A consultation document issued by the Director General of Telecommunications

Contents

Summary

Chapter 1
Introduction

Chapter 2
BT and Concert requests

Chapter 3
Methodological approach

Chapter 4
Assessment of market power - wholesale IDD

Chapter 5
Assessment of market power - retail IDD

Chapter 6
Oftel’s proposals

Chapter 7
Consultation

Annex A
The legal framework

Annex B
Market definitions

Annex C
Wholesale IDD routes reviewed (42 routes)

Annex D
Wholesale IDD routes considered to be CompetitiveStandard Services (20 routes)

Annex E
Consumer research findings

Annex F
Draft Concert Determination

Annex G
Draft BT Determination

Annex H
Category A routes (46 routes)

Annex I
Draft BT Consent

Annex J
Draft Kingston Consent

Annex K
Draft C&W consent

Glossary

Summary

S.1 International telephony is a vital and growing part of the telecommunications market. It plays an essential role in facilitating international trade, and businesses demand instant, reliable and high quality communication with their contacts overseas. In addition, the UK’s growing multi-cultural society has a need to keep in touch regularly with relatives and friends abroad on an affordable basis.

S.2 Following the partial liberalisation of international telecommunications in the UK in 1993 and full liberalisation in 1996, around 200 operators now offer international telecommunications services in the UK. This combined with the opening of overseas markets and the substantial investment in international submarine cables has led to very low international call prices, particularly to the US where some suppliers offer retail prices which are similar to BT’s standard retail prices for a national call.

S.3 As a result of these developments, BT and Concert have asked Oftel to review the extent of competition in the wholesale and retail international direct dial (IDD) markets respectively, with a view to removing or reducing the regulatory controls imposed on them. Oftel completed a similar review last year where it found that 26 wholesale IDD routes and 23 retail IDD routes for business users were effectively competitive. This document presents the results of a review of the remaining routes together with Oftel’s proposals for further reductions in regulatory controls.

S.4 Oftel’s approach is to assess the competitive pressures to ensure that regulation remains appropriate to the level of competition. At present, BT and Concert are both subject to greater regulatory controls on the provision of international services than most of their competitors. Generally, these additional controls relate to the prior publication and notification of price changes and to requiring consent to any proposed reduction of retail international prices below cost.

S.5 The controls were imposed on BT at a time when it had a very strong position in the provision of international call services and were designed to prevent BT (and, subsequently, Concert) using that position to the detriment of its competitors and consumers. Oftel is concerned that some of these controls may actually be preventing BT and Concert from competing sufficiently vigorously and believes that this document contains proposals which will help to address this and at the same time are proportionate and sufficient to enable consumers to get a better deal in terms of quality, choice and value for money.

S.6 Recognising that there have been a number of developments in international markets, Oftel has in this review revisited its previous findings on market definition and concludes that the relevant markets are as follows:

S.7 This marks a change in market definition on the retail IDD side. A single global retail IDD market for all routes might exist if retail providers could enter on the same cost basis as operators with their own facilities, either because wholesale IDD markets were competitive or if there was a regulatory requirement, or Concert chose, to provide network access at a fully competitive level for all routes. In fact, at present the way in which Concert is regulated at the wholesale level does not require it to provide access on this basis. As a result, the fact that some wholesale IDD routes are still not effectively competitive prevents a global retail IDD definition.

S.8 In terms of the competitiveness of the markets, at the wholesale level Oftel focussed on 42 routes. Considering factors such as market shares, trends in market shares, the number of competitors and potential barriers to entry, Oftel’s conclusion is that a further 20 routes are effectively competitive.

S 9 Adding the traffic on these 20 wholesale routes to the traffic on the 26 wholesale routes already found effectively competitive in 2000, means that Oftel will have found that around 83% of IDD traffic is conveyed on routes which are effectively competitive.

S.10 As a result of an increase in competition in the retail markets as a whole, BT’s market share has fallen over the past two years both in terms of revenues and volumes at both the business and residential level. However, BT’s market share of the total residential market is still particularly high (61.2% on revenues). Oftel also has some concerns that although international prices have fallen, they still tend to be higher than other comparative countries and that although some groups of residential consumers actively seek out cheaper prices, the majority are reluctant to change suppliers for IDD calls. However, BT’s market share of business market is much lower (37.2% on revenues) and business consumers are more likely to change suppliers and seek lower prices.

S.11 Accordingly, Oftel’s conclusions on the retail IDD markets are as follows:

S.12 As a result of these conclusions, Oftel proposes to reduce regulation of the international markets further as follows:

• for the additional 20 wholesale IDD routes found to be effectively competitive, these will be determined as being Competitive Standard Services enabling Concert to offer charges on those routes outside Network Charge Control’s ceiling control and obliging Concert to only give one days’ notice of price changes; and

• for the Category A routes (ie the 20 routes determined effectively competitive at the wholesale level in this review together with the 26 routes determined effectively at the wholesale level in 2000):

• reduce BT’s retail price notification period from 28 days to one day; and

• remove BT’s obligation to provide Oftel with a break down of costs for changes prior to publication and remove BT’s requirement to seek the Director’s consent to prices which are below cost on these routes.

S.13 Although the review focuses on BT’s and Concert’s obligations, and the text of this document has been written accordingly, any decision to reduce the present regulation of BT and/or Concert would also have implications for the regulation of other operators. This document also covers the impact of Oftel’s proposals on other operators.

S.14 This consultation document seeks information and views on the competitiveness of retail and wholesale IDD markets and on Oftel’s analysis and proposals on reducing the regulatory obligations that currently apply to BT and Concert in respect of IDD calls. In particular, Oftel is seeking responses to the questions which are highlighted in bold in this document and set out in chapter 7.

S.15. Chapter one of this document provides an introduction to the international markets and a background to Oftel’s previous reviews. Chapter two sets out in detail the requests received from Concert and BT, which form the basis for this consultation.

S.16 The methodological approach used for this review is set out in chapter three, including a discussion of the relevant markets for the purposes of this review. Chapters four and five contain the analysis of the relevant wholesale and retail IDD markets respectively and Oftel’s conclusions and proposals are then set out in chapter six.

S.17 In chapter seven, Oftel sets out the process of consultation. Oftel has previously notified stakeholders of its intention to set a shorter consultation period in relation to this review of the IDD markets. Oftel did not receive any objection to the notification. Accordingly, the consultation period will run until 28 January 2002.

Chapter one

Introduction

Background

1.1 In March 2000, Oftel published a statement (Oftel’s Statement on Competition in International Markets) setting out its views on the state of competition on certain international direct dial (IDD) and international private leased circuit (IPLC) routes. Oftel concluded that competition was sufficient for regulatory controls to be reduced on BT in respect of 23 retail IDD routes and 22 IPLC routes, and on Concert in respect of 26 wholesale IDD routes.

