3.1 The first consultative document put forward a two stage process which was to be used in the assessment of the scope of the retail price cap. The first stage involved the definition of the relevant telecoms product markets while the second stage involved the assessment of the competitiveness of those markets. The presumption underlying this approach was that any markets which were judged to be fully competitive would be freed from price control; those which were prospectively competitive would be removed from the price basket but subject to a safeguard cap, and those services which were unlikely to become competitive would remain within the price control basket.
3.2 Oftel regards the process of examining telecoms markets and evaluating the competitiveness of those markets as central to the price control process. Oftel also sees it as an important part of its other activities and in particular those where Oftel acts as a competition authority. Oftel was therefore very disappointed to see that among the initial industry responses only BT had given any detailed and systematic thought to these issues. This was particularly surprising in light of the contention of many operators that there would be effective competition in many markets by 1997 - it is only more recently that some operators have begun to put forward arguments to support their views. Nevertheless, Oftel intends to continue to develop this market analysis because it believes that it will be central to Oftel's work in the future.
3.3 The approach that Oftel proposed to use in respect of market definition follows that used by the main UK competition authorities(ie the Office of Fair Trading and the Monopolies and Merger Commission) and is also broadly similar to that used by the European and US competition authorities. Oftel felt that it was important to have a robust framework for the consideration of market definition in order to ensure that the reasoning for its decisions should be transparent. It is also the case that a methodical approach to market definition can reveal a great deal about the workings of a particular market and how firms acquire or develop market power within a market.
3.4 The proposed approach to market definition focused on the existence of constraints on the price setting behaviour of firms (in the absence of price control). This requires that the definition of the market for a product takes into account the opportunities for demand-side substitution (by customers), supply-side substitution (by suppliers) and also the geographical areas within which these factors interact.
3.5 Demand-side substitution focuses on whether there are alternative products that are available to customers and to which they could switch, without significant cost and effort, if the supplier of a particular product tried to implement a small but significant permanent price increase. Demand-side substitution does not require that products are perfect substitutes, just that there are alternatives which would fill a similar role to the good or service in question and to which consumers would be prepared to switch in the event of the hypothetical price increase. If similar products can be found, then these alternative products should be included in the definition of the relevant product market because they would constrain the price-setting behaviour of suppliers. A consideration of the choices available to customers is therefore at the heart of Oftel's approach.
3.6 The approach proposed by Oftel also takes into account constraints on the pricing behaviour of a firm that come from firms in closely related areas. In considering the scope for supply-side substitution one needs to assess whether there are firms that, although not currently supplying a particular product, not only could switch some of their existing production facilities to produce the product in question but also would be likely to chose to do so in the event of an increase in the price of the original product under consideration. If such firms exist, then if a firm tried to increase the price of a particular product it would be unsuccessful because these other firms would switch production to take advantage of the higher prices of the original product. When such firms do exist, then their presence needs to be factored into the definition of the relevant product market.
3.7 The focus of this approach to market definition is on the constraints on the price setting behaviour of firms. This approach can be extended to the situation where a firm is able to discriminate perfectly in the prices it charges to different groups of customers (allowing for volume discounts). In this situation, one group of customers is unable to gain access to the lower prices paid by the other group of customers and so it is logical to define a series of product markets that correspond to each customer group.
3.8 It should be stressed that the elements in market definition set out above are intended to guide those considering market definition, to make them aware of the issues that should be taken into account. There is an element of judgement involved, as well as a certain amount of technical knowledge: more than one reasonable definition of the market may be possible in a particular case. Those conducting a market definition exercise would need, for example, to decide what weight to give to the different factors.
3.9 Once the definition of the market has been established, the second stage of the approach proposed by Oftel is to consider the competitiveness of that market. Oftel envisages a competitive market as one in which no firm is able to act independently (in terms of either pricing behaviour or output decisions) of any of the other firms competing in that market, or a market in which an incumbent firm's behaviour is effectively constrained by the threat of entry from firms outside the market. In this situation no firm should be able to raise and sustain its prices above the 'competitive level'.
3.10 This approach does not just examine whether a firm is 'dominant' (ie has the ability to act independently etc) but also whether the market could be characterised as potentially collusive. Although there might not be a dominant firm in a market, that does not automatically imply that the market is fully competitive. The concept of effective competition thus goes beyond the issue of whether a single firm is dominant or not and takes into account how firms compete with each other and whether competition is efficient and sustainable.
3.11 In a multi-operator environment, an assessment of competition needs to take account of a range of factors encompassing not just the structure of the market but also the conduct of firms in that market. The number of firms in a market alone is not a reliable indicator of the extent of competition in that market. As was said in the first consultative document, there is no unique indicator of a competitive market and the consultative document set out a range of factors that Oftel proposed to take into account when assessing the competitiveness of a given product market. The range of factors included the changing pattern of market shares over time; the degree of concentration in the market; the price history of the market; the degree of excess capacity that competitors possess; barriers to entry (and exit) together with the history of entry into and exit from the market; and the way in which firms compete in the market (eg whether they compete on the basis of price, by product differentiation, after sales service or other factors). There is also the need to take into account issues such as customer awareness and customer inertia.
