October 2000

Contents

1. Introduction

Background

2. Objectives and scope

Dial-up Internet access review

Oftel promotes competition

3. Information gathering

Market segments

• Internet call origination
• Internet call termination
• Internet service provision

Sources available within Oftel

Improving existing estimates – stakeholder involvement

4. Existing regulation

5. Timetable

6. Industry and consumer group involvement

Deadline for comments and contributions

7. Project team and contacts

Annex A: Effective competition indicators

1. Introduction

1.1 In January 2000 the Oftel strategy statement: Achieving the best deal for telecoms consumers set the goal of achieving the best deal for consumers in terms of choice, quality and value for money.

It says,

The strategy is designed to ensure that regulation is only imposed where it is justified and that it is appropriate to the level of competition in the market. Oftel must be clear where and why it needs to regulate as regulation where none is justified can distort or undermine competition. Competitive markets, which have incentives to innovate and invest, are the best way of meeting consumer needs.

1.2 To achieve these goals, Oftel has started a series of reviews of effective competition in different areas of the telecoms market. Oftel guidelines define the concept of ‘effective competition’ as,

…competition which brings tangible benefits to consumers eg lower prices, higher quality and greater choice of services and enables consumers to exercise choice effectively.

1.3 This statement is the formal start of Oftel’s 2000/01 Internet access market review and is aimed at consumer groups and industry. It sets out the objectives; timetable and scope of the review; explains how Oftel intends to measure competition; and asks stakeholders for their input into the process.

1.4 Further details of the effective competition review process are available in the document Implementing Oftel’s strategy: 'How Oftel will assess effective competition' (August 2000)

2. Objectives and scope

2.1 The objectives of the effective competition review of Internet access are:

1. To review the state of competition in Internet access in the UK and to assess if Oftel’s objective of "effective competition-benefiting consumers" is being met.
2. To use these results to determine whether the current mix of formal, co and self-regulation is working effectively and to identify and lift / impose any necessary regulatory action flowing from those findings.

2.2 Oftel is actively pursuing competition in Internet access. Competition gives choice to consumers, and spurs innovation and lower prices. Inappropriate or disproportionate regulation can reduce incentives to innovate and invest, but some regulation may be needed to promote competition. Oftel will act firmly if necessary. Oftel wants to see prices for Internet access in the UK compare favourably against the UK’s main competitors, and for consumers to have a variety of options for reliable and workable access to the Internet.

2.3 There are two main areas of Internet access that Oftel is considering in its day-to-day work: Narrowband and Broadband.

• Narrowband is the term used to describe dial-up access typically using a computer and modem over the telephone network. This is currently the most common method of accessing the Internet for residential and small business consumers, and may remain so for some time, especially for low and occasional users.

• Broadband is the term used to describe higher speed access (typically faster than 500kbit/s) to the Internet using a variety of technologies. This will enable advanced services which, depending on the connection speed, will range from enhanced web browsing and communication through to true broadband services such as the ability to watch and interact with video over the Internet. A broadband access link can be used by businesses to connect their internal networks to the Internet, allowing multiple users to share the same connection. Broadband access is usually provided as a permanent ‘always-on’ connection, allowing companies more flexibility in how they interact with the Internet, and allows users to access the Internet without having to repeatedly dial in to their service provider.

2.4 Oftel recognises that there are alternative methods to access the Internet. Most obviously, these include access via technologies such as DSL, cable modems, leased lines, broadband fixed wireless, mobile and satellite. The review will touch on alternative Internet access methods in the planned consultation document and consider their position relative to the dial-up Internet access market but Oftel plans to focus the review on dial-up access over the Public Switched Telephone Network (PSTN).

2.5 Dial-up is the most readily available method for accessing the Internet in the UK. The overwhelming majority of UK consumers and small businesses access the Internet by this method. 28% of UK homes and 44 % of small businesses access the Internet by this method. Several alternative methods of Internet access (2.4), such as leased lines, fixed higher bandwidth services and mobile, are being covered by other market reviews - as set out in Oftel’s Effective Competition Review Guidelines. Consequently, Oftel considers it reasonable and practical to undertake a focused market review of this type of Internet access.

