C.1 Oftel has identified the following markets to be considered in the context of the Price Control Review:
(Note: These categories cannot be regarded as definitive. Markets can, of course, change over time - for example, as technology changes.)
C.2 The customer groups referred to in Chapter 3 are described below in terms of their estimated spend on fixed link telecoms and type of telecoms usage. The spend on mobile telecoms has not been estimated across the customer segments although it is clearly an important element for businesses and increasingly for the residential market.
C.3 Some of the key characteristics of each of the customer groups that can be broadly associated with the telecoms spend level are also given. The groupings are not intended to be a precise analysis but, instead, a robust means of helping to gauge the impact of telecoms price changes and competition on different customer groups.
C.4 The six basic groups (three business and three residential) with further sub-divisions, where appropriate, are set out below.
C.5 Access to the telecommunications network refers to the link between the network termination point in the customer's premises and the connection to the main distribution frame in the local exchange from which the customer can then communicate with other subscribers. Until relatively recently most customers did not have a choice between access providers and they were also tied to BT for the delivery of all their telecommunications services: the exception being Mercury offering a call service via an "indirect access" facility.
C.6 Being the sole provider of access to a customer gave BT 'bottleneck' control over calls originating or terminating on that customer's line. The most recent annual figures indicate that BT has over 95 per cent of all residential lines (see Table C.1 below) but this figure has fallen since March 1995.
Table C.1: Numbers of Residential and Business Telephone Lines (millions): 1994-95.
Residential Business TOTAL
BT 20.61 6.46 27.07
Mercury 0.00 0.24 0.24
Kingston 0.14 0.03 0.17
Cable 0.74 0.07 0.82
Note: Figures for Mercury are for direct connections.
Figures for cable refer to number of subscribers.
C.7 However, sole provision of access is changing: where homes have been passed by cable TV, customers now have a choice between access to BT and access to cable telephony. The introduction of number portability will help also significantly the development of competition between access providers at the residential level.
C.8 Cable telephony has been targeted primarily at residential customers but there are a number of business subscribers. Although overall cable TV penetration rates have been static - on average penetration rates are estimated to be in the order of 20-25 per cent of homes passed and marketed - a high proportion of households that subscribe to cable TV have also subscribed to cable telephony so that cable telephony penetration rates have been far higher than were once anticipated. As a share of all homes passed by cable TV, the penetration rate for cable telephony is about 20 per cent. As at end June 1995, 82 out of the 92 cable franchises that were then operational offered cable telephony and cable companies have so far passed a total of 5m homes - just under 25 per cent of all UK homes. The latest figures indicate that there are now over 1m installed cable telephony exchange lines.
C.9 When the build programmes of the 125 cable franchises that have been licenced under the Telecommunications Act have been completed, approximately two thirds of UK homes will have access to cable (14.5m homes out of a total of 22m). Additional franchise areas (Local Delivery Operator areas) awarded or advertised by the Independent Television Commission will eventually take this figure to over 75 per cent of homes. Cable telephony therefore has the potential to become a significant competitive threat to BT.
C.10 A third access provider, Ionica, is due to launch in 1996 and will be rolling out its services over the next price control period. Eventually its services will be available through out much of the UK including a licensing arrangement with Scottish Telecom for Scotland. The radio-based distribution system which Ionica proposes to use will enable it to offer an alternative to BT and cable's access services. Given that it has the potential to provide a service in areas in which it would be uneconomic for cable companies to build, it will also help to increase the range of customers that have a real choice of access provider.
C.11 There are already a number of operators which provide service directly to business customers: eg BT, Mercury, Energis, COLT, MFS, Torch etc. However, the degree of competition that BT faces tends, at present, to be limited to urban areas with the result that overall BT still has in the order of 95 per cent of lines installed to business customers (see Table C.1).
C.12 Many new operators have chosen to roll out their competing networks in city business districts first. There are obvious factors which make this approach attractive: the density of business customers and other organisations which require a variety of telecommunications services means that the distances involved in servicing what tend to be high value customers are relatively small and therefore potentially profitable relative to the initial investment. In addition the telecommunications managers of such companies tend to be sophisticated customers who may be more willing to try service offerings from the new entrants.
C.13 Although competitive pricing has undoubtedly been important for these companies in establishing themselves, they are able to offer more than just a cut-price service: they are increasingly able to offer a range of services, tailored to customers' requirements.
C.14 At present competition in access services for most residential and business customers is probably best described as uneven. In some areas and for some classes of business user there is very little effective competition to impose any significant constraints on BT's behaviour. For instance, the position of the smallest business customers probably mirrors the situation of residential customers.
C.15 BT faces stiff competition for large business customers and large corporate users, in particular, may choose to source their requirements for telecommunications services from several different network operators, thus using different access providers. They can also choose to contract out the management of their telecommunications requirements and leave it to third party service providers to negotiate the best packages from a range of operators. Contracting out is likely to become increasingly common.
