Provisional Order

Explanatory Memorandom

WHEREAS:

1.On 22 June 1984, the Secretary of State granted a licence (the "Licence") to British Telecommunications under section 7 of the Telecommunications Act 1984 (the "Act") for the running of the telecommunication systems specified in Annex A to the Licence (the "Applicable Systems");

2.By virtue of section 109 of, and paragraph 20 of Schedule 5 to, the Act the Licence has effect as if granted to British Telecommunications plc ("BT");

3.Condition 54.9 of the Licence requires that BT shall ensure that discount schemes offered by BT to its Subscribers, including Consumers, are fully transparent and shall be published in the same manner as set out in Condition 54.6;

4.Condition 54.6 requires BT to publish such a discount scheme in a publicly accessible part of every Major Office and send a copy of such information to any Consumer who may request such a copy;

5.IBM Global Services ("IBM") has entered into contracts with BT under which BT ISDN2 and BT PSTN (analogue) circuits are currently being provided by BT to IBM;

6.In October 2002, IBM informed BT that it had considered an alternative supplier for such circuits and that it intended to cancel the existing contractual arrangements and novate them to Vanco UK Limited ("Vanco") in order to gain a price benefit;

7.However, in November 2002, BT introduced RHM Telecommunications ("RHM") to IBM on the grounds that RHM could offer IBM significant savings. RHM proposed that, on the basis that IBM continued with its existing retail contract with BT, RHM would make a regular payment to IBM. IBM would not be providing any services to RHM in return for this payment;

8.It appears that, BT, through the use of an indirect sales channel, has offered a discount scheme, to one of its Subscribers, which is not transparent and which has not been published;

9.Accordingly, on the information presently available to him, it appears to the Director that BT is contravening Condition 54.9 of the Licence. The Director’s reasons for making this Provisional Order are detailed in the Explanatory Memorandum that accompanies, and is published with, this Provisional Order;

10.Having regard to all the relevant matters arising from his examination of the complaint referred to above and, in particular, to the fact that Vanco is likely to sustain loss or damage in consequence of anything which, in contravention of Condition 54.9, is done or is likely to be done, or omitted to be done, before a Final Order is made, it appears to the Director to be requisite that a Provisional Order be made on the following terms.

THEREFORE:

THE DIRECTOR IN EXERCISE OF THE POWERS CONFERRED ON HIM BY SECTIONS 16(2) AND 16(6) OF THE ACT MAKES THE FOLLOWING PROVISIONAL ORDER

1.To the extent that BT continues to offer an individual discount scheme to IBM by virtue of its arrangement with RHM, BT shall within 3 days from 10 February 2003, ensure that the offer of that discount scheme is made fully transparent and shall be published in the same manner as set out in Condition 54.6.

2.This Provisional Order shall take effect on Monday 10 February 2003. If not previously confirmed by the Director under Section 16(4) of the Act or revoked, it shall cease to have effect within two months of Monday 10 February 2003.

3.In this Provisional Order, words or expressions used have, except where the context otherwise requires, the same meaning as in the Act or the Licence.

PETER WALLER

DEPUTY DIRECTOR GENERAL OF TELECOMMUNICATIONS

10 February 2003

1.This issue relates to the use of a third party agent (indirect sales channel) by BT to offer a discount in relation to standard PSTN ("Analogue") and ISDN lines to a customer, who was considering switching to one of BT’s competitors.

The Parties Involved

British Telecommunications plc (BT)
2.BT is one of Europe's leading providers of telecommunications services. In the UK, BT serves over 21 million corporate and residential customers with more than 28 million exchange lines, as well as providing network services to other licensed operators. BT Retail is the UK's largest communications service provider, on the basis of call and exchange line revenues.

Vanco UK Limited (Vanco)
3.Vanco is a global virtual network operator specialising in the design, implementation and management of global corporate data networks. Vanco’s core service is called "packaged network solutions" which essentially provides major organisations with end to end global data services for their wide area networks. Vanco is independent of carriers and equipment manufacturers. It sources infrastructure to suit customer needs from third parties on a case by case basis seeking the best prices and the most appropriate technology.

RHM Telecommunications Limited (RHM)
4.RHM is one of many agents and services providers which form part of BT Retail’s "indirect channel" which was set up to assist BT to acquire customers in the SME market.

IBM Global Services (IBM)
5.IBM provides services to industry in respect of the creation, development and manufacture of information technologies, including computer systems, software, networking systems, storage devices and microelectronics.

Background

6.IBM entered into an outsourcing contract with a customer approximately 12 months ago. In order to fulfil part of its obligations under that contract, IBM entered into a contractual arrangement with BT under which a significant number of access services (Analogue circuits and ISDN2 circuits) are supplied by BT to IBM. The contractual arrangement covers approximately [x,xxx] (for confidentiality purposes the Director has removed all business sensitive information). Analogue lines and [x,xxx] ISDN lines

7.The value of the IBM contract to BT in 2002 was around £[x.x] M.

8.IBM invited Vanco to submit a proposal for the provision of the same services, at a reduced price. Using BT’s Wholesale Line Rental (WLR) to provide the Analogue circuits and Calls and Access (C&A) products to provide the ISDN2 circuits, Vanco was able to put together a package for IBM at a price that was approximately [xx.xx%] lower than that proposed by BT.

9.IBM and Vanco entered into negotiations in the knowledge that all the circuits provided by BT were regulated products which could be novated at the request of the customer, IBM. All the Analogue and ISDN2 circuits would have been novated to Vanco as the service provider via a BT Ignite wholesale contract.

10.On 23 September 2002, IBM informed BT Retail that it was considering an alternative supplier for circuits in respect of IBM’s aforementioned customer. IBM informed BT that the supplier had offered better annual rates than BT on ISDN and Analogue lines and that the savings IBM was seeking to make were in the region of £[xxx,xxx] on BT’s annual figure for the specific IBM customer account.

11.On 8 November 2002, a representative of BT approached a representative of IBM with a view to discussing a revised proposal which would compete with that provided by Vanco. In a letter dated 13 January 2003, IBM has informed the Director, that the BT representative "suggested that IBM be introduced to a company called RHM, on the grounds that RHM could offer significant savings and the prospect of avoiding operational difficulties associated with moving away from BT as the direct service provider." (Emphasis added.)

12.IBM has informed the Director that BT arranged a meeting between RHM and IBM on 15 November, where it introduced IBM to RHM. Until this point, the IBM representative had had no previous contact with RHM.

13.After introductions, the BT representative withdrew and in the subsequent discussion between RHM and IBM, RHM offered to pay IBM a certain amount each month provided that IBM would continue its contractual relationship with BT (the "arrangement"). There was no suggestion that anything would be provided by IBM to RHM in return for this payment.  

14.On 18 December 2002, RHM sent a draft letter (dated 25 November 2002) to IBM setting out the particulars of the arrangement. RHM would pay IBM a monthly sum of £[x.xx] for each access line provided under the BT contract. Given the number of access lines this amounts to an annual payment from RHM to IBM of £[xxx,xxx] or [xx%] of BT’s 2002 contract.

15.To date, IBM has not entered into any agreement with RHM.

Representations from parties

16.Following receipt of the complaint from Vanco, the Director has gathered further information from BT, RHM and IBM in order to identify whether there appears to be a breach of any licence conditions.

Information from BT

17.BT states that it is simply using an indirect sales channel in a legitimate way. BT states that it was not involved in RHM’s negotiations with IBM and that it did not attempt to influence the arrangements between RHM and IBM in any way. In a letter dated 20 December 2002, BT states that "at IBM’s request IBM and RHM representatives were introduced to one another by the BT Retail Manager and that a room was made available for the meeting"(Emphasis added). The Director notes that this contradicts IBM and RHM’s version of events (see paragraphs 21 and 26 below).

18.BT states that it, "suggested to Vanco, that it might be useful for IBM to meet RHM because RHM was the indirect sales channel that was likely to be best matched to the service that IBM was seeking". BT’s suggestion was based on RHM’s size and specialisation in calls and access

19.BT claims that all commission payments to RHM are made on the usual ‘indirect sales channel’ criteria and made retrospectively based on a customer’s actual billed revenue. BT maintains that it does not have any control over any agreement RHM has entered into with IBM nor any payment made by RHM to IBM. BT states that it is unaware of whether RHM is offering IBM additional services.

Information from RHM

20.In a letter dated 7 January 2003, RHM states that, "BT Indirect Channels Account Team contacted RHM sometime in early November 2002 to advise us that there may be a possible opportunity to enter into a business arrangement with IBM". RHM states that, "RHM explained to IBM the various facilities and services that it could offer as an independent dealer, services that would be in addition to those offered by BT and explained that although we couldn’t effect the BT pricing structure we would be prepared to rebate an amount of our commission…" (Emphasis added)

21.Following further discussions, BT arranged a meeting between RHM and IBM. RHM confirms that the meeting with IBM took place without any BT personnel present.

22.RHM explained to IBM that it would be prepared to ‘rebate’ an amount of its commission. Details of the arrangement were set out in the draft RHM offer to IBM dated 25 November 2002 as follows:

• RHM will rebate IBM a monthly sum of £ [x.xx] (payable in advance, commencing November 1 2002) for each Analogue, ISDN and Highway line provided for IBM’s Customer that is rented from BT;
• IBM to keep all its customer’s lines with BT for a minimum period of 12 months commencing 1 November 2002;
• IBM to notify RHM of any changes to the number of lines eligible for the rebate;
• The monthly figure for November and December 2002 is based on [x,xxx] Analogue lines and [x,xxx] ISDN/Highway lines (giving a monthly rebate of £[xx,xxx.xx] + VAT);
• IBM to invoice RHM with a monthly VAT invoice.

Information from IBM

23.In a letter dated 13 January 2003, IBM advised the Director that in September 2002, IBM advised BT that it was looking to move this particular IBM/customer account away from BT for commercial reasons and was proposing to contract with an unnamed supplier. The supplier had offered better annual rates than BT on ISDN and analogue lines and the target savings IBM was seeking to make were in the region of £[xxx,xxx] on BT’s 2002 figure for this particular IBM customer account.

24.IBM has stated that on 8 November 2002, BT made it clear that it could not offer IBM a discount as it was obliged to keep to standard rates. BT did however suggest that IBM be introduced to RHM on the grounds that RHM could offer significant savings and IBM could avoid any prospective operational difficulties of moving away from BT as a direct service provider. IBM did not indicate that they were seeking a wider bundle of services, which might be procured via RHM. Hence, the savings sought must have been in relation to the BT access lines

25.BT arranged for a meeting to take place between IBM and RHM on 15 November 2002. Until this point, the IBM representatives had had no previous contact with RHM. IBM confirmed that after initial introductions BT did not take part in the meeting. RHM advised IBM that provided its contractual arrangements with BT were continued, RHM would match the target savings IBM had stated that it required. On 18 December 2002, IBM received a draft letter agreement dated 25 November 2002 from RHM. To date IBM has not entered into a contract with RHM.

An effective discount scheme

26.On the basis of the information provided from BT, RHM and IBM it appears to the Director that the arrangement between RHM and BT amounts to an effective discount scheme. The key facts to emerge are as follows:

• BT introduced RHM to IBM; on the grounds that RHM could offer IBM significant savings and the prospect of avoiding the operational difficulties associated with moving away from BT;
  
• RHM proposed that on the basis that IBM continued with its existing retail contract with BT, RHM would pay IBM a monthly sum of £[x.xx] for each access line;
• given the number of lines involved this amounts to an annual payment of approximately £[xxx,xxx], ie a [xx%] reduction of BT’s 2002 charges;
• this payment closely matches the discount offered by Vanco;
• IBM would not be providing any services to RHM in return for this payment. Indeed, RHM have further offered other services to IBM

27.It appears to the Director that, in essence, BT has offered IBM the same service as under its existing contract with BT but at a lower price (due to the proposed arrangement with RHM and IBM). It appears to the Director that the proposed arrangement between RHM and IBM is effectively a discount scheme, even though BT is not a direct party to the contract. The Director has considered the reasons as to why BT would introduce IBM to RHM after it had learnt that IBM was considering moving its account to Vanco. He is currently of the view that the only explicable rationale for doing so was to enable IBM to pay less than published prices for the supply of services it was threatening to take from a competing supplier (ie Vanco). There appears to be no other reason why BT would introduce RHM to IBM other than the expectation that RHM would offer an effective discount to IBM.

28.Given the incentives facing RHM, the Director considers that BT would have a reasonable expectation of how RHM would behave once introduced to IBM by BT. As RHM receives no commission from BT for line rentals, it follows that RHM would be offering the payment at a ‘loss’. However, this might represent a form of ‘loss leading’ since RHM would receive a commission from BT if it could secure for BT the supply of other services such as calls to IBM. Alternatively, RHM might offer to supply IBM directly and earn revenues in this way.

Licence Conditions

29.It appears to the Director that the arrangement between BT, RHM and IBM effectively constitutes an offer of a discount scheme to a Subscriber. He has therefore considered whether BT is in breach of any licence conditions which relate specifically to the transparency of discount schemes.

Condition 54

30.Condition 54 applies to operators who have been designated with SMP under the RVTD. On 20 July 1998, BT, being an operator that provides both a fixed public telephone system and voice telephony services, was determined to have SMP under the Telecommunications (Open Network Provisions) (Voice Telephony) Regulations 1998 SI 1998/1580.

Condition 54.9

31.Condition 54.9 provides that, "the Licensee shall ensure that discount schemes offered by the Licensee to its Subscribers, including Consumers, are fully transparent and shall be published in the same manner as set out in paragraph 54.6".

32.As detailed above, it appears to the Director that BT's arrangement with RHM amounts to a discount scheme.

33.IBM falls under the definition of "Subscriber" - i.e. it is a person who is party to a contract with the provider of Publicly Available Telephone Services for the supply of such services in the United Kingdom.

34.Publicly Available Telephone Services includes Fixed Publicly Available Telephone Service, which in turn means "the provision to end-users at fixed locations of a service for the originating and receiving of national and international calls, including voice telephony services...". The Director understands that IBM has contracted with BT for such services, namely Analogue circuits and ISDN2 circuits.

35.The Director believes that BT's arrangement with RHM is not transparent and has not been published. Accordingly, it appears to the Director that BT is in breach of Condition 54.9. The Director has a duty under section 16 of the Telecommunications Act 1984 to enforce this condition (to the extent that this duty has not been disapplied under Section 16(5)).

36.The Director, having regard to all the relevant matters arising from his examination of the complaint referred to above, believes that it is necessary to issue a Provisional Order now rather than wait to issue a Final Order. In particular, Vanco has stated that, as a result of BT's offer of an unpublished discount scheme IBM indicated that it was minded to remain with BT. Financial information submitted by Vanco suggests that it is likely to sustain loss or damage in consequence of anything which, in contravention of Condition 54.9, is done or is likely to be done, or omitted to be done, before a Final Order is made. The value of the contract falls within a range of 5-10% (for confidentiality purposes the Director has stated an appropriate range - During the course of the investigation Vanco has provided detailed figures to the Director) of Vanco’s UK turnover of £37m p.a. Vanco has submitted further information to the Director, which indicates that around [£XX,XXX] of margin is being foregone per month.

37.It therefore appears to the Director to be requisite that a Provisional Order be made in accordance with his duties under Section 16(2) of the Telecommunications Act 1984.

38.The Provisional Order requires BT to remedy the breach of its Licence by ensuring that, within 3 working days of the Provisional Order taking effect, its discount scheme, namely the arrangement with RHM in respect of its IBM contract, is fully transparent and published in the same manner as set out in Condition 54.6. For the avoidance of doubt, the Director’s current view is that a response by BT which simply referred to its published price list would be unlikely to be considered as an acceptable way of complying with the provisional order.

Annex A

Further information from BT

39.On 22 January 2003, the Director invited BT to comment on a draft of this Provisional Order. The Director gave BT five working days to make any representations on issues of fact and confidentiality.

40.On 30 January 2003, BT submitted comments to the Director on the draft Provisional Order, BT argued that the Director should not proceed with a Provisional Order on the following basis:

BT’s arguments
41. BT highlights that it is charging IBM the published price and that there is no discount on the product and services IBM receives from BT. BT adds that it does not pay commission to RHM on PSTN and ISDN lines and that it may or may not pay a commission to RHM on calls.

The Director’s response
42. The Director accepts that IBM is currently paying published charges to BT. However, it appears to the Director that the payment offered by RHM to IBM in this context (ie with BT facing the threat of losing a customer and BT introducing RHM to IBM) constitutes an effective and targeted discount from BT’s standard prices. The Director highlights that the payment is contingent on IBM continuing to remain with BT for PSTN and ISDN access lines and that these conditions have not been published or made transparent by BT.

