulate wholesale international services markets. Ofcom proposes to revoke ex ante competition regulation in wholesale international services markets. Companies competing in these markets remain subject to the Competition Act.

1.22 Ofcom notes that the Director’s decision in November 2003 to deregulate a significant number of medium-sized wholesale international services markets did not result in any recorded complaints about anti-competitive behaviour, breaches of certain ex ante conditions or disputes. Ofcom proposes the deregulation of the remaining smallest markets. Collectively these 112 markets account for only 5% (about £35 million) of the total value of all 235 wholesale international services markets (some £600 million).

1.23 The revocation of SMP conditions previously imposed on BT and C&W will further reduce the burden, in particular the costs of regulation, incurred by the regulated and regulator in these markets.

1.24 Ofcom does not anticipate that its proposals will have any significant impact on the overall trend of UK wholesale international services markets in which BT’s market share has dropped from 90% to 30% as growing numbers of competitors have entered the markets. Whilst the smaller markets may be less attractive to wholesale competitors they are nevertheless easier than ever to access as more far-end destinations become liberalised and as technology offers alternatives to legacy routing arrangements.

Questions being asked in this consultation

1.25 In this document Ofcom sets out specific questions on which it seeks responses from stakeholders in addition to any other comments respondents may wish to make. Ofcom would particularly invite comments from BT and C&W; their competitors in the supply of wholesale international services and all customers who purchase these wholesale services. A list of all the questions can be found at Annex 4.

1.26 Details on how to respond to this consultation at set out in Annexes 1 to 3. The consultation period runs for 10 weeks. The closure date for responses is 5pm on Thursday 18 May 2006.

Next steps

1.27 When Ofcom has considered representations, including any made by the Commission and other National Regulatory Authorities (“NRAs”), it may give effect to its proposals. Ofcom will do this by publishing a final Notification as provided for under section 79 of the Act.

1.28 Ofcom intends to conclude its review of wholesale international services markets by the end of July 2006.

Review of wholesale international services markets [pdf]
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