1.2 In relation to the 23 retail IDD routes, Oftel concluded:

• that the price publication notice period should be reduced from 28 days to one day (conditions 54 and 58 of BT’s licence); and

• that BT should no longer be required to provide a breakdown of costs for price changes , nor to seek the Director General’s prior consent to prices which are below cost (condition 71).

1.3 For wholesale IDD services, Oftel concluded that the markets for wholesale IDD services on each of the 26 routes were effectively competitive, meaning that Concert’s charges on those routes would be outside the Network Charge Control (NCC) regime and no longer subject to the cap of RPI+0%. Oftel also concluded that Concert need only give one day’s prior notice of changes to such charges rather than 28.

1.4 In addition, Oftel confirmed its view that on international markets which are competitive and where BT and Concert do not have market influence, any discriminatory offerings are less likely to be interpreted as ‘undue’ under conditions 57 and 66.41 of BT’s and Concert’s licences respectively.

1.5 The necessary modifications to the licences of BT and Concert were made in September 2000 and the necessary determinations and consents made in February 2001.

BT and Concert requests

1.6 Oftel has now received further requests from BT and Concert for Oftel to conduct a review of competitive conditions on the remaining retail and wholesale IDD routes with a view to making similar reductions to the regulatory controls. Consideration of these requests is the basis for this consultative document. Further details of the requests are set out in chapter two.

Developments in international markets

1.7 Over the past two years international traffic has continued to grow substantially. The volume of outgoing IDD call minutes has grown from six billion minutes in 1998/1999 to eight billion minutes in 2000/01. This growth of 32% is significantly more than that for local or national calls.

1.8 At the same time, revenues from IDD calls as a whole have fallen, although at a much lesser rate – from £1.5 billion in 1998/1999 to £1.2 billion in 2000/01. The graphs below illustrates the comparative trends in IDD volumes and minutes.

1.9 At both the wholesale and retail IDD levels, a number of competitors have entered the market for the provision of IDD calls. This increase in competition at the wholesale level has provided an incentive for carriers to reduce prices. As a result, wholesale charges are falling closer to costs, although they are still some way from costs on less competitive routes. The decline in prices and increases in traffic can also be linked to a dramatic increase in cable capacity in the past two years.

Implementing Oftel strategy

1.10 Oftel’s goal is to obtain the best deal for consumers and to achieve this, Oftel seeks to regulate only where it is necessary to bring benefit to consumers and, to keep regulation to the minimum necessary to obtain appropriate outcomes. Oftel believes that:

• where competition is increasing but not yet effective, regulation should become progressively ‘lighter touch’ as the market gets near to effective competition; and

• promotion of competition should cease when there is effective competition.

1.11 Competition in the provision of both retail and wholesale IDD services has continued to grow since Oftel’s Statement on Competition in International Markets published in March 2000. Oftel is concerned that the present controls on each of BT and Concert may be hindering the further development of competition in these markets by diluting BT’s and Concert’s ability to compete effectively. In carrying out the present review and in coming to the initial conclusions and proposals set out in chapter six, Oftel has focuses on whether the present regulatory controls are appropriate given the current state of competition, Oftel’s strategy and the regulatory principles set out in the previous paragraph.

Relationship with other Oftel projects

1.12 This review also takes into account, and impacts on, other work already underway within Oftel. In particular, on 28 June 2001, Oftel published the consultative document BT’s regulatory obligations to provide advance notification of price changes and to maintain a published price list, which considers whether the requirement for BT to give 28 days notice before amending its retail prices remains appropriate. A statement on this is due out shortly. In addition, on 31 July 2001, Oftel published the consultative document Competition in the provision of fixed telephony services, which began Oftel’s review of the current price controls of BT’s basic telephony services (including IDD calls).

1.13 Where necessary, this consultative document cross-refers to other relevant Oftel consultation documents and statements.

Cable & Wireless determination of ‘market influence’

1.15 The effect of this current review of international markets on C&W’s market influence status are discussed further in chapter six of this document.

BT/Concert restructuring

1.16 In October 2001, BT announced that Concert (which is a joint venture between BT and AT&T) is to be dissolved and that BT and AT&T will each take direct ownership of substantially the same business and assets that they originally contributed to the Concert joint venture. Each company will also assume direct ownership of the customer and supplier contracts that they originally contributed to Concert.

1.17 Oftel has conducted this review on the basis of the existing arrangements and structure of BT and Concert. At present, Oftel does not see that the proposed dissolution of Concert and the re-absorbtion of former BT international assets and contracts by BT will affect the analysis or conclusions contained in this consultative document. However, if it transpires that there are any particular implications, Oftel will consider them as and when appropriate.

1.18 Do you agree that the re-absorption of Concert will not affect the analysis, or the proportionality of the proposals, contained in this document?

Chapter two

BT and Concert requests

2.1 Following Oftel’s Statement on Competition in International Markets, and in light of the continued development of competition in the provision of retail and wholesale IDD services, BT and Concert have now requested that Oftel review the competitive conditions on the remaining retail and wholesale IDD routes respectively.

2.2 Throughout this document, unless otherwise stated, all references to conditions in either BT’s or Concert’s licence refer to each of those licences as at 29 November 2001.

2.3 The legal framework that currently applies to Concert and BT in respect of the provision of wholesale and retail IDD services, respectively, is set out in Annex A.

Concert request for wholesale IDD services

2.4 Concert’s request relates to the market for wholesale IDD services as a whole. Concert has requested that the Director General determine the market for wholesale IDD services to be effectively competitive in its entirety. However, Concert has also asked that if Oftel is not prepared to determine that the market for wholesale IDD be competitive in its entirety, then only routes where Concert’s market share is above 40% be considered when assessing the case for any continued Concert-specific regulation.

Determination as Competitive Standard Services

2.5 Concert has requested that the Director General make a determination that wholesale IDD services not be ‘Standard Services’. ‘Standard Services’ are defined in Concert’s licence and may be referred to generally as the various interconnection services which Concert is obliged to offer to any Annex II operator (see also paragraphs A.2 to A.5 of Annex A).

2.6 Condition 66 of Concert’s licence sets out the requirements relating to Concert’s Standard Services. In particular, Concert must:

• make a reference interconnection offer (RIO);

• offer interconnection charges that are based on forward looking incremental cost (LRIC) and which are non-discriminatory and unbundled;

• notify charges and changes to charges in advance; and

• (except for certain competitive services) offer charges in accordance with the NCC regime.