BT’s arguments
43.BT points out that no commission from BT passes directly to IBM and that the payment of commission to RHM is not within BT’s control but depends on whether IBM decides to transfer calls from its current call operator to BT. BT states that the agreement between RHM and IBM is separate (from the BT indirect channels contract) and asserts that an agreement between two independent companies cannot be considered a discount by BT.

The Director’s response
44. BT itself states that it advised IBM that it could not provide a comparable offer for similar services (BT could not match the Vanco offer) but that they could refer IBM to one of its Indirect Sales Channels (RHM).

45.In their letter dated 7 January, RHM informed the Director that "…(RHM) explained to IBM that although we could not affect the BT pricing structure we would be willing to rebate an amount of our commission"

46.It appears to the Director that the proposed arrangement between RHM and IBM would result in payment being passed from RHM to IBM and that BT introduced RHM to IBM with a reasonable expectation of how RHM would behave.

BT’s arguments
47. BT adds that RHM acts as a principal in relation to its offer to IBM and not as agent for BT and that BT is not in a position to know what contract price is being offered by RHM to IBM. BT states that it has no evidence that BT confirmed to IBM that RHM would be able to offer savings IBM.

The Directors response
48.RHM has advised the Director that "…in early November 2002 BT indirect Channels Account team contacted RHM to advise us that there may be a possible opportunity to enter into a business arrangement with IBM". In addition, IBM has informed the Director that, " On 8 November 2002 BT made it clear that it could not offer IBM a discount as BT was obliged to keep to standard rates. BT suggested that IBM be introduced to RHM on the grounds that RHM could offer IBM significant savings and the prospect of avoiding the operational difficulties associated with moving away from BT as the direct service provider". (Emphasis added.)

49.The RHM payment to IBM is contingent on IBM continuing service with BT ( and thus not switching to a competitor) and therefore it appears to the Director that an effective discount is in operation. The fact that BT argues that RHM would attempt to sell other services to IBM including BT calls in order to earn commission under the indirect sales channel contract, demonstrates that BT does have a reasonable expectation of RHM’s behaviour as set out in paragraph 30 above.

BT’s arguments
50. BT states that indirect sales channels cannot be subject to publication obligations and that RHM cannot be obliged to publish the terms on which it deals with IBM. BT states that it is not possible or practicable for BT to publish the terms on which indirect sales channels deal with customers. BT states that it is entitled to use indirect sales channels and it is entitled to make commission payments to these channels. Such payments do not of themselves constitute a discount scheme that is offered to Subscribers in breach of C54.9. BT adds that if it were to publish its commission to RHM and others, this would have an anti-competitive effect, as companies such as Vanco would be better able to price smaller competitors such as RHM out of the market.

The Director’s response
51. The Director does not require BT to publish details of commission paid to its Indirect Sales Channels. However, where BT has introduced an Indirect Sales Channel to an existing BT customer, which then makes the offer of savings contingent on the customer remaining with BT (and thus not switching to a competitor) then it appears to the Director’s that BT has used the Indirect Sales Channel as a device to offer a discount. Therefore as required by BT’s licence in C54.9 BT must take the relevant steps to ensure that the discount scheme is transparent and published.

BT’s arguments
52. BT claims that Oftel must specify the steps that BT needs to take to comply with the draft Provisional Order.

The Director’s response
53. In paragraph 1 of the draft provisional order sent to BT for comments on the 22 January 2003, the Director required BT "….to ensure any discount scheme, including any arrangements which amount to discount schemes, offered by BT …are fully transparent and shall be published in the same manner as set out on C54.6" Due to the urgency of the situation and to ensure BT’s compliance with the order the Director has narrowed the scope of paragraph 1 to apply explicitly to the RHM /IBM offer. The Provisional Order requires BT to make the discount scheme fully transparent and to publish the discount scheme in accordance with the provisions of Condition 54.6.

BT’s arguments
54.BT insists that it already complies with C54.9 as it publishes its discount schemes and that because RHM has offered IBM a payment does not mean that the payment is a BT discount scheme. BT reiterates that there is not a legal relationship of agency between BT and RHM in relation to the offering of the payment to IBM.

The Director’s response
55.The Director has considered BT’s arguments but remains of the view that BT by introducing RHM (the indirect sales channel) to IBM on the grounds that it could offer IBM significant savings (and in any case, having a reasonable expectation of how RHM would behave given its incentives) has in effect offered a discount scheme which is unpublished and non-transparent and is therefore in breach of Condition 54.9.