C.16 As the new operators become established, they expect to expand their fields of operation and roll out their services into other areas. For instance, COLT intends to start construction of networks for corporate users in Manchester and Edinburgh and Scottish Telecom plans to offer a complete service to business and residential customers throughout Scotland.
Oftel would welcome views on the extent to which effective competition in the provision of access services is likely to develop across different customer groups and across different geographical areas in the future.
C.17 At the retail level, some network operators compete to offer a customer a complete range of telecommunications services directly (eg cable companies who provide a whole range of telephony services) while others offer a limited range of services through indirect access: the latter typically involves the customer retaining the BT line for access but using other carriers eg Mercury.
C.18 The entry of new carriers, such as Energis, has meant that cable operators now have a choice of operators with which they can link up to offer services outside their franchise areas.
C.19 At the same time competition at the wholesale level has also been stimulated by the decision of some operators not to compete at the retail level but to position themselves to act as a 'carriers' carrier' carrying traffic for other operators: for example, NTL currently acts in this way.
C.20 This competition at the wholesale level between carriers has put downward pressure on wholesale prices and this in turn should allow retail prices to fall.
C.21 It is not clear how many more firms might try to market their call services direct to the customer in future. Some operators may choose to offer services to the customer utilising some sort of indirect access facility and arranging for interconnection via the access provider.
C.22 The extent to which price reductions available to operators as a result of competition at the wholesale level will be passed through as price reductions to retail customers could depend on the degree of competition at the retail level. Competition in the provision of inland calls to residential customers could mirror the development of competition in the provision of access services in that the choice of service provider available to customers will depend on having been passed by a cable company or by a company using radio based technology.
C.23 For the business user there is already a degree of competition in the provision of call services. Business users have been targeted by new entrants because even just a few high spending customers can yield large revenues for a relatively small initial outlay.
C.24 In the future there is likely to be still more competition between service providers: AT&T is in the process of establishing itself in the UK; utilities are developing their own networks eg Scottish Power, Norweb, and other companies such as Torch and Racal are positioning themselves to compete to supply telecommunications services to business users on a regional basis.
Oftel would welcome views as to the extent to which the market for inland calls is likely to become fully competitive for all customer groups over the next price control period.
C.25 The BT/Mercury duopoly of the provision of international gateway facilities means that no other operators can own international circuits into or out of the UK.
C.26 The provision of IDD calls is a market in which Mercury had made significant progress in winning business from BT. In 1994-95 BT's share of the market for outgoing international voice traffic had fallen to 70 per cent. However, given that the duopoly in the provision of international gateway facilities means that on most routes the threat of entry is absent, it is difficult to assess the degree of real competition for IDD calls between the two.
C.27 The introduction of International Simple Resale (ISR) has made the market for the provision of International Direct Dial (IDD) calls on those routes on which voice ISR is permitted significantly more competitive. On those routes - Canada, the USA, Sweden, Finland, Australia and New Zealand - the price for international calls has fallen substantially: eg on the UK-US route, BT's charges for a three minute standard rate call has fallen by around 45 per cent (in nominal terms) between 1990/91 and 1994/95.
C.28 The extent of price reduction has been possible because the prices of international calls have historically been significantly out of line with the costs of providing those calls and so there is considerable room for arbitrage by resellers. The introduction of competition has been successful in beginning to drive prices down towards costs.
C.29 Moreover both corporate and residential customers have benefitted from these price reductions. Not only have Mercury and BT have been forced to respond by lowering their own tariffs, but the savings through using an ISR operator are also widely available. For example, the ISR operator ACC Long Distance UK Ltd estimates that around half of its business comes from residential customers.
C.30 A degree of competition may also be available for business users on routes other than those on which ISR is permitted because one-end break out into the PSTN from a private circuit is permitted to any country in the world under a Telecommunications Service Licence. However, it is difficult to judge how significant an impact this has had on competition.
C.31 The recent decision by Oftel to publish details of accounting rates for IDD calls between the UK and other OECD countries in order to improve the transparency of settlement rates may encourage more reductions in accounting rates and more competition between BT and Mercury as margins fall.
C.32 Oftel will shortly be publishing a consultative document on how to secure the benefits of competition for the users of international telephony services. This document will address the potential for increased international liberalisation and will make proposals for interconnection arrangements for IDD calls from April 1996 which will promote greater competition in the UK market.
Oftel would welcome views as to the impact on competition in the provision of IDD calls of one-end breakout into the PSTN. It would also welcome views as to the extent to which the IDD market is likely to become fully competitive for all customers during the next price control period.