2.7 If Oftel does not believe that it should make a determination that wholesale IDD services are not Standard Services, then as an alternative, Concert has made representations under condition 66 of its licence for the Director General to determine that the remainder of the wholesale IDD routes be determined effectively competitive. The effect this has on Concert’s price publication obligations and price control constraints, is discussed below. Concert believes that such a determination would correct the current asymmetry between Concert’s obligations and the obligations of C&W as a result of C&W being determined as having market influence on certain wholesale IDD routes.

Price notification and publication

2.8 At present, condition 66.18 of Concert’s licence requires Concert to give at least 28 days notice (both to the Director General and to all other operators with which it has entered into an interconnection agreement) of a change to the charges for any Prospectively Competitive Standard Services. In the case of Competitive Standard Services, the prior notice period is one day. If the Director General determines that wholesale IDD services are effectively competitive (ie that they are Competitive Standard Services), then the prior notice period for amendments to Concert’s charges becomes one day.

2.9 Concert raises the issue that even where C&W has market influence with respect to a wholesale IDD route, it has no obligation to notify Oftel of, or to publish, its prices for wholesale IDD services on that route. This is as a result of a consent given to C&W at the time of its market influence determination which was given as it was considered appropriate in respect of C&W’s position in the markets concerned.

2.10 In addition to the request that wholesale IDD services be determined as Competitive Standard Services, Concert has requested that for all Competitive Standard Services there no longer be a prior publication requirement. Again, Concert considers that this would go some way to address the differences between its obligations and those of other operators for whom, on wholesale IDD routes which are deemed to be competitive, there are no advance price publication or notification obligations.

BT request for retail IDD services

2.11 BT’s request is for Oftel to consider whether the provision of retail IDD services in respect of all routes is effectively competitive. BT also requests that Oftel reduce the regulatory controls applying to the remainder of the retail IDD routes (ie all routes other than the 23 retail IDD routes in 2000 on which controls have already been reduced).

2.12 In its request, BT divides the remaining routes into those on which it has greater than 40% market share of the traffic by volume, those on which it has between 25% and 40% and those on which it has less than 25%. BT argues that even on the routes where its market share would suggest dominance, conditions for competition do exist in that there are a number of competitors; that competitors are offering retail IDD services at rates that are cheaper than BT; that the presence of indirect access operators has increased significantly; and that there is a high awareness of choice among residential and business consumers. These factors are discussed in more detail at chapter 5 below.

2.13 BT has asked that Oftel, in relation to all retail IDD routes:

• reduces the regulatory controls relating to price publication and notification;

• removes the requirement to provide a breakdown of costs for price changes and to obtain prior consent to pricing below cost; and

• confirms that any discrimination shown in retail IDD services is less likely to be considered to be undue.

Price notification and publication

2.14 BT’s price publication requirements are set out in conditions 54.5 and 58 of its licence. Under these conditions, BT must publish a notice specifying the prices for its services. Notices of a proposal to amend any price must be published not less than 28 days before the change is to become effective, unless the Director General has consented otherwise. Most other operators offering international services are not, in practice, required to provide prior notice of their price changes, although Kingston Communications (Hull) Plc (Kingston) has the same 28 day notification period and, on the retail IDD routes for which C&W has been determined as having market influence, C&W must provide one days’ prior notice.

2.15 Both conditions 54.5 and 58.1 of BT’s licence give the Director General discretion to vary the price publication requirement by written consent. BT has requested that the Director General exercise his discretion under each condition to reduce BT’s obligation to give notice to the Director General of, and to publish, changes to prices from 28 days to one day in relation to the remainder of the retail IDD routes.

2.16 In addition, condition 54.6 of BT’s licence requires BT to place a copy of any amendments to its prices in a publicly accessible part of every BT ‘Major Office’ in such a manner and in such place that it is readily available for inspection free of charge by members of the general public. Condition 58.5 imposes a similar requirement in respect of BT’s obligations under Part B of its licence (relating to BT’s universal service obligations). Since September 1999, BT has provided an Internet version of the Price List with Oftel’s agreement. BT has asked Oftel to confirm that by placing new prices next to or linked to current price list entries on BT’s Price List on its website, rather than putting such entries in a separate notifications file of the Price List, BT would be meeting its publication obligations.

Undue preference and undue discrimination

2.17 Condition 57 of BT’s licence prohibits BT from exercising undue discrimination and undue preference. Condition 57 applies to all services which BT is obliged to provide under its licence, all markets in which the licensee has been determined as having market influence, and all markets where the licensee has been determined as having Significant Market Power (SMP) for the purposes of the ONP Directives. The condition therefore applies to the retail IDD services offered by BT.

2.18 BT has requested that the Director General exercise his discretion pursuant to condition 57 to determine that for the purposes of condition 57, in respect of retail IDD calls, any discriminatory offerings on these services would be less likely to be interpreted as undue.

Ability to price below cost

2.19 Condition 71 of BT’s licence requires BT to obtain the Director General’s prior consent to certain proposed retail prices which are below cost (see also paragraphs A.21 to A.25 of Annex A). This condition applies to proposed retail IDD prices which are below cost. Condition 71.15 of BT’s licence provides the Director General with discretion to consent in writing to the disapplication of condition 71.

2.20 BT has requested that the Director General exercise his discretion under condition 71.15 of BT’s licence and consent to the disapplication of condition 71 in respect of all IDD calls from residential and business exchange lines. This would enable BT to offer below cost prices on any retail IDD routes to which the consent applies without the need to first seek the Director General’s consent, although any such prices would be subject to normal competition rules.

Chapter three

Methodological approach

Assessment of effective competition

3.1 Oftel’s strategy is to achieve the best deal for consumers in terms of choice, quality and value for money. 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 relevant market.

3.2 Generally, an assessment of effective competition involves two stages: an analysis of the relevant market or markets for the particular product followed by an assessment of the market power held by the supplier(s) of that product.

3.3 The format of this consultation document follows these two stages. The first step of the market analysis is to define the market, or markets, for review. Oftel’s views on the relevant market definitions are discussed below in paragraphs 3.5 to 3.9. The detailed analyses of the particular markets are then set out in chapters four and five. In this consultation document, Oftel analyses the wholesale IDD market first and then the retail market in recognition of the fact the conditions at the wholesale level will affect competition at the retail level.

3.4 While the present review in respect of retail and wholesale IDD services is not an ‘effective competition review’ as identified in Oftel’s publication Implementing Oftel’s Strategy: Effective Competition Review Guidelines of August 2000, the approach taken by Oftel in assessing the competitiveness of the defined markets is consistent with the approach set out in those guidelines. In particular, in terms of the provision of retail IDD services, this consultative document also includes an assessment of the outcomes for consumers to establish whether they are getting benefits consistent with an effectively competitive market.