3.12 The responses from operators and consumers broadly supported the two stage approach that Oftel had proposed in the first consultative document.
3.13 Some of the responses did express the concern that the approach to market definition was not sufficiently customer orientated. However, as has been reiterated above, a key component of the approach to market definition that Oftel proposes to use is a consideration of the choices that are realistically available to customers.
3.14 There was little critical appraisal of the factors Oftel proposed to use to assess the actual or potential competitiveness of given markets. Most of the responses from operators discussed competition solely in terms of the number of firms in that market and there was little discussion of the other factors which Oftel had suggested might be relevant.
3.15 In markets that were previously monopolies or duopolies, an increase in the number of firms obviously represents a significant development in the structure of the industry. However, it is not indicative, on its own, of the existence of effective competition in that market. Oftel wishes to promote competition between operators and not simply the development of a small, competitive fringe or a series of niche players - Oftel wishes to open up the debate about the nature of competition in telecoms markets.
3.16 Responses from customers indicated support for taking into account the broader range of factors set out by Oftel in assessing competitiveness. In particular customers were concerned that there was a need to guard against collusive behaviour by operators.
3.17 Oftel's approach to market definition and the assessment of competitiveness is intended to have a general applicability. It is being used in the context of this price control review for determining the scope of the retail and network price caps. The approach is used in the rest of this chapter to discuss the competitiveness of retail markets. Chapter 5 uses the approach to discuss issues of market definition and the competitiveness of different interconnection services. The approach will also have a significant role to play if Oftel's alternative option of a 2-year price control period and early review of the market is chosen.
3.18 The approach will also be used in a wider context, for example, examining allegations of anti-competitive behaviour. In order to produce a systematic examination of potential or alleged anti-competitive issues, it is first of all necessary to have a robust definition of the market within which the anti-competitive behaviour is alleged to be taking place and an understanding of the way in which competition operates in that market. The development of a series of robust market definitions will contribute to the establishment of a body of anti-competitive practices casework which in turn will create precedents which will help to guide operators about Oftel's likely definition of relevant product markets.
For the purposes of defining relevant product markets within the telecommunications sector and the assessment of competitiveness within those markets, Oftel proposes to use the approach set out in the first consultative document. In assessing the degree of competition of the market, Oftel believes that there is a need to take into account a range of factors and that a consideration of competitiveness that is limited to the number of firms or market shares within a market is inadequate.
3.19 Market definition is not necessarily a static concept: competitive and technological developments can change the demand and supply characteristics of product markets. In an industry, such as telecommunications, where technological developments are rapid, there is a need to look ahead to try to anticipate how markets might develop in the future and thus to include a dynamic element to market definition. Chapter 3 of the first consultative document briefly discussed the potential convergence of switched and unswitched networks and the increased blurring of the distinction between telecommunications, IT and broadcasting markets over the course of the next price control period.
3.20 Changes in the underlying technology also have implications for network charges. Traditionally interconnection charges have been based on a range of factors such as distance, capacity, minutes of use etc: they were the original cost drivers in telecommunications networks. However, the introduction of digital technology and fibre optics means that distance is likely to become increasingly less significant: the cost of transmission has already fallen relative to the cost of switching. Such developments have also meant that services which require large amounts of bandwidth and which previously were delivered over unswitched systems, can now increasingly be delivered over switched systems. However, as the first consultative document pointed out the timetable for the emergence of services based on converging technology is uncertain and this in turn means that the regulatory implications for switched and unswitched markets are also uncertain.
3.21 The first consultative document, therefore, posed the question as to whether it was appropriate to take into account the convergence of delivery technologies within the context of this price control review and in particular whether it was appropriate to treat broadcasting and telecommunications markets as separate markets.
3.22 Most operators acknowledged that network convergence was a technical possibility but felt that the actual timescale for the convergence of delivery technologies was too uncertain to be an important factor in this price control review. Only BT put forward the argument that convergence of voice and data networks (ie voice services being provided over packet switched networks) would become a reality by the end of the next price control period. Other operators felt that it was more appropriate to continue to treat broadcasting and telecommunications as separate markets at this stage.
Oftel concludes that the issue of the convergence of different delivery technologies is unlikely to be material to the value of X over the next review period and thus proposes to put this issue to one side for the purposes of this price control review. Oftel intends instead to develop its understanding of the issues surrounding network convergence through other approaches, in particular by taking forward the discussion generated in the responses to its Consultative Document Beyond the Telephone, the Television and the PC.
3.23 The first consultative document set out a series of customer groups ranging from large business users, down through smaller business users and high spending residential customers, to customers that are currently unphoned. The purpose of grouping customers in this way is to enable Oftel to gain an understanding of (and to monitor) the distribution amongst customers of the benefits from increased competition in the UK telecommunications market.