C.33 At present because of its near monopoly over direct customer connections, BT has an effective monopoly over the raw data used to provide directory products, although it is obliged to make the data available to other operators with whom it interconnects. Mercury has withdrawn from providing its own directory enquiry service and has contracted this service to a third party service provider. There is little competition in this market at present.
C.34 At the end of October, Oftel issued a consultative document "Use of Directory Information" which deals with directory enquiries and other products provided using directory information. The proposals in the document are intended to stimulate competitive service provision. Under the new regime, Licensed Database Managers (LDMs) would be able to provide directory products. Operators would be obliged to provide their directory information to at least one LDM. LDMs would then be obliged to exchange information. The document consults on the terms on which an LDM licence might be available: none have yet been granted.
Oftel would welcome comments on the extent to which there will be effective competition in the provision of Operator Assisted/DQ calls taking into account Oftel's proposals for stimulating competition in this area.
C.35 The provision of specially tariffed services (eg 0800, 0345, 0990) has been an area in which BT has enjoyed a significant degree of first mover advantage. For instance, Mercury found that there was little awareness of its 0500 freephone service in comparison to BT's 0800 service.
C.36 Oftel now has responsibility for the administration of numbering and determining numbering policy. The numbering policy for these services, including number portability, is under review within the context of a broader review of numbering strategy in order to ensure that more effective competition in the market for these services can develop.
Oftel would welcome views as to whether there is likely to be effective competition in the provision of specially tariffed services and in particular the extent to which competition will depend upon the implementation of number portability for these services.
C.37 At present Oftel has chosen to make a distinction between high and low capacity circuits based on a threshold drawn, for digital circuits, at 64kbit/s.
Oftel would welcome views as to whether it is appropriate to make a distinction between digital circuits with a capacity of more than or less than 64kbit/s for the purposes of assessing effective competition. For instance, would it be more appropriate to make a distinction based on circuits up to 64kbit/s, circuits of between 64kbit/s-2Mbit/s and circuits over 2Mbit/s?
C.38 BT is the only operator in the UK to offer the analogue circuits which make up the bulk of this market. Mercury does offer digital circuits of up to 64kbit/s capacity but overall there is very little competition in this market and there is little prospect of effective competition developing. The provision of low capacity circuits tends to be a relatively high cost exercise unless these services are provided in conjunction with other services.
Oftel would welcome comments on its analysis of the prospects for competition in the provision of low capacity inland private circuits.
C.39 The liberalisation of the UK telecommunications market has led to an increase in the number of providers of digital leased circuits although this has mainly been in the field of circuits with a capacity of more than 2Mbit/s.
C.40 Given that high capacity leased circuits are products used by larger businesses rather than small businesses or residential customers, it is possible that the larger corporate customers possess a degree of buyer power (in terms of being able to trade one operator off against the other) in this market which has been augmented by the increase in the number of operators from which they can choose.
Oftel would welcome views as to whether corporate customers possess a degree of buyer power in this field and whether there will be effective competition in the provision of high capacity private circuits.
C.41The duopoly provision of international gateway facilities means that currently only BT and Mercury can provide international leased circuits. This means that all competitive methods of transporting traffic (eg one-end break out and ISR) are dependent upon obtaining international private leased circuits from BT or Mercury.
C.42 However, as with high capacity inland private leased circuits it is possible that some customers could possess a degree of buyer power which could mean that the operators' conduct is more competitive than the duopoly structure might suggest.
Oftel would welcome views as to the degree to which there will be effective competition in the provision of high and low capacity international private leased circuits over the next price control period.
C.43 At the time of the last price control review, vision circuits (ie private circuits which are used to carry broadcast sound and vision services) were excluded from the price caps that applied to inland and international private circuits. One of the principal reasons for this exclusion was that BT argued that vision circuits were used to provide bespoke services and thus needed a degree of price flexibility.
C.44 In light of the recent order made against BT in respect of satellite uplinking services, Oftel wishes to look again at this service. Oftel recognises that vision circuits are not used exclusively in the provision of satellite uplinking services and that other operators such as NTL, Energis and Mercury also provide vision circuits to the media industry.
Oftel would welcome comments as to whether it is appropriate to distinguish between vision circuits and other private circuits and, if so, whether there is likely to be effective competition in the provision of vision circuits.
C.45 Similarly at the time of the last price control review private circuits which are used to provide closed circuit television (CCTV) services were excluded from the price cap for private circuits.
Oftel would welcome views as to whether it is appropriate to distinguish private circuits used to provide CCTV services from other private circuits and, if so, whether there will be effective competition in the provision of these circuits.
C.46 It is estimated that there are in the region of two million telex terminals worldwide. However, telex has been comprehensively superseded by the fax and e-mail and demand for telex services has fallen both in terms of volume of telex traffic and the size of the customer base: in 1988 BT had 110,000 telex customers - by 1994 this had fallen to 40,000. Oftel is not proposing to include telex within the price cap as it is believed that in most cases customers have simply switched to newer services such as fax and e-mail.