Market definitions

• the market for international retail services;

• the market for international services to other operators; and

• the market for IPLCs,

each on a route by route basis. Within the market for international retail services, Oftel further defined services to business and residential customers as forming two separate markets. However, recognising that market definitions can change over time as new opportunities arise, as part of the current review Oftel has revisited the issue of market definition to examine whether the conditions in the market have altered.

3.6 By applying Oftel’s standard methodology for market definition, Oftel has identified the relevant markets below. A more detailed explanation of these findings and Oftel’s conclusions is set out in Annex B.

Wholesale IDD

3.7 Although Oftel believes that the existence, and increasing use, of hubbing and bandwidth exchanges may have the effect of widening the geographical market definition for wholesale IDD calls in the future, Oftel still considers that the relevant market at present for wholesale IDD calls is wholesale IDD calls from the UK on a route by route basis.

Retail IDD

3.8 Because the competitive conditions across all retail IDD routes are not the same, Oftel’s conclusion is now that there are two types of retail IDD routes: those which are competitive at the wholesale level and those which are not. As a result, Oftel considers that the relevant markets for the provision of retail IDD services are as follows:

3.9 The factor preventing a single global retail IDD market for all routes is the fact that competitive conditions are not the same across all retail IDD routes (see paragraphs 5.11 to 5.13 below). At present, the way in which Concert is regulated at the wholesale level allows Concert the freedom to set charges between a ceiling of gross accounting and a floor of net accounting. Under the international settlements regime, because accounting rates are not cost oriented and high profits are earned on terminating incoming international calls, net accounting (which takes this fact into account) actually gives a lower cost base than gross accounting. This means that Concert may be able to charge in excess of competitive rates while fulfilling its regulatory obligations. Oftel recognises that regulation on the basis of gross accounting is the most appropriate basis where it is trying to encourage competition in IDD markets and stimulate facilities-based entry, whereas net accounting is more appropriate where it is trying to encourage competition at the retail level. If Concert considers the general level of regulation on Category B routes to be excessive, then Oftel would consider that the way to achieve a single market definition would be for it to set wholesale IDD charges on the basis of net accounting. While Concert sets wholesale IDD charges close to gross accounting for non-competitive routes, it is unlikely that Oftel will move toward a single global retail IDD market for all routes.

3.10 Do you agree with Oftel’s conclusions on the relevant market definitions and the analysis set out in Annex B?

Market information

3.11 In this consultation document, Oftel uses market data collected from licensed operators and published in Oftel’s market information documents. While there may be some error attached to the international call revenue and volume data, the figures are considered to present a reliable guide to current trends. In addition, Oftel has recently expanded the scope of its market information data collection to include a larger number of indirect access (IA) operators. This expansion has lead to a significant upward revision in Oftel’s estimates of total international volumes and revenues and consequently a decline in estimates of BT’s share. While there are still some smaller operators who are omitted, Oftel’s estimates of total IA volumes are now close to those submitted by BT. Oftel does not believe that any remaining discrepancy is greater than around one to two per cent.

3.12 BT has raised with Oftel a concern that Oftel’s market information does not take into account retail IDD calls made from mobile phones. However, on the basis that Oftel considers that mobile origination of retail IDD calls is not a substitute for fixed origination, it does not believe that this is a concern for the purposes of this review (see Annex B for a detailed discussion of relevant market definition).

3.13 On the wholesale side, Oftel accepts that market shares may be likely to be overstated in earlier periods as data were not collected from as many operators as currently. Also, current data for Concert is not strictly comparable with earlier BT data as the volumes also include BT's retail IDD traffic, which would not have been included in the earlier BT figures. But, as before, this issue does not materially effect any conclusion regarding levels of, or trends in, market shares.

Consumer research

3.14 Oftel carries out regular consumer research from which it draws information to assess the competitiveness of retail IDD services. Some consumer research is of a more general nature and is part of Oftel’s ongoing consumer research programme, while other research is commissioned specifically for Oftel’s reviews of competition in particular markets.

3.15 In March 1999, Oftel commissioned quantitative consumer research to investigate customer perceptions of competition in IDD services. The study was aimed at assessing consumers’ awareness of IDD service suppliers, identifying which suppliers consumers use, identifying historical and potential future IDD patterns of usage and understanding the reasons for consumers’ selection of suppliers. The key findings of this study were set out in an Annex to the 1999 consultation document.

3.16 Following on from this, and in order to understand better the findings of the quantitative research, in June of this year Oftel commissioned Research Works to conduct qualitative research of residential IDD services. The objectives of this research were to determine the following:

• whether consumers are aware of, and make use of, the range of different methods and fixed line suppliers available for making international calls;

• what factors consumers take into account when selecting a supplier for international calls;

• whether consumers choose their supplier for international calls based on prices for an individual country, or based on generally cheaper international prices; and

• whether frequent international callers exhibit different behaviour in terms of choice of supplier/method, than less frequent callers.

3.17 The full text of the report is available on Oftel’s website at www.oftel.gov.uk/publications/research/2001/idd0801.pdf. Details of other business and residential surveys published by Oftel can be found at www.oftel.gov.uk/publications/research/index.htm. The findings of the consumer research as they relate to this review are summarised in our analysis of the retail IDD market in chapter five.

Chapter 4

Assessment of market power – wholesale IDD

4.1 As set out in Oftel’s publication, The Application of the Competition Act in the Telecommunications Sector (January 2000), Oftel will look at a number of factors when assessing market power in a particular market. These include: market share, the number of competitors and whether there are any barriers to entry and exit to the market. These factors in relation to the wholesale IDD market are considered below.

Methodology

4.2 Following Oftel’s definition of the market as that for IDD calls at the wholesale level on a route by route basis, it would be logical to consider the effective competition indicators for each route. Although 26 wholesale routes were deregulated in March 2000, there are around 217 routes on which regulatory controls still exist and which are therefore yet to be examined. However, such an extensive review is impractical, not least because of the difficulties in procuring sufficiently reliable information for a reasonable assessment of all routes. In any event, Oftel’s view is that the remaining routes are less likely to be effectively competitive as a result of the amount of traffic across those routes and the high proportion of the routes which are non-WTO countries (and hence not liberalised at the far end).

4.3 Accordingly, Oftel has analysed in detail a further 42 wholesale IDD routes. Thirty of these routes were chosen by Oftel on the basis of Oftel’s Market Information publications for Q1-Q3 (inclusive) 2000/01 (being 30 of the next largest routes, after the 26 deregulated routes, in terms of volume). However, Oftel is aware that the ranking of some of the routes varies dramatically from quarter to quarter. For example, the rankings for Uzbekistan are 94^th, 38^th and 18^th for Q1-Q3 respectively. Accordingly, the 30 routes chosen are not necessarily the next largest 30 from the most recent market information, but a selection of those routes over the three quarters. Oftel also tried to balance out the routes according to region so that not all the routes selected were from a particular region or regions with other regions being under represented.