3. Information gathering

3.1 In order to assess effective competition, Oftel proposes to look at market shares in three identifiable market segments of dial-up access:

• Internet call origination: Operators with lines to consumers, for example BT, ntl and Telewest

• Internet call termination: Operators on whose network the call terminates, for example Energis, Worldcom and Thus

• Internet services provision: Providers of Internet services to consumers, for example Freeserve, AOL and BT Internet.

3.2 Figure 1: Relationship between consumer, call originator, call terminator and Internet service provider (ISP).

3.3 To review competition in each of the 3 market segments Oftel will attempt to measure each of the indicators outlined in the document ‘Implementing Oftel’s strategy: effective competition review guidelines’. (See Annex A)

3.4 Oftel already has a number of sources of information available in-house. For example, Oftel collects quarterly information regarding traffic revenues and volumes from telecoms operators. This information will be used primarily to examine structural and supplier behavioural effects in the call origination and termination markets.

3.5 Consumer outcomes and behaviours in all of the 3 market segments will be assessed using results from Oftel’s market research programme, bringing together responses from both residential and business consumers.

3.6 In April, Oftel published results of its first International benchmarking study of Internet access prices. This study will be updated by December 2000 and will form an important part of the review process.

3.7 Oftel is aware that there are many other sources of information that must be examined if the review is to be as comprehensive as possible. Oftel encourages industry and consumer groups, to submit data which allows a fuller understanding of the Internet Service Provision sub-market. It would also welcome views on how best to assess market shares for this market segment.

3.8 Oftel will respect confidentiality of sources if required but, in the interest of transparency, would prefer contributors to allow their data to be reproduced in the consultation document (even if only in an anonymous / aggregate form)

3.9 Oftel will use the most up-to-date market information available where possible.

3.10 Oftel will identify complaints received by Oftel that relate to the Internet dial-up market. These compliance cases will be used to help assess the state of the market and identify where potential problems exist.

4. Existing Regulation

4.1 Oftel regulation has had impact on the dial-up Internet market:

• Flat Rate Internet Access Call Origination (FRIACO)

• Price Control review

• Universal Service Obligation (USO)

• Calls and access

• NTS

4.2 The review will not therefore address these existing regulations directly but enable Oftel to ensure that there is a consistent and transparent market analysis of whether there is effective competition underpinning its approach to regulation of Internet access.

4.3 There are also a number a co- and self- regulatory initiatives in the Internet market including:

• Nominet

• LINX

• ISPA

4.4 The review will consider whether there are other opportunities for co- and self-regulation.

5. Timetable

5.1 Table 1: Internet dial-up access market review timetable

5.2 Oftel plans to issue a consultation document at the beginning of December, outlining its initial findings and the possible policy implications they pose. This will be followed by a three month consultation period during which Oftel will be asking industry and consumer groups for comments on the competition assessment. A final statement will be published in Spring next year, setting out Oftel’s review of the responses and some regulatory conclusions.

6. Industry and consumer group involvement

6.1 Oftel would like to encourage the widest possible stakeholder input into the review.

6.2 Oftel will be seeking initial data and comments from stakeholders before issuing the consultation document in December.

6.3 Oftel would be grateful for all sources of information that industry and consumer groups are able to provide. This data will help provide an accurate picture of the dial-up market for assessment and analysis, in particular:

• Scope of the review

• Availability of market information

• Potential ways forward in accessing accurate market information, particularly in terms of how best to measure market shares in Internet services provision

• Any other issues that should be considered by the review

6.4 Oftel will circulate a template which will detail the type of information required from ISPs and operators.

6.5 The deadline for this initial round of comments and data is 31 October.

7. Project team and contacts

Lucy Rhodes                       Internet dial-up access market review manager

Dave Simpson                     Internet and ecommerce policy project manager

Kenny Osborne                  Statistician

Geoff Delamere                   Policy adviser

Luca di Mauro                    Economic adviser

Russell Richardson              Legal adviser

Maeve Gallagher                 Casework team leader

Shane Adams                      Internet casework manager

7.1 Comments should be sent to:

Lucy Rhodes
Oftel
Regulatory Policy Directorate
50 Ludgate Hill
London EC4M 7JJ

Email: lucy.rhodes@Oftel.gov.uk

Annex A

Effective competition indicators