Oftel would welcome views on its analysis of the market for telex services.
C.47 Public call boxes (PCBs) are defined in BT's licence in terms of being situated on public land to which the public has 24 hour access. Private payphones are ones which are located on private property and consequently public access to them may be restricted: for instance, railway stations, pubs, shopping centres or hospitals.
C.48 Until the entry of the Italian company Industria Politecnica Meridionale (IPM) last year, the provision of PCBs in the UK had effectively been limited since only BT, Mercury and Kingston (together with a few cable companies) operated PCBs. IPM has taken over a number of Mercury's PCB sites following Mercury's decision to withdraw from offering this service.
C.49 There are no such restrictions on the provision of private payphones which can be operated under the class Telecommunications Services Licence (TSL) and a number of operators and service providers offer private payphone services.
C.50 Thus, competition to date has developed principally in the private payphone sector of the market. However, Oftel proposes to modify the PCB Condition in the licences of all the other PTOs to enable them to offer PCB services to the public on a deregulated basis.
C.51There is also the prospect of an increase in the range of services which are offered from PCBs: for instance, BT is experimenting with offering facsimile services from PCBs.
C.52 The development of card/account based services could also provide competition to payphones both by simplifying their use and at the same time providing alternatives.
Oftel would welcome views on the prospects for the development of effective competition in the provision of payphones in the future.
C.53 ISDN is essentially a delivery mechanism: it is a means of delivering a variety of telecommunications services through a common means of access to a digital switched network. ISDN lines provide an end-to-end digital link, thus making accessible a fully digital, switched wideband network and the ability to offer voice, data, image and text services over the same network connection. At its most ambitious it has the capability of offering video transmission and facilitating a genuine convergence of telecommunications and other electronic media enabling the delivery of IT, telecommunications services and video services over the same network connection.
C.54 A distinction has been made between basic rate and primary rate ISDN lines. Currently only BT offers basic rate ISDN lines through its ISDN 2 service. Customers have a degree of choice for primary rate ISDN lines in that as well as BT's ISDN 30 service, Mercury also has an ISDN offering. In future there is the prospect of broadband ISDN lines.
C.55 ISDN has not had the success in the UK that it has had in, say, Germany and France for a number of reasons: private circuits are more readily available in the UK than in those other countries; connection charges for ISDN in the UK are relatively high and there are significant price differentials in terminal adaptors in the UK.
C.56 In light of increased demand for ISDN lines from business and the possibility that in future residential customers might wish to choose ISDN access in order to take advantage of new on-line or 'multimedia services', Oftel wishes to review this market.
Oftel would welcome comments as to whether there will be effective competition in the provision of ISDN lines in the future.
C.57 The value added and data services sector covers a wide range of products and services that deal with the electronic transfer of information: eg ticket reservation systems, database access, teleshopping, e-mail, home banking, linked automated teller machines, Electronic Funds Transfer at Point of Sale (EFTPOS), video-conferencing and Electronic Data Interchange (EDI). As well as these messaging and transaction based services there are also associated network management services.
C.58 At present Oftel has chosen to group the various types of VADS together under these two broad headings: Messaging/Transactional services and Network Management/Support services. There are a wide range of telecoms and specialist firms operating in these sectors and the various markets are generally regarded as being competitive.
C.59 A recent report by CIT Research Ltd estimated that revenues for the Network Management and Support Services sector were around £372m and revenues for the Messaging and Transactional Services sector were £257m. It also estimated that BT's share of these two sectors was 16 per cent and 9 per cent respectively. There are a wide range of firms in these markets including Cable & Wireless/Mercury, IBM and AT&T.
Oftel would welcome comments as to whether it is appropriate to regard Value Added and Data Services markets as being competitive at present and whether they are likely to remain so.
C.60 This Annex has so far focused on the fixed link telecommunications sector and has put the mobile sector to one side. This is in part because there is a presumption that the retail markets for mobile telephony and mobile data services are competitive. Although the number of network operators is subject to regulatory restrictions, there are a large number of service providers which not only compete to purchase airtime from the operators but also have to compete with each other for customers.
C.61 The mobile sector is characterised by a wide range of innovative service offerings and pricing packages and Oftel believes that the mobile sector is sufficiently competitive not to require a price cap for retail purposes.
C.62 At present mobile services are considered as an adjunct to fixed services rather than as in competition with them. However, in the future there is the prospect of increasing convergence between mobile and fixed services and this would have a significant competitive impact.
Oftel would welcome comments on the extent to which there is effective competition within the mobile sector. It would also welcome comments on whether the possible convergence of fixed and mobile services might raise issues which should be addressed in this price control review and, if so, what they are.
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