4.4 Oftel then gave Concert the opportunity to comment on the 30 routes chosen and to add to the list any that Concert thought should also be included. Concert added a further 12 routes. This has produced what Oftel considers to be a reasonable selection of routes, for which competition can be assessed. The 42 wholesale IDD routes reviewed are set out in Annex C.

4.5 The percentage volume of traffic in minutes represented by the 42 routes is around 22% of the total wholesale IDD outbound traffic for Q4 2000/01. When these routes are added to the 26 wholesale IDD routes already deregulated, the total volume in minutes represented is just under 90% (again, for Q4 2000/01).

4.6 Oftel has reviewed the competitive factors on each of the 42 wholesale IDD routes and our findings are summarised below. As a lot of the information on which Oftel has based our findings is confidential, Oftel has not been able to reproduce its detailed analysis for each of the routes.

Market share and trends in market share

4.7 In chapter three above, Oftel has defined the relevant market as that for IDD calls at the wholesale level on a route by route basis. However, before beginning any analysis of market share data it is necessary to consider in more detail the question of how to treat sales between BT and Concert.

4.8 Oftel understands that BT purchases all its wholesale IDD calls from Concert. Other operators can therefore only compete with Concert in sales of wholesale IDD calls to operators other than BT. This is known as the ‘addressable market’. While Concert’s share of the addressable market might be quite low, its share of the total market (including sales to BT) is significantly higher.

4.9 Oftel is interested in whether Concert has market power both in the market for the supply of IDD calls to the addressable market and in the overall market for IDD calls at the wholesale level (the addressable market plus in-house sales to BT and in-house sales of other operators). However, because of the relationship between Concert and BT, BT’s position in the retail market, and the fact that BT purchases all its wholesale IDD calls from Concert, Oftel is particularly interested in market shares in the overall market for the purposes of this review.

4.10 Oftel emphasises that even where an undertaking has a high market share, there may be other constraints that would prevent it acting anti-competitively, such as existing and potential competitors and barriers to entry or exit. In addition, high market shares at a particular point in time are not necessarily indicative of market power and it is usually more informative to consider trends in market share over time. Oftel has done this in relation to each of the 42 wholesale IDD routes.

4.11 Concert’s current market share (in terms of volumes of minutes) of the total market , varies considerably across the 42 wholesale routes reviewed. On some routes, Concert had, over the period reviewed, a relatively high and stable (or increasing) market share. On these routes, Concert is more likely to be considered to have market power. Examples of these are Bangladesh, Cyprus, Sri Lanka and Tuvalu.

4.12 At the other extreme, there are some routes on which Concert has had a consistently low and volatile (or decreasing) market share and on these routes Concert is less likely to be considered to have market power. Examples of these routes are El Salvador, Mexico and Vietnam.

4.13 A significant number of the 42 routes sit somewhere in between and, for these, it is even more necessary to look at the other competitive factors discussed below.

4.14 In terms of market share and determining whether a wholesale IDD route is competitive, it is also necessary to look at the concentration of the market, that is, the combined market shares of the major players in that market. Routes which are more concentrated (ie where a high market share is held by only a few operators) are unlikely to be considered to be competitive. Examples of the routes that have a high concentration are Cyprus, the Czech Republic, Liechtenstein, Jamaica, and Uzbekistan.

Number of competitors

4.15 It is difficult to determine precisely the number of operators providing wholesale IDD services. The International Facilities Licence (IFL) is now encompassed within the PTO licence and, as a result, any PTO operator is permitted to provide IDD services. At present, 318 PTO operators are currently so licensed.

4.16 From data collected from licensed operators on the 42 routes analysed, the number of competitors currently active ranges from approximately eight wholesale IDD operators (for each of Liechtenstein and Tuvalu) to approximately 18 (for India). On most of the routes reviewed there are around 13 to 15 wholesale operators.

4.17 In looking at the number of competitors, Oftel has also looked at evidence of entry and exit of competitors.

Barriers to entry

4.18 In the past, Oftel has considered the following to be potential barriers to entry into the wholesale IDD market: the need to obtain correspondent agreements with operators at the far end of routes; limitations in submarine cable capacity and/or problems in constructing new cables; restricted cable station access; and the need for backhaul.

4.19 As these were considered in detail in the 1999 consultation document, these are only considered briefly below.

Correspondent agreements

4.20 International operators will normally need to negotiate a ‘correspondent’ or other agreement with an operator or operators at the far end of any particular route. The extent to which this could be a barrier to entry depends on the degree to which the market at the other end has liberalised the provision of international facilities. That is, where the provision of international telecoms services in the far-end country is liberalised (thus permitting other operators to provide IDD services to and from that country), the need to negotiate a correspondent relationship with an operator in that country is less likely to be a barrier to entry for a UK operator wanting to provide wholesale IDD services to that country.

4.21 Leaving aside members of the EU and the other wholesale IDD routes on which regulatory controls were relaxed following the 1999 consultation document, the remaining wholesale IDD routes may then be divided into those countries which have made telecoms-specific commitments as part of the Fourth Protocol to the WTO General Agreement on Trade and Services, and those which have not. Oftel has approached its analysis of the individual wholesale IDD routes on the basis that where a particular country is a signatory to the WTO GATS agreement, that route is more likely to be effectively competitive. However, Oftel is aware that this separation is not wholly meaningful, as signatories have made varying commitments in respect of the extent, and the timing, of liberalisation of international telecoms services.

4.22 If the WTO distinction is drawn, this still leaves a number of routes for which restrictions on offering IDD services may still exist. However, as Oftel has previously noted, where difficulties in negotiating correspondent agreements remain, or where International Simple Voice Resale (ISVR) is still not permitted, the ready availability of refile from operators offering carriers’ carrier services, or ‘hubbing’, weaken the potential for this to act as a barrier to entry.

4.23 In determining the competitiveness of the 42 individual wholesale IDD routes, Oftel took into its consideration whether the relevant country was a signatory to the WTO agreement, whether Concert has the only direct route to that country and whether these factors have affected the competitiveness of that route.

Cable capacity

4.24 In order to provide wholesale IDD services, a new entrant needs to purchase cable capacity in sub-marine cables. This may be by purchasing Indefeasible Rights of Use (IRUs) in existing capacity or by being part of a cable consortium constructing new cable. The extent to which the first option is possible depends on the amount of excess cable capacity available, and the willingness of cable consortia to make such capacity available and on what terms.

4.25 In the 1999 consultation document, in relation to the 26 routes under consideration, Oftel found that an increased amount of cable capacity would be made available in 2000/2001 in respect of those routes. Although it is hard to determine on a route by route basis, from the information Oftel has, it appears that there is currently an over-supply of bandwidth capacity on international routes as a whole. This, together with the increasing use of some countries as a ‘hub’ for the provision of wholesale IDD services and the emergence of bandwidth exchanges, implies that at present access to capacity is not a particularly strong barrier to entry.