3.24 Most operators agreed that the customer segmentation set out by Oftel was indeed a useful approach and accepted that it would make an important contribution to monitoring the spread of the benefits of competition. However, most operators felt that there needed to be an additional geographical dimension to the customer segmentation in order to enhance its usefulness. A number of operators suggested this should be done either through an urban/rural split or by making a distinction between areas where there is a cable franchise and those where there is not.
3.25 A difficulty with this approach is that it would tend to fragment the product markets. At present BT is required geographically to average its prices which means that customers in all parts of the UK benefit from any price reductions that BT introduces. This means that BT need only face significant competition in key parts of the UK for all customers to benefit from the price competition that these competitors provide.
3.26 Geographical factors are only likely to be relevant to the process of market definition if the requirement on BT geographically to average its prices should be lifted or if other operators start to vary charges for a given call service according to the geographical area from which that call was made. However, since Oftel does not propose to change the principle of accessibility on the same terms throughout the UK to services falling within the definition of universal service, it does not propose to define markets for services in geographical terms.
Oftel recognises that the impact of liberalisation has been uneven across customer groups in terms of geographical reach so that residential customers in urban areas are more likely to have a choice of operator than those in rural areas. Oftel proposes to take this into account in its monitoring of the benefits of competition across different customer groups (Oftel is in the process of collecting information from operators on a postal code basis as well as service and customer basis). For price control purposes, Oftel regards markets for most services as being UK in geographic scope.
3.27 As well as putting forward a general methodology for assessing market definition and competitiveness, the first consultative document also invited comments on a number of specific markets.
3.28 Oftel invited views as to whether it was appropriate to separate the provision of access and call services for the purposes of market definition and also whether it was appropriate to distinguish between the provision of local and national call services.
3.29 Chapter 3 briefly set out the reasons why Oftel regarded it as appropriate to distinguish between access markets and call service markets. Although network access and call services have traditionally been supplied by the same network operator, applying the market definition approach set out above would lead to the conclusion that the price of call services would not constrain the price which a monopoly operator of a local network could charge for access.
3.30 An alternative way of approaching this market definition issue is to regard it as making a distinction between the provision of the network itself and the provision of services over that network. Mercury's use of indirect access to offer long-distance call services to BT customers is an example of the way in which the provision of network access and call services can be separated. The MMC Report "Telephone Number Portability" published in December 1995, also chose to make a distinction between the access network and call services.
3.31 The responses from both operators and customers broadly agreed that access and call services did constitute different product markets. A number of responses anticipated the situation in the future where operators could package together access and call services for a flat fee in a similar manner to mobile operators but nevertheless considered network access and call services on their own to be sufficiently distinct to warrant being described as separate markets. The bundling together of products from different markets but with common costs was anticipated in the Oftel document Fair Trading in Telecommunications. Oftel does not anticipate that bundling of calls and access services will affect market definitions during the review period.
Oftel proposes to treat network access and provision of call services as constituting separate product markets for the purposes of this price control review.
3.32 In terms of assessing the competitiveness of the provision of network access, the first consultative document noted that BT should face increased competition from cable companies as they rolled out their networks. This would mean that more and more residential customers will have a choice of access provider. Over the course of the price control period BT would also begin to face competition from regional networks, such as Norweb, Torch and Scottish Telecom, and new operators such as Ionica and other operators which could provide radio-based networks. In certain areas (notably the City of London) business customers are already able to choose between a number of operators: eg BT, Mercury, MFS and COLT.
3.33 In its response BT argued that the market for access services is already extremely competitive and that these new operators had been very successful in winning new business away from it. BT claimed that its share of all new fixed lines had fallen from 76% in 1993 to 45% in 1995 and that cable operators now account for 51% of all new lines. The most dramatic change had occurred in the residential sector where BT's share of new lines had fallen to 24% - BT still retains 70% of new lines in the business sector.
3.34 BT also argued that the cost of providing network access is no longer the barrier to entry that it once was: for instance, wireless access can be significantly cheaper for both urban and rural settings and it does not require dedicated infrastructure for every property in a given area. This means that the radio-based networks pose a significant, and in BT's view immediate, competitive threat.
3.35 Oftel welcomes the emergence of competition in the supply of network access. BT certainly faces competition for new lines but since it still has over 90% of the installed base of exchange lines in the UK, the network access market cannot be said to be competitive at present. Although cable companies have passed around 25% of homes in the UK, this still means that only a quarter of households currently have a choice of access provider. The spread of competition to existing BT customers will depend upon competing operators not only rolling out their networks but also overcoming considerable customer inertia. However, the introduction of number portability over the period of the price control will assist the development of competition.
3.36 Oftel recognises that competition is developing in the provision of network access but does not believe that it will become fully competitive over the next price control period and a number of uncertainties remain - not least the roll-out of other operators' networks (ie the cable companies, Ionica and the regional operators). There is, however, the potential for this position to change over the course of the price control period which is why Oftel has put forward the possible alternative approach of revisiting this issue in two years' time (see Chapter 2 and 6).
3.37 In an industry such as telecommunications in which technology evolves so rapidly, it is important to ensure that decisions taken on market definitions do not ossify existing structures and practices and discourage innovation.
3.38 In the first consultative document Oftel proposed that it might be appropriate to regard local and national calls as part of a single market for inland switched calls. Although Oftel was not suggesting that customers regard a local call as a direct substitute for a national call, it was trying to capture the fact that technically the differences between local and national calls were disappearing. Given that the cost of transmission is generally agreed to be falling rapidly, it seemed appropriate to explore the argument that, over time, distance would cease to be a defining characteristic of a call service. It also avoided basing definitions of local and national call markets on BT's existing local call areas and tariff structure and thereby creating a disincentive for BT (and other operators) to innovate in respect of the way in which customers are charged for call services.
3.39 BT's response argued that a key factor in defining call service markets is the fact that the price of local calls does not constrain the price of national calls (or vice versa) because customers do not regard the different call services as alternatives. It argued that the demand and supply for calls is organised on a local, national and international basis in the UK. The majority of responses from other operators supported BT's position that local and national calls constitute separate product markets.
3.40 There were some operators and customer representations (eg the National Consumer Council) that were prepared to accept that local and long distance calls were in fact part of one larger, inland switched calls market but it seems that operators' attitudes towards market definition are heavily influenced by their own particular perspectives of the market. For instance, mobile operators chose not to make or support a distinction between local and long distance calls, while ACC, the national reseller and ISR operator did support such a distinction.
3.41 Oftel currently has a project to investigate the nature and extent of the relationship between BT's and other operators' telecommunications services' costs and geographical factors such as distance, population density and the nature of the terrain. The project will specifically look at the relationship between BT's local call areas and costs. Oftel proposes to discuss these findings with the industry later in 1996.
For the purposes of this price control review Oftel proposes to accept the distinction between local and national call markets.
3.42 In terms of assessing competition for call services, many of the arguments that are used in assessing the competitiveness of the access market also apply in the markets for the provision of local and national calls. Competition in the provision of local call services is closely linked to competition for access services because operators who provide access services are usually best placed to supply provide local call services as well. Competition in the local call market will tend to depend on the degree of competition in the provision of the network access.
3.43 Indirect access means that there is scope for competition to develop in the national call market faster than for local call services because indirect access is essentially independent of local network competition. Apart from indirect access services, the argument that competition at the wholesale level will feed through to price competition at the retail level depends upon the operators having to compete for customers and thus on the customer having a realistic choice of operators.
3.44 Although there is more potential for competition for national calls through indirect access, many of the uncertainties surrounding network access and local call services also apply to the competitiveness of national calls. Again, because of the degree of uncertainty, Oftel has proposed the possible alternative approach of re-examining this issue in two years' time.
3.45 The first consultative document suggested that there was a market for International Direct Dialled (IDD) calls but did not elaborate further on possible market definitions.
3.46 The responses suggested that from both demand and supply side perspectives, the relevant product markets were individual country routes (eg UK-US/US-UK) because the price of calls to one country was unlikely to be constrained by the price of calls to other countries. The prices for different country routes are based, in part, on distances and, in part, on accounting rates negotiated bilaterally between the national PTOs.
For market definition purposes, Oftel proposes to treat country pair routings as the relevant product market in the IDD calls sector.
3.47 The first consultative document suggested that there had been significant competitive developments in the field of IDD calls on those routes where voice International Simple Resale (ISR) had been introduced (data resale to many EU countries is already in operation). Operators agreed that on those routes where ISR had been introduced, the markets had become more competitive: there is now a significant degree of price competition as well as a range of new service packages.
3.48 For these other routes there is the prospect not only of liberalisation of telecommunications infrastructure and basic telephony services within the European Union by 1998 but also at the wider international level (under the auspices of the World Trade Organisation). The EU Directives on full telecommunications liberalisation will oblige most Member States to liberalise all intra-EU telecommunications services completely by 1 January 1998. The EU initiatives will mean that there will be a liberalisation of international facilities infrastructure and competing operators will be able to own and operate their own international telecommunications links and this in turn would end the BT-Mercury duopoly. However, competition for IDD calls at the residential level is still likely to be closely linked to competition for access services.
3.49 There is the prospect of competition being introduced in the UK even earlier than 1998 - the DTI has recently published proposals for the liberalisation of international facilities in the UK ahead of the timetable set by the European Commission. The DTI proposals also consider extending liberalisation to routes beyond the EU.
Oftel proposes to consider IDD call routes as competitive on the assumption that there will be increasing international liberalisation and that competition will develop on a significant number of international routes by the end of the price control review period.
3.50 For certain retail customers, typically business customers, with high call volumes between specific locations, it makes sense to consider investing in the dedicated capacity afforded by private circuits rather than paying the usage based PSTN tariffs. Private circuits can of course be combined to form private networks. It could be argued that the possibility of switching back to PSTN services could constrain tariffs for private circuits but in practice this is likely to be only a very weak constraint and thus private circuits are a separate market from PSTN call services.
3.51 New private circuits can be either analogue- or digital- presented to the customer. This means that the underlying conveyance infrastructure for the private circuit is the digital core network but the format in which access to the customer is made will be determined by the customer's requirements. For instance, analogue-presented private circuits that link together PBXs on different sites may comprise a digital circuit between the sites but analogue presentation to the PBXs. Such analogue-presented circuits can be upgraded to a digital presentation if required but this is not a costless exercise and since the rental of analogue-presented circuits is, on average, cheaper than for digital-presented circuits, a consumer would be unlikely to upgrade the analogue-presented circuit purely in response to an increase in price.
3.52 Analogue-presented circuits also tend to have a more limited functionality than digital circuits which has led Oftel to conclude that they do not appear to be close substitutes from the customer's point of view. This suggests that the price of analogue-presented private circuits is not likely to constrain the price of digital-presented circuits or vice versa.
Oftel therefore proposes to regard analogue-presented and digital-presented circuits as separate markets.
3.53 BT, however, has argued that it is relatively easy to upgrade analogue circuits which means that analogue should not be treated as a separate market.
3.54 As well as the different formats for private circuits, it also seemed appropriate in defining the relevant markets to consider the capacity of the circuits because there seems to be an important distinction in the way in which digital presented circuits up to and including 64kbit/s and over 64kbit/s were provided and thus the way in which the markets for digital circuits operated. Oftel understands that circuits of over 64kbit/s but less than 2Mbit/s are often provided over a 2Mbit/s bearer circuit.
3.55 In the first consultative document Oftel chose to make a distinction between high and low capacity circuits based on a threshold drawn at 64kbit/s. However, in response to earlier representations from one particular operator, the first consultative document also invited comments as to whether a better description of the markets for digital circuits might involve defining three markets: one for digital circuits up to 64kbit/s, one for circuits between 64kbit/s-2Mbit/s, and finally one for circuits in excess of 2Mbit/s.
3.56 There was little support from operators for this 3-way division of the private circuit sector.
Oftel proposes to make a distinction between low and high capacity digital circuits at the 64kbit/s level (ie 64kbit/s and below or greater than 64kbit/s) for the purposes of this price control review.
3.57 As far as Oftel is aware, BT is the monopoly provider of inland analogue circuits in the UK and it has a considerable installed base of these circuits. New network operators have chosen only to offer digital private circuits and there is also perceived to be a general trend away from analogue-presented circuits towards digital-presented circuits. There is thus little prospect of significant competition emerging for the provision of analogue-presented circuits.
3.58 The proposed market definitions for digital circuits were deliberately couched in terms of capacity rather than the underlying delivery technologies eg fixed link versus wireless. This was intended to provide Oftel with the flexibility to allow for the emergence of new delivery mechanisms such as radio-based systems. A number of responses from operators raised the possibility of increased competition in the low capacity digital market not only from Ionica but also from the holders of the licences for wireless based local loop services in the 10Ghz range of the radio spectrum recently issued by the DTI. The responses which drew attention to this anticipated that these licences could enable the wireless delivery of low capacity services to businesses by 2000/01.
Oftel concludes that for the next price control period there is little prospect of competition in the provision of analogue private circuits. In the case of low capacity digital circuits, Oftel acknowledges that competition may emerge over the period but that this market will not be competitive at the start of the next price control period and the development of competition is uncertain.
3.59 High capacity inland private circuits is a market in which there are not only a number of competing suppliers but these suppliers are competing with BT across the UK rather than just in London. BT currently faces competition from the national operators such as Mercury, Energis, as well as from the main cable companies, the regional networks and MFS and COLT. Some of the responses also raised the prospect of additional competition in the 2Mbit/s segment of this market from holders of the licences for wireless based local loop services in the 10Ghz range of the radio spectrum referred to earlier.
3.60 Given that high capacity private circuits are typically products used by larger businesses rather than small businesses or residential customers, the first consultative document invited comments as to the extent to which it was possible that the larger corporate customers possessed a degree of buyer power (in terms of being able to trade one operator off against the other) because of the increase in the number of operators.
3.61 The responses agreed that customers do have a degree of buyer power in this market because they now have an effective choice of operator.
Oftel proposes to consider the market for high capacity inland private circuits as a competitive market.
3.61 The arguments set out above for distinguishing between analogue and digital inland private circuits also apply to international private circuits. However, they are identified as separate markets from inland private circuits because they are not substitutes for inland circuits.
3.62 At present there is the BT-Mercury duopoly in respect of international facilities and the ability to provide international private circuits. Although Mercury does compete with BT in the supply of analogue international private circuits, the future competitiveness of these markets will be determined by the potential for the liberalisation of international facilities.
As with IDD calls, Oftel proposes to recognise that international private circuits will become competitive on the assumption that international liberalisation proceeds.
3.63 ISDN lines are a means of delivering a variety of telecommunication 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.
3.64 Basic rate and primary rate ISDN lines offer a different functionality from ordinary PSTN connections and this in turn means that a small but significant price rise could probably be sustained without a significant degree of substitution back to PSTN lines. Basic rate and primary rate lines are thus sufficiently distinct from ordinary network access to constitute separate markets. BT have also put forward the argument that basic rate and primary rate ISDN lines are technically different both in terms of the physical infrastructure and in the way in which the signalling across them is set up. This means that customer premises equipment is not interchangeable. This in turn suggests that the price of one type of ISDN line is unlikely to constrain the price of the other and that they should be regarded as separate markets.
Oftel proposes to define separate markets for basic rate and primary rate ISDN lines.
3.65 The first consultative document stated that one of the reasons for the slow uptake of ISDN in the UK compared to, say, Germany and France was that connection charges for ISDN in the UK were significantly higher. However, BT has pointed out that although the connection charge is higher, the actual usage charges in the UK are significantly lower. In addition a series of recent comparative studies indicate that in terms of "life cycle" costs, ISDN in the UK is cheaper than in the US, France and Germany.
3.66 Responses from operators to the first consultative document indicate that competition is beginning to develop in both the basic rate and primary rate ISDN sectors. For instance, Norweb has begun to offer an equivalent to BT's ISDN2 (basic rate) service to customers in the Manchester area and BT reports that a number of cable companies (eg Midland Cable and Diamond Cable) have indicated that they intend to extend the portfolio of products that they offer to include basic rate ISDN lines. As mentioned above in the discussion of private circuits there may also be the prospect of some competition from radio-based networks and, in particular, from Ionica.
3.67 A wider range of companies now offer primary rate ISDN lines: BT lists COLT, MFS, Energis and Scottish Telecom among its competitors. However, the connection and rental costs have yet to fall significantly. Chapter 6 discusses some of these issues in more detail.
3.68 Oftel believes that competition has only just begun to emerge in this area because the demand for ISDN lines has only recently begun to develop and that in turn is because applications have only recently emerged for which ISDN has clear advantages over the PSTN or a private circuit connection. An example of this is the use of ISDN for dial-up access to the increasing number of on-line services. The provision of ISDN services has been technically feasible for some time but without the underlying consumer demand for ISDN access, there has been no incentive for operators to bring forward these services.
Oftel believes that competition is developing in the markets for both basic rate and primary rate ISDN lines although it acknowledges that it is likely to become competitive more quickly in the primary rate market than in the basic rate market.
3.69 The first consultative document linked Directory Enquiry (DQ) services together with Operator Assisted calls (ie reverse charge calls and Operator connected calls) in its market definition. The responses to the first consultative document suggested that this was an inappropriate market definition and that DQ services and Operator Assisted calls constitute separate product markets. Whereas in the past it may have been the case that there were certain economies of scope in the provision of these services, competitive developments in the field of DQ services mean that these two services areas have fragmented into separate markets. In particular, a whole range of competitive services and products has been developing around the DQ service (eg a variety of CD-ROM based products).
For the purposes of this price control review, Oftel proposes to treat DQ services and Operator Assisted calls as separate product markets.
3.70 DQ services is an area which has shown itself to be price sensitive: when BT introduced a charge for calls to DQ in an attempt to recover the costs of what was believed to be a loss-making service, the use of the service dropped to such an extent that BT was forced to lower its charges. With the development of new DQ products such as directory CD-ROMs and on-line services, large users (ie business users) have a range of choices. In addition Oftel intends to liberalise the market for directory information by granting rights of access to the core database to a wider group of entities than at present. The rights of access will enable service providers to provide a full range of competing wholesale and retail directory products and services, helping to extend competition in the provision of DQ services to all categories of user including the residential user.
Oftel proposes to consider that DQ services will become competitive over the course of the price control.
3.71 Although Operator Assisted calls cover a range of services, some of which could be regarded as an "overhead" of operating a telecoms network (eg a general enquiries facility) and other more specific operator controlled services, such as alarm calls, the price control only relates to reverse charge calls and Operator connected calls.
3.72 At present many PTOs rely on BT's operator service (ie they obtain access to a number of Standard Services at wholesale rates.) However, the PTOs do have the option of the self-provision for these services so that if BT tried to increase its charges, they would have the incentive to combine to establish their own operator service: the only operator service which operators cannot provide themselves is the 999 emergency service which must be provided by BT or Mercury. At the retail level, Operator Assisted calls are a loss-making service but Oftel is unwilling to fossilise existing cross-subsidies. In addition Oftel believes that the option of self-provision for PTO's will be an important constraint on BT's behaviour in this market in the event of its removal from price control.
Oftel proposes to consider that Operator Assisted calls will be subject to the competitive constraint of the threat of self-provision by other PTOs.
3.73 The first consultative document proposed that there is a separate market for the provision of specially tariffed voice services (ie 0800, 0345, 0990 numbers). It seemed appropriate to make a distinction between these services and the Premium Rate Services (PRS) which do not fall within the price cap basket because the uses to which they are put (eg marketing) are very different from those to which PRS are put so that they are not close demand-side substitutes. The responses to the first consultative document supported this market definition.
Oftel proposes to regard specially tariffed voice services as a separate product market from PRS for the purposes of this price control review.
3.74 Although the area of Specially Tariffed Voice Services is one in which BT has enjoyed a significant degree of first mover advantage, competition is developing and most responses supported the view that there is the potential for this market to become fully competitive. However, a significant number of operators went on to comment that regulatory action was needed to ensure that effective competition would develop.
3.75 In fact, the Consultative Document Promoting Competition in Services over Telecommunications Networks, sets out Oftel's proposals that the number translation component (but not the conveyance) of Specially Tariffed Voice Services should be moved into BT's Supplemental Services Business. This will mean that the potential for BT to discriminate between itself and independent service providers in the provision of the basic inputs to these services is removed. Oftel is also setting in train measures which will lead to the introduction of portability for 0800 etc numbers and it believes that this will assist the development of competition between operators.
Oftel proposes to consider that the Specially Tariffed Voice Services market will become competitive.
3.76 At the time of the last price control review, vision circuits (ie one-way private circuits which are used to carry broadcast sound and vision services) were excluded from the price basket of 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 greater degree of price flexibility. In the light of the 1995 order made against BT in respect of satellite uplinking services Oftel wished to consider this issue again.
3.77 Although some of the responses did not believe that it was appropriate to distinguish the uses to which circuits are put, the main participants in this field (BT, NTL and Energis) agreed that it was a market distinct from other private circuits and agreed that the market was competitive. Energis, for instance, has been able to win a substantial BBC contract away from BT. Instead the responses suggested that what is needed is simply an effective means of ensuring fair competition in this market. Oftel believes that the new general provision on anti-competitive behaviour put forward in the Fair Trading in Telecommunications document would give it the means to do this.
Oftel proposes to continue to define vision circuits as a separate product market from other forms of private circuits. It regards this market as competitive.
3.78 The first consultative document also invited responses on whether it was appropriate to identify circuits used to provide Closed Circuit TV (CCTV) as a separate from other private circuits. BT argued that it is appropriate to define the market in this way and went on to argue that it is a competitive market: not only did it face competition from cable companies but also some users (eg local authorities, police forces) who are able to self provide circuits for CCTV.
Oftel proposes to continue to define CCTV circuits as a separate product market from other forms of private circuits. It regards this market as competitive.
3.79 Although audio circuits (also known as music circuits) were not referred to in the first consultative document, they form another group of private circuits which have a very specific use. Several years ago, Oftel examined this market and concluded that there was the prospect of competition developing so that there was no need to consider extending the scope of the existing controls on private circuits. However, Oftel has recently received a number of complaints about proposed tariff changes for these circuits. The fact that BT is able to increase prices in this market may indicate that it still possesses a dominant position in this market. However, Oftel proposes to examine this separately as a competition issue rather than to deal with it in the context of the price control review.
3.80 The first consultative document suggested that telex services had been superseded by other services such as e-mail and facsimile. Responses agreed with this analysis but also agreed that for certain groups of customers telex still had an important role because it was accepted as a legally binding document in a way that e-mail or faxes were not. Thus telex should be regarded as a separate market.
3.81 However, there was agreement that the demand for telex services had been in decline for some time and was likely to continue to decline.
3.82 The first consultative document invited comments about the potential for competition in this market.
3.83 For the purposes of describing the operation of the payphone market, BT identified three segments of the market: public street payphones; managed payphones and private payphones. However, because BT envisaged that competition would spread from private payphones to public payphones, it did not consider it appropriate to define them as separate markets.
3.84 As well as that of BT, other responses made the point that payphones face increasing competition from mobile 'phones and calling cards.
3.85 The payphone market is one which is becoming more competitive. As well as a number of companies operating in the managed private payphone sector (eg BT, UK Telecom, IPM International Plc, ACC Long Distance, New World Payphones and 3C Communications), competition is beginning to spill over into the public payphone sector. IPM entered this sector last year, taking over many of Mercury's call box sites, and New World Payphones has recently been granted a licence to operate a public payphone service. Oftel has also issued a consultation document which sets out proposals to relax the restrictions on the public payphone sector which should encourage more competition.
Oftel proposes to regard the payphone market as in the process of becoming competitive for the purposes of this price control review.
3.86 The first consultative document referred briefly to supply of terminal equipment as another area of the telecommunications industry which could give rise to market definition and competitiveness issues. However, there was a presumption that the various markets for the supply of different sorts of equipment were competitive because they had been among the first to be liberalised.
3.87 There is one particular market for terminal equipment that is subject to price control and that is the rental of "hard wired" telephones. At present the price cap on rentals is simply RPI (ie BT is only allowed to increase rentals in line with inflation). The price cap was introduced because the rental of hard wired phones is a BT monopoly - modern telephone equipment uses "plug and socket" connections - and there is no prospect of competition in what is a declining market.
3.88 The first consultative document identified a wide range of services that are covered by the term Value Added and Data Services (VADS): 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.
3.89 In the first consultative document Oftel chose to group these various services under two broad headings, Messaging/Transactional services and Network Management/Support services and invited comments as to whether it was appropriate to begin to divide VADS into these two groups according to the nature of the activity.
3.90 However, in February, Oftel published Promoting Competition in Services over Telecommunication Networks which set out a series of proposals for promoting service provider competition and set out definitions of "enhanced" services. An enhanced service is one which had a telecommunications component but in addition contains some function over and above basic retail telecommunication services. Oftel identified three broad categories of enhanced service: voice-based services (eg number translation services, voice messaging services); data-based services (eg e-mail, EDI) and video-based services.
3.92 Oftel proposes to link the consultation process on the Service Provider Document to the timetable for the price control review so that Oftel's proposals for service providers can be taken into account in considering the price control proposals.
3.93 The responses to the first consultative document so far have made it clear that the VADS sector is made up of a wide range of different markets and that it is an area that is already subject to competition.
3.94 The responses also suggested that in the case of complaints about anti-competitive behaviour in this sector, it would be more appropriate to approach market definition on a case by case basis rather than try to be too prescriptive at this stage. Over time competition casework should mean that Oftel will develop a series of market definitions which it will be able to apply on a consistent basis in the enhanced services sector.
Oftel proposes to amalgamate the issue of market definition in respect of enhanced services with the responses to the service provider document to develop more considered proposals at the next stage of consultation.
3.95 The first consultative document stated that there was a presumption that the retail markets for mobile telephony and mobile data services were competitive. It recognised that although the number of network operators is subject to regulatory restrictions, there appeared to be significant competition at the service provider level: a large number of service providers have to compete not only to purchase airtime from the network operators but also have to compete with each other for customers. Oftel also drew attention to the fact that the mobile sector is characterised by a wide range of innovative service offerings and pricing packages.
3.96 At present mobile services are considered as an adjunct to fixed services rather than as in competition with them. Oftel did not consider whether it ought to distinguish between analogue and digital networks for market definition purposes.
3.97 The first consultative document set out a competition matrix which attempted to give an indication of the views of a number of operators as to the development of competition across different customer groups between 1995 and 2001.
3.98 Most operators saw the continued development of competition across the range of markets through to 2001 with the largest increases in the degree of competition being experienced in the business sector and in urban areas.
3.99 Table 3.1 continues with this matrix format and attempts to reflect the position that Oftel has now reached regarding the competitiveness of markets for the purposes of this consultation document.
3.100 It uses the same 1-4 "index" of competition that was set out in the first consultative document with "1" representing no competition and "4" signifying fully competitive. The main assumptions underlying the matrix are that: competing networks keep to their timetables for the roll-out of their networks; number portability is generally available; there is international facilities liberalisation in the UK; and there is liberalisation of access to BT's core DQ database; and wireless local loop operators begin to offer the equivalent of low capacity digital circuits to business customers.
TABLE 3.1: Services Subject to Price Control.
ACCESS LOCAL CALLS NATIONAL CALLS
CUSTOMER '96 '99 '01 '96 '99 '01 '96 '99 '01
Global 2/3 3/4 3/4 2/3 3/4 4 2/3 3/4 4
Large Businesses 2/3 3/4 4 2/3 3/4 4 2/3 3/4 4
SME 1/2 3 3/4 1/2 3 3/4 2/3 3/4 4
Residential 1/2 3 3/4 1/2 3 3/4 2 3 3/4
INLAND: LOW INLAND: HIGH
IDD CALLS CAPACITY P.Cs CAPACITY P.Cs
CUSTOMER '96 '99 '01 '96 '99 '01 '96 '99 '01
Global 3 3/4 4 1 1 1/2 3/4 4 4
Large 3 3/4 4 1 1 1/2 3/4 4 4
Businesses
SME 2/3 3/4 4 1 1/2 2/3 3 3/4 4
Residential 2 3 4 n.a n.a n.a n.a n.a n.a
International
Private Circuits DQ Services Specially
tariffed voice Services
CUSTOMER 96 99 01 96 99 01 96 99 01 Global 1 3/4 4 2/3 4 4 3 4 4 Large 1 3/4 4 2/3 4 4 3 4 4 Businesses SME n/a n/a n/a 2/3 4 4 3 4 4 Residential n/a n/a n/a 1 3/4 4 n/a n/a n/a
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