Cable station access and backhaul

4.26 In addition to cable capacity, a new entrant requires access to cable landing stations and backhaul from the landing station to the international switch.

4.27 Although within the UK the majority of the cable landing stations are owned by either Concert or C&W, meaning there is potential for either of these players to deny access, Concert’s licence obliges it to meet reasonable requests for cable station access on cost-oriented terms. Under condition 66.41 of its licence, Concert is also under an obligation not to unduly prefer its own business or to unduly discriminate between operators. C&W also has an obligation to meet reasonable requests to connect other operators with Annex II status to cable stations it controls.

4.28 In terms of backhaul, as noted in the 1999 consultation document, any UK long distance operator can now use elements of their existing network to provide backhaul, resulting in an increase in competition in the provision of backhaul services. The main providers of backhaul services in the UK, apart from BT and C&W, are Energis, Worldcom, and ntl. As all PTO operators have the right to access BT and C&W cable landing stations to provide backhaul services, there is also scope for other operators to enter the backhaul market.

4.29 Oftel is not aware of any operator that has experienced any material difficulty in obtaining such backhaul services. Accordingly, Oftel’s view is that access to backhaul is not a barrier to entry to new entrants wishing to provide wholesale IDD services.

Consumer behaviour/countervailing buyer power

4.30 Oftel considers that there is more likely to be buyer power in the wholesale IDD market than the retail IDD market where many buyers are large telecoms operators. Oftel has previously used the example of C&W which, being a large originator of traffic, has a high degree of knowledge as to the costs involved. Oftel understands that, for example, C&W uses least cost routing for its retail IDD traffic.

4.31 In addition, Oftel has also received some evidence suggesting that length of wholesale IDD contracts are becoming shorter as competition in market increases with purchasers who shop around and who are less willing to be committed for long periods.

Conclusion

4.32 Oftel’s has reviewed each of the 42 individual wholesale routes on the basis of the above factors. Oftel’s conclusion is that the following 20 routes are effectively competitive.

4.33 These routes are also set out in Annex D. Generally, these are the routes where Concert’s market share has been relatively low and volatile or decreasing, where the concentration of the market is low, where there are a number of competitors on the route and where the market at the far end is liberalised or where Concert does not have the only direct route. Oftel’s conclusion would not have been different had it concentrated on the addressable market, rather than the total market.

4.34 The remainder of the wholesale IDD routes (other than those reviewed in the 1999 consultation document) remain increasingly competitive. Oftel has not reviewed all of these routes on an individual basis as Oftel believes these routes are less likely to be effectively competitive due to the relatively low volume of traffic on the route and the proportion of routes which are non-WTO countries.

4.35 The effects of Oftel’s conclusions on the wholesale IDD routes are set out in chapter six.

4.36 Do you agree with Oftel’s assessment of market power for the provision of wholesale IDD services?

Chapter 5

Assessment of market power – retail IDD

5.1 As set out in chapter four, when assessing market power in a particular market, Oftel will look at a number of factors, including market share, the number of competitors and barriers to entry and exit. In addition to this, Oftel will also consider the outcomes for consumers, to establish whether they are getting benefits consistent with an effectively competitive market. Each of these factors is considered below.

5.2 On the basis that the only factor preventing a single global retail IDD market definition is the availability of wholesale IDD at cost-oriented prices, and because of the difficulties in obtaining data in a more disaggregated form, Oftel has analysed the remaining competitive factors for the retail IDD market as a whole. The analysis Oftel has conducted of the wholesale IDD markets in chapter four above forms the basis for the remainder of our analysis of the retail IDD market (see also paragraphs 5.11 to 5.13 below).

Market structure

Market share and trends in market share

5.3 In determining whether BT has market power in the retail IDD market, it is necessary to examine BT’s market share. However, as with the wholesale IDD market, it is important to bear in mind that just because an undertaking has a high market share, this is not necessarily indicative of market influence. In particular, there may be other constraints that would prevent it acting anti-competitively.

5.4 As Oftel believes that business and residential calls are in separate markets, it considers the market shares for each of these markets separately below.

Residential market

5.5 Ideally, Oftel would have obtained separate data on BT’s market share for Category A and Category B routes (see paragraph 3.8 above). However, since this is not available, Oftel has considered BT’s market share of all routes in the residential IDD market. BT’s market share of that market is significant, but decreasing. Based on Oftel’s market information 2000/2001, BT’s current market share of the residential retail IDD market based on revenues is 61.2% and based on volume is 49.4%.

5.6 In terms of the trends in the residential retail market shares, Table 1 below shows BT’s market share (based on revenue) for the past three years and compares this with the relevant market shares of C&W and cable operators. Table 2 does the same for market shares based on volumes.

Table 1 – Residential retail IDD market shares by revenues

Table 2 – Residential retail IDD market shares by volumes

* Includes indirect access operators.

= Prior to Q1 2000/01, C&W Comms includes NTL ConsumerCo.; for Q1 2000/01 ntl ConsumerCo. is split between ‘ntl & Telewest’ and ‘C&W Comms’; and from Q2 2000/01 onwards, ntl ConsumerCo. is included in ‘ntl & Telewest’.

5.7 The figures in Tables 1 and 2 show that BT’s residential retail market share based on revenues has been decreasing steadily over the past three years, but still remains fairly high. This is at a time when total revenues for retail IDD have fallen over this period by 16% and BT’s volume share has also decreased by almost 32%. Oftel also notes that BT’s market share on a revenue basis is consistently higher than when calculated on a volume basis. These factors, in conjunction with BT’s high ROCE on international calls (see paragraph 5.39 below), suggest that BT is able to price significantly in excess of the competitive level and still maintain a high market share, suggesting in turn that BT has some degree of market power, at least in some parts of the retail market for IDD calls. However, this is partly explained by the fact that BT has a higher share of traffic on more expensive routes.

Business market

5.8 Similar to the residential analysis above, Table 3 summarises BT’s market share in terms of revenue for business retail IDD services and Table 4 does the same for BT’s business retail IDD market share in terms of volumes.

Table 3 – Business retail IDD market shares by revenues

Table 4 – Business retail IDD market shares by volumes

* Includes indirect access operators

5.9 BT’s market share of the business retail IDD market by revenue and volume is significantly less than its residential retail IDD market shares. BT’s current market share of the business market is only 37.2% based on revenues. Again, Oftel notes that BT is maintaining a market share by revenue in the business retail IDD market in excess of its market share by volume suggesting that BT is able to maintain its market share while pricing above its competitors. However, as with the residential IDD market shares, this is partly explained by BT having a higher share of traffic on more expensive routes.

Number of competitors

5.10 Oftel estimates that around 35 PTO licensees and over 50 ISVR licensees are active in the market for retail IDD services. In addition, Oftel has information suggesting that there are around 100 indirect access operators active in providing IDD retail services. However, these are only broad estimates as it is difficult to ascertain exactly who is active in the market at any one time.

Barriers to entry

Access to wholesale inputs

5.11 Operators who wish to provide retail IDD services (either in the residential or business markets) by purchasing wholesale IDD services, or by the facilities based method of conveyance may have to source the necessary inputs from operators who themselves compete at the retail level. Previously, Oftel has identified that control over these wholesale inputs could represent a barrier to entry to those operators without such control.

5.12 These wholesale inputs are discussed in more depth in chapter four. Oftel concludes that there are no significant barriers to obtaining the necessary wholesale inputs for operators providing retail IDD calls on one or more retail IDD routes. However, Oftel recognises that for operators not currently providing retail international calls, there may be a barrier to entry in the form of needing to form relationships with wholesale suppliers.

5.13 In paragraphs 3.5 to 3.9 above, Oftel discusses the relevant market definition for the retail IDD market. Oftel’s conclusion is that as Concert is currently allowed to set wholesale IDD charges with a ceiling of ‘gross accounting’ and because of the way the international accounting regime works, access to wholesale IDD inputs at a competitive cost level will depend on whether the particular retail IDD route is effectively competitive at the wholesale level or not. This is because, at present under the network charge control regime (NCC), Concert has the freedom to set charges on the basis of ‘gross accounting’. However, because of the international settlements regime, Concert’s charges are not necessarily equal to the competitive cost: where there is a lot of inbound international traffic, ‘net accounting’ actually gives a lower cost than gross accounting. Accordingly, Concert may be able to charge in excess of competitive rates while fulfilling their regulatory obligations. Therefore, access to wholesale IDD inputs at a competitive cost-based level may be a barrier to entry to retail IDD routes that are not effectively competitive at the wholesale IDD level.

Consumer inertia

5.14 In the 1999 consultation document, Oftel concluded that customer inertia might be a possible barrier to entry in the retail IDD market. This was due to the reluctance of both residential and business consumers to switch suppliers shown in the results of the quantitative research carried out by NOP (although there appeared to be less reluctance with business consumers). This conclusion is supported strongly by the results of the qualitative research carried out this year (see paragraph 3.16 above). This research found that, generally, residential consumers’ awareness of different international calling options was mixed.

5.15 The results of the qualitative survey show that residential consumers fall into one of two groups. The majority of survey participants called mainly from their fixed home phone, were making more calls overall than the second group often to a number of countries and were more concerned with convenience, quality and comfort than cost. Generally, these people expressed considerable apathy to changing international calling options. Many had stayed with BT because of custom and perceived quality factors.

5.16 The remainder of the survey participants (the minority) tended to call principally one country or region, and were more concerned with cost. These people had used a variety of methods to make calls in order to find the cheapest option and were generally more aware of international calling options. As cost was an important factor for these people, they spent a lot of time trying to find the cheapest option.

5.17 For the business retail IDD market, inertia was not so much a factor. Rather, factors for not using IA operators included being content with their current supplier; the hassle to dial the short code; that they were too busy to arrange it and concerns that IA operators were unknown to them and may not be reliable. Larger business users also indicated that they would not want to switch suppliers every week because of the costs involved in reprogramming switches and because of the desire to keep important numbers. However, they have also indicated that if a supplier made it easy for them to switch, then they would switch if the deal were worth it in terms of pricing.

5.18 Oftel believes that customer inertia is still a significant barrier to entry at the residential level. Overall, consumer research has indicated that businesses are more likely than residential consumers to use an additional or alternative supplier to BT, are more open to the choices available and less set in their ways.

Branding

5.19 For those not already providing retail telecommunications services, the need to have an established brand may also act as a barrier to entry to the retail IDD market (both for residential and business consumers). The significance of brand recognition in the telecoms industry services is supported by recent qualitative research carried out on behalf of Oftel on the importance of branding in the UK telecoms market. The issue of branding is discussed further below in Annex E in relation to customers’ attitudes to switching suppliers.

5.20 The findings of this research included that a large customer base seemed to be important to give a company credibility. Also, if a company was successful and had large financial backing, these factors also added to its credibility.

5.21 Oftel believes that the importance of branding and the importance consumers place on a known supplier of telecoms services means that this remains a potential barrier to entry to the retail IDD market for those not already providing international calls, particularly in relation to residential and SME consumers. New entrants would have to incur substantial and sunk costs of advertising in order to acquire a reputation as a ‘trusted’ supplier.

Ability to leverage off market power in other markets

5.22 Oftel’s view is that to the extent that Concert has market power in the wholesale market and to the extent that Concert and BT are vertically integrated, it is possible for BT to leverage any market power that Concert has in the wholesale level into the retail IDD market.

5.23 In theory, it is also possible for an operator to leverage from the retail IDD market into the wholesale IDD market. However, in the telecoms market, because the retail telecoms market is usually more competitive, and operators have less market share at the retail level than the wholesale level, such upstream leveraging is unlikely.

Consumer behaviour

Consumer awareness and access to information

5.24 In order for a market to be competitive, consumers need to be able to access and use information to help them make choices effectively and to take advantage of market opportunities. For a market to be effectively competitive, consumers also need to be aware of and responsive to relative prices in the market. The more aware consumers are of alternative suppliers and their different prices, and the more prepared they are to act on this awareness and the more likely the relevant market is to be competitive.

5.25 Given the separation of the residential and business markets for IDD calls at the retail level, Oftel has considered the awareness and behaviour of both residential and business customers. Further details are set out in Annex E.

5.26 Generally, overall awareness of alternative suppliers for the provision of retail call services and awareness of the fact that consumers have a choice was relatively high, with general awareness of IA operators amongst business consumers increasing and being significantly higher than residential consumers.

5.27 However, Oftel has identified that there may be an issue with the availability of detailed information enabling consumers to make informed decisions as to their telecoms supplier, possibly preventing switching in a number of cases for residential consumers.

Barriers to switching suppliers

5.28 If consumers face barriers to switching suppliers, this may affect the extent to which competitors are able to enter into the provision of retail IDD services. The potential barriers to switching suppliers which Oftel has identified in relation to retail IDD services are as follows:

• the switching process;

• billing issues;

• length of contracts;

• limitation of services provided by alternate suppliers; and

• branding.

5.29 Further detail of the consumer research on these factors is again provided in Annex E.

5.30 Of these, the switching process and billing issues do not appear to be actual barriers to switching suppliers, however, it is possible that these are factors which lead to the high degree of inertia that is present amongst retail consumers generally and residential retail consumers in particular. Also, there does not appear to be any issue with the length of contracts or any limitations in terms of the services provided by alternate suppliers which would prevent retail consumers switching providers.

5.31 However, as referred to earlier, consumer research carried out on behalf of Oftel into the importance of branding in the telecoms market has shown that branding is a potentially important issue for residential consumers with regard to switching telecoms supplier. Overall, while those customers with a relatively high international call spend are less likely to be constrained by branding in their choice of supplier, BT does enjoy a significant brand advantage among most residential callers.

Countervailing power of buyers

5.33 In the residential retail market for IDD calls, Oftel believes that there is no countervailing buyer power. The purchases of individual consumers are sufficiently small not to be able to affect the profitability of a price change and there is no suggestion that concerted action amongst consumers of the type that might allow their behaviour to impact of profitability is taking place.

5.34 In the business market for IDD calls there is perhaps greater scope for buyer power. There is no doubt that the accounts of some large businesses are of considerable importance to suppliers, and the threat of their behaviour in the face of a price rise might constrain a supplier of international calls to price at the competitive level. However, it must be noted that the behaviour of large business would only constitute countervailing buyer power if it had the effect of constraining the supplier’s pricing to the competitive level across the whole of the relevant market. Oftel has conducted research among large businesses, which revealed that large businesses expect to be able to, and can without difficulty, negotiate bespoke tariffs with suppliers of international calls. These businesses, then, do not take a standard tariff package from their suppliers but rather negotiate tariffs on the basis of their particular needs.

5.35 Although it must be noted that, in number, such clients account for a relatively small percentage of the total number of business clients – the vast majority being SMEs – in terms of revenue they account for a significant proportion. Because of the potential significance of their volumes to operators, Oftel believes that the behaviour of large corporate clients may indeed suggest a degree of countervailing buyer power in the business market for retail IDD calls.

Consumer outcomes

International benchmarking

5.36 One of the indicators of effective competition is that UK consumers enjoy the best or near best deal in comparison with consumers in similar economies. In terms of international benchmarking of retail IDD services, Oftel has found that UK consumers do less well in terms of their international calling than in other aspects of their telecoms services. The UK does better when different parameters are considered, for example, where different baskets of calls are used (eg for high/low users) and where discount schemes are included. See Annex E for further detail.

Consumer satisfaction

5.37 Overall consumer satisfaction seems to be high for both residential and business consumers. In addition, satisfaction with current supplier appears to be the main reason for not switching supplier for a large number of business and residential consumers. Annex E has further details of consumer research in this area.

Prices reflecting underlying costs

5.39 According to BT’s most recent set of Financial Statements (for 1999/2000), BT’s rate of return on capital employed (ROCE) for the International Calls activity within the Retail Systems Business was 88%. This ROCE is very high, which suggests that the market is not yet effectively competitive. Oftel also has indications that this figure is going to increase significantly.

Supplier behaviour

Active competition on price

5.40 Oftel does not collect pricing information from other operators who provide retail IDD services. However, information which has been provided to Oftel indicates that the amount of competition in the retail IDD market (at both the business and residential levels) is increasing, but that it is still limited. In terms of the different categories of retail IDD routes, overall BT provides greater discounts off its headline prices on Category A routes, than on Category B routes. This is the case for both residential customers and business customers (SMEs and large corporates). In addition, on average, BT’s discounts for residential customers appear to be less than discounts offered to business customers (with large corporates obtaining the largest discounts), suggesting that competition on price is more prevalent in the business markets (for both Category A and Category B routes).

Conclusion

Residential market

5.41 There is clear evidence of competition in the market for the provision of residential retail IDD calls. As a result, BT’s market share for the residential market has fallen over the past two years both in terms of revenues and volumes, and a wide range of competitors have entered the market and compete particularly on price.

5.42 However, BT’s market share is still high (61.2% on the basis of revenues). This together with the fact that BT has been able to maintain a high ROCE and a market share based on revenues in excess of its market share based on volumes indicate that BT still has a degree of market power in the market for residential retail IDD calls. Consumer research has also shown that residential consumers are particularly disinclined to switch to alternative suppliers, especially away from BT which is perceived to have a strong brand name.

5.43 Accordingly, Oftel judges the residential retail IDD market as increasingly competitive, rather than effectively competitive, even for those routes where the corresponding wholesale route is competitive (ie Category A routes).

Business market

5.44 On the business side, BT’s market share both in terms of revenue and volume is much less than its residential IDD market shares. Although BT is able to maintain a market share in terms of revenues in excess of its share on volumes, other competitive indicators, particularly in relation to consumer behaviour, indicate that the business IDD market is more competitive than for residential IDD. BT’s prices for business IDD calls are lower than those for residential consumers and businesses are more capable of, and for the larger companies proactive in, switching telecoms suppliers or in taking more than one supplier to obtain lower IDD prices.

5.45 Therefore, for Category A routes, Oftel concludes that the business retail IDD market is effectively competitive.

5.46 For other business IDD routes (ie Category B routes), where the corresponding wholesale route is not effectively competitive, Oftel notes that there is competition, but that it is less intense and BT’s discounts are lower. These routes are properly categorised as increasingly competitive.

5.47 Do you agree with Oftel’s assessment of market power for the provision of retail IDD services?

Chapter six

Oftel’s proposals

Introduction

6.1 Oftel’s strategy is to achieve the best deal for consumers in terms of quality, choice and value for money. Oftel recognises that in order to achieve this, regulatory controls should be proportionate to the level of competition in the particular market and should become more ‘light touch’ as the market gets nearer to effective competition.

6.2 In particular, as Oftel has explained in its January 2000 document Oftel strategy statement: Achieving the best deal for telecoms consumers, regulation where none is justified can distort or undermine competition by, for example, encouraging inefficient suppliers to enter the market. Oftel is particularly concerned that, despite evidence of competition, the present regulatory controls may be inhibiting the ability of BT and Concert to compete fully in the markets for the provision of retail and wholesale IDD services and, due to their size and importance in the market and the fact that other operators can act as price followers, this may be dampening competition.

6.3 The analyses set out in chapters four and five show that competition in the wholesale and retail IDD markets is increasing. On the wholesale side, competition is increasing as more and more IDD routes are opened up at the far end. In terms of the provision of retail IDD services, BT’s market share continues to fall as it faces increasing competition from indirect access operators.

6.4 This chapter draws together Oftel’s conclusions on the competitiveness of each of the markets considered and sets out the proposals Oftel is considering as a result of the conclusions reached, including a discussion of the appropriateness of the existing regulatory controls where relevant.

Summary of conclusions

6.5 Oftel’s conclusions about the effectiveness of competition are set out below: