document issued by the Director General of
Oftel’s goal is the best deal for consumers in terms of quality, choice
and value for money. Competitive markets are the best
way of achieving this goal. Price control is a means of protecting consumers
in retail markets where competition is ineffective
now and is likely to continue to be ineffective in the immediate future.
price control has taken the form of placing
a ceiling – or a cap – on the extent to which BT can raise prices for
In February 2001, Oftel published the Statement Proposals for Network
Charge and Retail Price Controls from 2001.
Oftel concluded that retail price controls on BT should be extended
for the period 1 August 2001 to 31 July 2002. While
recognising that competition was increasing in the provision of basic
telephony services, Oftel did not believe that competition
alone would provide protection for all customer groups. The extension
of the price control was to allow Oftel time to further review
the extent of competition in basic telephony markets and to assess whether
further controls or other measures are needed
beyond July 2002.
The current retail price control restricts annual increases in the average
price of a group or ‘basket’ of services to the rate of
inflation (RPI) minus 4.5%. The services controlled are connections,
line rentals, local, national and international calls and operator
assistance. Oftel calculates the relative weight of each service within
the basket by looking at the expenditure patterns of the lowest
80% of residential customers by spend. This means that the control focuses
price changes on services used largely by lower
BT is subject to a separate control on its retail retention on calls
to BTCellnet and Vodafone (that is, the control applies to the
price net of the outpayment made to the mobile operator). This control
is set at RPI-7% and is also set to end on 31 July 2002.
S5 This document
begins the further review of competition in the provision of basic telephony
services. In the first instance,
Oftel needs to define the relevant markets. Oftel can then begin to
explore whether competition is the main influence on BT’s
pricing behaviour. In this consultative document Oftel has defined the
relevant markets and given its preliminary views on
competition in those markets. Oftel plans to issue a consultative document
at the end of the year with proposals for future
consumer protection arrangements – if they are needed – and a statement
setting out its conclusions and final proposals by
June 2002. This statement will include the licence modifications needed
to give effect to Oftel’s proposals.
S6 If the review
finds that competition is acting as the overall constraint on the prices
of BT’s services, price controls would not be
required. However, if Oftel concludes that competition is not acting
as a constraint, further price controls or other measures to
stimulate competition might be required. The measures could include,
for example, requiring BT to provide cost-based access to
service providers or reviewing the way in which wholesale services such
as calls and access and carrier pre-selection are provided
S7 Oftel requires
input from stakeholders to help it to assess the competitiveness of
basic telephony markets in the UK.
Respondents are encouraged
to provide any data that they believe is of relevance to this market
S8 In order to assess
whether competition is effective in any market, and is thus protecting
consumers, it is necessary to define
what constitutes the relevant markets. Oftel’s view is that the following
services are in separate markets:
- Local calls;
- National calls;
calls by country pair;
- Calls from fixed
to mobile; and
- Operator assisted
and preliminary views
S9 In Implementing
Oftel’s Strategy: Effective Competition Review Guidelines, August 2000,
Oftel set out twelve indicators it uses
when assessing whether competition is effective in any market. This
document gives Oftel’s initial view on the extent of competition in
the relevant markets using those indicators. The overall picture at
this stage is one in which competition is increasing and this is
shown by prices increasingly moving towards costs, and consumers’ views
and behaviour. However, it is Oftel’s view that
competition may not be fully effective at present.
S10 To assess whether
action is needed beyond July 2002, and if so in what form, Oftel intends
to examine and invites views and
evidence on, amongst other things:
- how far customers
are benefiting from competition and have access to the information
needed to make effective choices
- barriers to entry;
- the extent to
which BT’s prices are likely to be constrained by existing and new
- the framework
for the competition analysis; and
- how the indicators
should be interpreted within the overall market assessment.
1.1 Oftel’s goal
is the best deal for consumers in terms of quality, choice and value
for money. Competition – rather than regulation
– is likely to ensure that operators increase efficiency by reducing
costs whilst still innovating and meeting customers’ requirements.
1.2 Retail price
controls should be used only where competition is ineffective and is
likely to remain that way. In a competitive
market, competition would act as a pricing constraint on all players
in that market. Price controls would not therefore be necessary.
However, price controls may be appropriate if there is insufficient
competition to provide a competitive constraint on prices.
1.3 BT is currently
subject to retail price controls that are focussed on the bottom 80%
of its residential customers by expenditure
and are set at RPI-4.5%. This control is set to end on 31 July 2002.
The control is focussed on the bottom 80% of residential
customers by expenditure because when Oftel implemented the controls
it believed that these consumers were benefiting the least
from competition. The price controls limit increases that BT can make
for the following group of services (the price control "basket"):
- Access (connection,
take-over and line rental);
- Local calls;
- National calls;
- Operator assisted
1.4 Within the ‘basket’
control, BT chooses how it wishes to meet the overall control subject
to the provisions of normal
1.5 In addition,
BT’s retention for calls to BTCellnet and Vodafone are subject to controls
set at RPI-7%. These controls are also
set to end on 31 July 2002.
1.6 This document
begins Oftel’s review of competition in the provision of basic telephony
services. In the first instance, Oftel needs
to define the relevant markets. Once Oftel has defined the relevant
markets, it can begin to explore whether competition is the main
influence on BT’s pricing behaviour. This consultative document gives
Oftel’s views on the relevant markets (Chapter 2) and its
preliminary thoughts on competition in those markets (Chapter 3).
1.7 Oftel has to
decide whether competition is protecting all groups of customers or
whether further price controls are required after
the present control ends on 31 July 2002. If competition is protecting
all consumers, it will not be necessary for price controls to
continue beyond July 2002. Conversely, if competition is not protecting
consumers, Oftel has to identify those groups of consumers
that are not benefiting from competition and decide what the best form
of protection for them would be. Oftel could protect consumers
either by proposing that price controls should continue or it could
attempt to stimulate competition further by, for instance, opening
up access to BT’s network to systemless service providers. Alternatively,
Oftel might find that it is not necessary to increase
regulation in this manner because services such as calls and access
and carrier pre-selection provide a strong competitive
constraint. The threat of competitive entry to the market combined with
actual entry might, on its own, provide consumers with
adequate protection by constraining BT’s pricing flexibility. On the
other hand, it might be necessary to introduce a combination of
price controls and encourage competition still further.
with other Oftel projects
1.8 This review
will also take account of the outcome of other work underway in Oftel.
1.9 In March 2001,
BT asked Oftel to review regulatory obligations in relation to all retail
international direct dial (IDD) routes
that are not currently deemed to be competitive. BT believes that competition
is effective on all retail IDD routes and that the
obligations should be removed. Oftel aims to publish proposals for consultation
in September 2001 and complete this review by
1.10 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. This document
considers whether the requirement for BT to give
twenty-eight days’ notice before it can change any of its retail prices
remains appropriate. This requirement allows BT’s
competitors an opportunity to put in competitive responses to BT’s price
changes. However, there is some concern that this
might lead to price leading on BT’s part and price following on the
part of its competitors; BT’s consequent loss of first mover
advantage may discourage it from attempting to compete on price. In
some instances, advance price publication may even
facilitate the maintenance of collusive practices. This would not be
in consumers’ interests. Oftel is therefore considering
whether these requirements remain appropriate and are in consumers’
1.11 In its review
of the Universal Service Obligation, Oftel has been assessing whether
the placing and funding of the obligation
represented an unfair burden on BT. Oftel has explained that, in determining
this, it would take into account the extent to
which BT is unable to recover its costs of serving uneconomic customers
from the profit it makes from economic customers.
Oftel has indicated that, given BT’s current return on capital for basic
services, it is unlikely that any net cost of meeting the
obligation within the range of estimates made to date would be seen
as an unfair burden. Oftel will consider the implications
of the outcome of this Market Review for its policy on assessing the
net cost of the obligation.
indicators and data requests
1.12 At the end
of Chapter 2, Oftel has set out the key indicators of effective competition
that it is to consider in assessing
whether competition in the provision of retail telephony services is
or is not effective. These follow the framework set out
in Implementing Oftel’s Strategy: Effective Competition Review Guidelines,
August 2000. This document sets out Oftel’s
initial assessment of competitiveness based on these indicators. It
also sets out Oftel’s data requirements.
1.13 Oftel already
has a significant amount of data following the earlier review of competition
in the provision of retail services.
However, this data need updating. Oftel wishes to receive updated data
and other comments on what further information it
requires to accurately gauge the nature and extent of competition in
retail telephony markets. Such information will help to
inform Oftel in its view on whether competition in the relevant markets
is or is not effective.
1.14 The data that
Oftel has sought through this document, and on which it will base its
proposals, need to be sufficiently
robust to provide an accurate picture of competition in basic telephony
markets. Oftel will therefore seek views informally
– through an industry workshop and other meetings – in the autumn on
the relevance and accuracy of the data that it receives.
Thereafter the Director General will consult on his proposals for future
arrangements – whether this is for further price cap
arrangements or for the end of such controls – by December 2001. Oftel’s
final proposals and, if necessary, the draft licence
modifications to give effect to them will be set out in a statement
to be published by no later than June 2002.
1.15 In the event
that BT objects to the proposed licence modifications, the Director
General may make a reference
to the Competition Commission asking it to investigate whether his proposals
were in the public interest. The Director
General may express his views in any reference on the adverse impact
on the public interest if regulatory action is not taken,
and specify any licence modifications he considers appropriate in order
to remedy such adverse impact. Whilst the
Competition Commission was undertaking its investigation, the present
controls would continue for one further year
to 31 July 2003. Oftel can extend the controls for the additional year
in this way by invoking Condition 74B of BT’s licence
(‘Rollover of General Price Controls’). This condition can be invoked
only if BT has not accepted Oftel’s proposals to
modify its licence.
1.16 Oftel is seeking
views of consumers, their representatives and the industry and data
on competitive pressures that
show how far consumers are benefiting from competition. Comments are
also welcome on the interpretation of data,
for example on how survey responses can be combined with more quantitative
information. Responses to the consultation
are sought by 2 October 2001. Thereafter there will be a further 2-week
period in which comments can be made on
responses received following the first period of consultation.
2.1 The extent of
competition in the provision of services will decide whether price controls
or other action is required to
If competition in the provision of the relevant services is effective
price controls will not be required.
However, if competition is not effective, Oftel will need to ensure
that consumers are protected against potentially exploitative
2.2 Generally, there
are two sequential stages involved in competition analysis: an assessment
of the relevant market for the
product followed by an assessment of the market power held by the supplier(s)
of that product. Thus, the assessment
of competitive pressures faced by the suppliers is preceded by the definition
of the relevant market. This Chapter is concerned
with market definition.
2.3 Oftel’s approach
to market definition follows that used by the UK competition authorities
and is in line with those used
by European and US competition authorities. Market boundaries are determined
by identifying constraints on the
price-setting behaviour of firms. There are two main competitive constraints
to consider: how far it is possible for customers to
substitute other services for those in question (demand-side substitution),
and how far suppliers could switch, or increase,
production to supply the relevant products (supply-side substitution)
following a price increase.
2.4 The concept
of the ‘hypothetical monopolist test’ is a useful tool to identify close
demand-side and supply-side substitutes.
A product is considered to constitute a separate market if a hypothetical
monopoly supplier could impose a small but significant,
non-transitory price increase without losing sales to such a degree
as to make this unprofitable. If such a price rise would be
unprofitable, because consumers would switch to other products, or because
suppliers of other products would begin to compete
with the monopolist, then the market definition should be expanded to
include the substitute products. However, the relevant
market is not necessarily the smallest which it is possible to define
using the hypothetical monopolist test. It may be appropriate
to include, in the relevant market, a number of products, in the supply
of which competitive conditions are homogeneous.
2.5 In defining
a relevant market, it is usual to begin with a fairly narrow view and
then expand that market to include the relevant
substitutes. A natural starting point for an analysis of the need for
further retail price controls would be to consider whether
each of the services included in BT’s retail price cap, as well as calls
to mobiles, could be considered a separate market.
This would be consistent with the approach taken in the previous review
of BT’s retail price controls in 1996 and reaffirmed
in Oftel’s first consultative document of the current review Price Control
Review: Future developments in the competitiveness
of UK telecommunications Markets, July 1999. This means that Oftel needs
to consider the following services:
- Local calls;
- National calls;
- IDD calls (by
- Operator assisted
- Calls to mobiles.
A similar analysis
would be necessary for any other service proposed for inclusion in the
retail price cap.
2.6 Market definitions
may change over time and therefore it is important to consider again
whether the above market definitions
remain relevant. In addition, it is important to consider whether competitive
conditions in the supply of a service vary by customer
group and so whether separate markets should be defined for different
customer groups. A key feature of the current retail price
control is that the weight of each service in the price control basket
reflects the expenditure patterns of the lowest-spending
80% of residential customers, on the grounds that these were the group
of customers for whom competition was least well
developed. The appropriateness of this segmentation will also be reviewed
in the light of competitive developments.
2.7 From the consumer’s
point of view, access can be thought of as the ability to make and receive
calls. The price of access
is composed of the line rental, connection and take-over fees, for which
the customer receives an exchange line connecting
their premises to the operator’s local exchange.
2.8 If a hypothetical
monopoly supplier of access increased its price, consumers wishing to
use fixed telephony services
would consider switching to available substitutes. The most obvious
potential substitute is mobile access. Oftel has considered
whether fixed and mobile telephony are substitutes on a number of occasions,
most recently in its Effective competition
Review: Mobile, February 2001.
2.9 In that document
it was concluded that fixed lines would not be an adequate substitute
for mobile services since the
former are linked to a particular geographic location. The focus of
the Effective competition Review: Mobile was on whether the
availability of fixed telephony acted as a constraint on the price of
mobile services. The issue here is whether the availability
constrains the price of fixed access, though much of the evidence set
out there is equally relevant.
2.10 Oftel survey
evidence suggests that UK fixed line penetration of residential households
may have reached a peak of 95%
between 1997 and 1999 but has since fallen back to 93%. Of the 7% of
homes without a fixed telephone, nearly 90% (equating
to about 6% of households) use mobile services as an alternative to
the fixed network. However, the rapid rise in numbers of
mobile subscribers has largely been reflected in an increase in the
number of households with both fixed and mobile phones.
The number of such households as a proportion of the total rose from
60% to 72% between May 2000 and May 2001 whereas
the proportion of mobile-only households was relatively stable at around
5% - 6%. This suggests that mobiles are seen by most
customers as a complement to the fixed line rather than as a substitute
for it. This is supported by evidence from Oftel’s April
2001 survey of adults with both a fixed and a mobile telephone (note
that, although Oftel conducts regular surveys, not all
questions are repeated each time, so that the most recent data on a
particular issue may not come from the most recent survey).
Some 29% said that they would never completely replace their fixed telephone
with a mobile whilst, among the remainder, the
average increase in the quarterly fixed bill which would be required
to induce a switch entirely to mobile was 102%.
2.11 One reason
may be that, even if access and calls are regarded as separate markets,
there is a ‘buy-through’ in that a
customer cannot purchase calls without first purchasing access and,
in particular, a customer cannot purchase fixed calls
over a mobile network. A customer who used a mobile telephone instead
of a fixed line would therefore pay mobile call charges
and, for most users, these charges would be a major consideration in
deciding whether to switch from a fixed line to a mobile.
As noted in Effective Competition Review: Mobile, February 2001, mobile
call prices remain significantly above those from
fixed lines, particularly at peak times. Oftel’s analysis suggests that,
for comparable packages, mobile prices still exceed BT’s
prices by between 24% and 55%. In addition, mobile calls are dropped
more often than fixed calls and the quality of speech
is poorer, though survey evidence suggests that these differences may
not be significant for the majority of customers.
2.12 Some customers
may wish to have a telephone for incoming calls or emergencies only
and, for these customers, a
comparison based on access costs alone may be relevant. BT’s standard
line rental is £9.99 per month including VAT.
This also includes £1.80 worth of calls.
2.13 The price of
mobile access depends on whether the customer opts for a monthly contract,
a pay-up-front annual fee,
or a pre-pay package. The lowest available monthly rental is about £9.99
(including 20 minutes call time). However, customers
who want the ability to receive calls anywhere may favour a pre-pay
package, which until recently were widely available for a
one-off fee of about £39.99 (and even this may have been reduced by
special offers) subject to a (negligible) minimum usage
requirement. At this price, over a period of a year or so a pre-pay
mobile may have worked out cheaper than a fixed line if no
calls were made. However, anecdotal evidence suggests that the main
value of low- or no-use mobile pre-pay packages is as
a complement to the fixed line, for customers who value the ability
to be contacted or to make emergency calls anywhere,
but who make most of their calls over the fixed line. In addition, recent
price rises have reduced the attractiveness of such
packages relative to a fixed line. In any case, the number of BT customers
using their BT fixed line for access only is
proportionately very small.
2.14 On the supply-side,
the relevant consideration is whether a firm without a fixed local access
network could enter the
market and develop its own network. Amongst existing network operators,
potential candidates would be mobile operators and
those operators with long-distance transmission networks (who may provide
calls using indirect access (IA)). In both cases,
however, the operator would need to incur significant fixed costs to
develop a local access network. Given that a large proportion
of these costs are likely to be sunk (not recoverable on exit), entry
barriers are likely to be significant. Moreover, the process
of installing local access infrastructure is time consuming and this
also suggests that supply-side substitution is unlikely to
be possible within the timescale relevant to the hypothetical monopolist
2.15 Retail access
provision is also possible for operators without their own networks
by means of BT’s Calls and Access
product or Local Loop Unbundling (LLU). For the purposes of this review,
Oftel proposes to consider these as examples
of entry into retail markets rather than supply-side substitution. Their
impact is discussed further in Chapter 3.
2.16 Oftel believes
that fixed access is currently a separate relevant market.
of the access market
2.17 At first sight,
it might appear that the access market should be divided into local
areas, for example, cable franchise areas.
A consideration of the potential for demand-side and supply-side substitution
suggests that the potential for either of these
factors to constrain local line rental or connection charges is limited.
On the demand-side, fixed access in another area is
unlikely to be an acceptable substitute for a line at the home address,
whilst the entry barriers described above, together with
licence restrictions, are likely to limit the scope for supply-side
substitution by an operator in one (franchise) area into another.
2.18 However, whilst
there may therefore be differences in competitive conditions between
regions, BT’s charges for access
are geographically uniform. This means that any response to competitive
pressure in one area in the form of lower prices
would apply throughout the country. This suggests that, for the purposes
of the price control review, the geographic extent of
the relevant market should be regarded as being the whole of the UK.
2.19 Oftel believes
that the market for access is currently national in scope.
2.20 In the last
section, it was concluded that supply-side substitution by providers
of calls without their own local access
network (that is, IA and CPS operators) would not constrain the price
which a monopoly provider of local access could charge
for access. However, an operator with a local access network will certainly
be able to provide at least calls between customers
connected to the same concentrator, i.e. the part of the local exchange
which is positioned closest to customers, and typically
such an operator will supply the full range of call types including
national and international calls and calls to mobiles,
using interconnection with other networks where necessary.
2.21 However, Oftel
believes that calls markets should be regarded as separate from the
market for access. This is because
competitive conditions are not homogeneous between calls and access
and a single market definition would therefore obscure
the analysis of the extent of competition. In particular, the ability
of IA operators to offer calls, including increasingly local calls,
without themselves possessing a local access network means that entry
barriers into the provision of calls are much lower than
into the provision of access and suggest that calls markets are likely
to be more competitive.
2.22 Oftel believes
that calls markets should currently be regarded as separate from access.
of calls markets
2.23. As with access,
BT’s retail prices for calls are geographically uniform. Furthermore,
some of the suppliers of calls to
customers in one part of the UK would find it relatively easy to supply
such services to customers in another area in response
to a price increase in that area. IA operators may use their own long-distance
networks and buy in wholesale call origination
and termination from direct access operators. Supply side substitution
between areas exists for IA operators, given the
availability of wholesale origination and termination throughout the
UK (at geographically uniform charges in the case of BT).
The geographic extent of the relevant market for calls is, therefore,
the whole of the UK.
2.24 Oftel believes
that calls markets are currently national in scope.
2.25 In considering
whether a call from a mobile to a fixed line or to another mobile is
an adequate substitute for a call from a
a number of issues arise. Firstly, substitution is more likely if the
caller already has a mobile (as noted above some
72% of households have both fixed and mobile phones), and therefore
base their decision on the marginal call price. For the
reasons given in paragraphs 2.9-2.11, it may be difficult to persuade
customers who have a fixed line to replace it with a mobile,
especially if they wish to use it for data applications. However, it
may be relatively easy to persuade customers who have both
a fixed and a mobile to switch between them by price differentials.
According to Oftel’s February 2001 survey of residential
consumers (the last in which this question was asked), about two thirds
of those with both fixed and mobile phones find
occasions on which they do substitute mobile usage for fixed usage.
This means that just less than one third are not substituting
mobile usage for fixed to take advantage of lower prices at certain
times, or for convenience. In addition, 21% have a fixed
telephone only. The question then is whether this extent of substitution
is sufficient to constrain the prices of fixed calls.
2.26 The size of
the price differential depends on a number of factors including whether
the caller’s mobile tariff package
provides an allowance of ‘free’ calls in return for a fixed fee. Where
the users purchase an allowance of free calls with their
subscription, the marginal call price may be regarded as zero and this
may encourage use of the mobile in preference to the
fixed phone. However, the possible scale of substitution of calls from
the fixed line may be limited if the allowance of free calls
is small relative to the volume of fixed line calls. In addition, whilst
some off-peak mobile tariffs are now comparable to BT’s
charges for calls on the fixed network, in general the price premium
for making calls from a mobile suggests that mobile prices
do not constrain the prices of calls from a fixed line to another fixed
2.27 Another consideration
arises in the case of substitution by mobile to mobile calls. This is
most relevant for fixed to mobile
calls, though not necessarily exclusively so. The size of the price
differential then depends on whether the alternative mobile
to mobile call is on the same network (‘on-net’) or on a different network
(‘off-net’). Off-net mobile to mobile calls are often
excluded from inclusive call allowances (ICAs). In general, the strategy
of the mobile network operators is to maintain relatively
high prices for off-net calls but to offer low prices for on-net calls.
Indeed, prices for the latter can be comparable to fixed to fixed
prices even outside of call allowances. Substitution is therefore more
likely if the potential alternative mobile to mobile call is
on-net. The likelihood that a call will remain on-net will reflect the
market share of the mobile operator in question, which will
currently lie between 20% and 30% depending on the operator. However,
it is likely to be higher if the caller is a member of a
‘closed user group’. A closed used group can be defined as an identifiable
group of people who have an interest in how much
it costs to call each other. At present, Oftel does not have sufficient
information to draw conclusions on the importance of
closed user groups.
2.28 As Oftel argued,
in its July 1999 consultative document Price control review: Future
developments in the competitiveness
of UK telecommunications markets, the extent of substitution may increase
as the mobile networks expand and evolve to cater
for more advanced forms of data transmission and as costs fall. These
developments will significantly increase the overall traffic
capacity of GSM networks, particularly for voice which will be able
to match the fixed networks for quality. Improved quality and
lower off peak mobile tariffs may mean that the fixed line will be used
increasingly for data traffic while the mobile will increasingly
be regarded by some customers as the principal voice communication medium,
although enhanced mobile networks will
increasingly be able to provide data as well. However, mobile operators’
traffic-sensitive costs are expected to remain above
those of fixed networks. Consumers may well be prepared to pay some
premium for the additional convenience of mobiles
but full substitutability of residential fixed lines by GSM is unlikely
as long as a significant price premium remains.
2.29 Oftel’s May
2001 survey of residential consumers found that 79% of respondents still
consider the home fixed telephone
as their main method of making and receiving calls. About 15% regard
the mobile as their main telephone (the remaining 6%
use other methods such as a fixed telephone at work or a payphone).
Whilst this was similar to the findings of the February
2001 survey, the proportion of customers regarding their mobile as their
main telephone has increased significantly over the last
year and Oftel intends to monitor future trends in this figure. Some
70% of these consumers also have a fixed telephone at home.
2.30 Oftel believes
that, in general, calls from fixed lines are not currently in the same
market as calls from mobiles.
2.31 It may be possible
to define separate markets for different groups of customers, for example,
by distinguishing between
business and residential customers, or on the basis of spend levels.
This would be consistent with the structure of the current
retail price cap, which is focused on the lowest-spending 80% of residential
customers (with a safeguard arrangement for small
businesses). These are the groups which, in 1996, were considered to
have the least access to competition, and the price control
was designed to ensure that it benefited those that benefited least
from competition and were most in need of protection. However,
the 1996 price control review was not always explicit on the question
of whether they constituted a distinct market.
2.32 It is, however,
clear that competitive conditions were not seen as homogeneous across
all customers. The chosen
categorisation reflected the fact that the highest spending residential
customers had very different usage patterns to the rest
of BT’s customers. A much larger proportion of the top-spending 20%
of residential customers’ bills was (and is) spent on
international, ‘other’ (for example, premium rate services) and, to
a lesser extent, national call services than for other residential
customers. BT made higher returns on these services than for local calls
and rental so the high spending residential customers
were attractive and profitable both to BT and its IA competitors, and
were therefore already benefiting from competition. In addition,
it was noted that if their spending were included in the revenue weights
used to calculate compliance with the price control, they
would increase the attractiveness to BT of reducing national and international
call charges and decrease the attractiveness of
reducing local call and rental charges which constitute a large proportion
of the bills of low and moderate use customers. This
would have resulted in most of the benefits of the price control going
to those customers who were least in need of protection.
2.33 The choice of the 80% threshold was also informed by BT’s discounting behaviour, which indicated where it considered it
faced the greatest threat of competition. In 1995/1996 the threshold at which BT’s main discount packages became worthwhile
for customers was a call spend approximating to the borderline between the 20% of highest users and the rest of BT’s customers.
2.34 In the Decision
published in May 2001 following Oftel’s Competition Act investigation
into the pricing of BT’s ‘Surf’ product
within the BT Surf Together and BT Talk & Surf Together tariff packages,
it was noted that an argument could be made that
residential access is in a separate market from business access, because
residential and business customers tend to be in
distinct geographical locations. This will reduce the extent of supply
side substitution because a supplier of access to business
customers would need to incur significant sunk costs and take the time
to build out its network in order to compete against a
supplier of access to residential customers. Although smaller businesses
in particular may be more likely to locate close to their
customers, the fact that charges for business and residential access
are different would suggest that they do in fact constitute
2.35 The argument
is slightly less clear-cut in the case of retail calls. For direct access
operators supply side substitution
appears not to be present, because of the costs and time required to
build out networks to the areas in which residential
customers are located. Also, like access, different prices tend to be
charged to business and residential customers. IA operators
and resellers do not face these constraints, because they use existing
exchange lines rather than building their own. However,
it was argued that the characteristics of residential customers are
sufficiently different from business customers to limit the
extent of supply side substitution because a supplier of calls to business
customers would be likely to need to develop different
tariff packages that would appeal to residential customers and because
such a supplier might also need to incur significant costs
in order to create sufficient awareness and brand recognition in residential
2.36 In addition,
there are often fixed subscriber acquisition costs incurred by suppliers
to win customers. This might mean
that supply side substitution was not present for customers with lower
call expenditure, because IA operators currently supplying
calls to higher spending customers might not be attracted to provide
calls to the lower spending customers by a small but
significant non-transitory increase in price on the part of BT.
2.37 The precise
boundary between the markets by customer type is open to debate. For
example, the highest spending
residential customers have call expenditure as high or higher than small
business customers; and some small businesses
are located in residential areas. Nevertheless, for the purposes of
the Surf inquiry, it was concluded that distinguishing residential
from business customers is a reasonable approach.
2.38 In the price
control review, Oftel will consider the appropriate segmentation by
customer group in the light of current
and expected future competitive conditions. These findings may also
have wider implications. For example, a finding that
markets for the provision of basic telephony services to businesses
were effectively competitive could mean that other aspects
of regulation which apply to BT in these markets could also be relaxed.
2.39 The next question
is whether it is appropriate to treat all call types as part of a single
calls market or instead to
define separate markets for individual call types, for example along
the lines set out in paragraph 2.5. A consideration only
of the scope for demand-side substitution suggests that markets might
be quite narrowly defined. Indeed, in the limit, it might
be possible to define calls to particular individuals as separate markets
since, with some exceptions, a call to one person
will not be a good substitute for a call to someone else.
2.40 How far supply-side
substitution would undermine this very narrow definition depends on
whether a potential competing
provider of retail calls to a particular person is able to purchase
termination of calls to that customer as a wholesale service.
Suppose there is a monopolist of retail (end-to-end) calls to one individual,
but calls to other individuals are competitively
provided. If the hypothetical monopolist of retail (end-to-end) calls
to that customer refuses to terminate calls to that customer
originating on other networks then supply-side substitution is unlikely.
As has been well documented elsewhere, the calling
party pays principle means that the called party is unlikely to switch
networks if the price of calling him increases, as he will
not (usually) bear the cost. However, if other operators are able to
purchase termination of calls to the monopolist’s
customers, then they will be able to offer competing retail end-to-end
calls, using their own networks for origination and
conveyance as far as the terminating segment. In practice, call termination
is available as a wholesale service and therefore
a hypothetical monopolist provider of retail calls to one individual
would face the prospect of competition from providers of calls
to other individuals if it attempted to raise its prices. Hence the
possibility of supply-side substitution suggests that a broader
market definition is likely to be appropriate. This could be along the
lines set out in paragraph 2.5 since, for example, an
operator with a local network could be able to offer local calls terminating
with all customers in its local area.
2.41 The principle
that the extent of the market is determined by the area and services
in which competitive conditions
are homogeneous is again useful. In practice, operators do not price
discriminate on the basis of the identity of the called
party. However, differentiation between the prices for local, national,
international calls, calls to mobiles etc is however usual.
This suggests that a sensible set of market definitions for fixed calls
would be those set out in paragraph 2.5. Note however
that a distinction between local and national calls has not been drawn
in the case of mobile calls, since mobile call prices
are generally uniform within the UK and do not vary with distance.
2.42 In the 1996
price control review, Oftel considered whether local and national calls
should be regarded as a single
market. The main argument advanced in favour of this treatment was the
increasing irrelevance of distance as a
determinant of the costs of providing call services. However, Oftel
decided in the light of responses to the consultation
to accept the distinction between local and national calls.
2.43 It could be
argued that the case for making this distinction might have been stronger
in 1996 than now. IA operators
did not then offer local calls because the margin between local call
prices and network charges was insufficient to cover the
additional switching costs of IA operators and allow an adequate profit.
This meant that there was a significant difference
in competitive conditions between local and national calls. IA operators
are now able to offer local calls profitably and indeed
there has been rapid growth in this traffic. There may therefore now
be greater homogeneity in competitive conditions than at
the time of the last review. This could be reinforced when the ‘all
calls’ option for carrier pre-selection (discussed further in
paragraphs 3.75-3.76) becomes available from 2002. However, whilst margins
between retail prices for local calls and
network charges are currently sufficient for IA operators to offer local
calls profitably, this might not be so at the competitive
level of prices. The relevant question, then, is whether the threat
of re-entry by IA operators would constrain local call prices
to the competitive level.
2.44 Oftel believes
that local calls and national calls should currently be regarded as
separate markets. This market
definition is consistent with Oftel’s conclusion in its investigation
into BT’s pricing of ‘Surf’ within the BT Surf Together and
BT Talk & Surf Together tariff packages. It was also noted there
that it is unlikely to be critical as BT’s market share
and profitability in local and national calls are broadly similar.
2.45 In January
2001, Oftel published the results of its Review of whether Cable and
Wireless has Market Influence on
international routes (the C&W review). In the C&W review, Oftel
looked separately at markets for international retail services
on a route-by-route basis. Oftel defined that these markets consisted
of international retail calls (retail international direct
dial and retail calls delivered via international simple voice resale)
and, for large corporate customers, international private
leased circuits (normally considered part of the market for international
services to other operators) insofar as they represent
a substitute for international retail calls for such customers.
2.46 The main issue
in the case of international calls concerns the geographical definition
of the markets at both the
wholesale and retail levels. In the C&W review, Oftel considered
it appropriate to treat paired country routes as separate
markets at both levels, as it has done in previous analysis of international
markets. On the demand side, substitution between
different country routes is not possible as a call to one country is
not a good alternative for a call to another country. Oftel
accepts that a degree of wholesale supply side substitution is possible
by means of ‘hubbing’ (the routing of traffic via
an intermediate third country), and other forms of indirect transmission
such as ‘transit’, ‘re-origination’ and the use of ‘ring’
systems. However, for the purposes of the C&W review, Oftel considered
it appropriate to examine all individual wholesale
routes separately given the difficulty in establishing the extent of
indirect routing. Whilst the C&W review also considered it
appropriate to analyse retail routes separately, the growing importance
of IA operators and re-sellers in retail IDD competition
and their potential to offer conveyance services to a wide range of
international routes raises the potential for a retail supply
side market definition wider than route-by-route. This issue is being
considered further in the reviews of competition in retail
and wholesale IDD markets requested by BT and Concert. Oftel believes
that it should adopt a set of market definitions
for the price control review which are consistent with those derived
from these reviews.
2.47 Oftel believes
that it is currently appropriate to consider country pair routes as
individual markets. However, the
market definition for the price control review will be consistent with
the view that Oftel takes in relation to its review
of competition in retail IDD markets, and could therefore evolve.
2.48 The services
charged for and currently included in the retail price control are duration
charges for operator-controlled
calls and facility fees for operator-controlled calls other than when
the caller experiences difficulty in obtaining a connection
and reverse charge calls (other than from a public telephone box). It
is important to distinguish between operator assistance
supplied to retail customers and the wholesale operator assistance service
supplied by BT to other operators. The latter
market is deemed to be competitive since there are no major barriers
to an operator self-providing or using other operators’
services. Here we are concerned with operator assistance (OA) supplied
to retail customers.
2.49 In the last
price control review, Oftel took the view that retail OA is an integral
part of the telephone service provided by
an operator when an exchange line is supplied. It was considered that
entry by an independent service provider was unlikely
given the costs it would face and the difficulty it would have in persuading
customers to switch supplier of a service which
was typically a very small part of telecommunications spend. On this
basis, it could be argued that operator assisted calls
should be treated as part of the market for access, given the likely
homogeneity of competitive conditions between the two
the likelihood that competition to provide OA on a given network may
be small, prices for operator
assisted calls could be constrained by prices for direct-dialled calls
if the latter were seen as good substitutes. However,
the significant additional cost (up to £2 per call) involved in making
an OA call suggests that calls will only be made via the
operator as a last resort, for example to some international destinations
where direct dialling is not available, and this is
consistent with the low revenue from OA calls. Moreover, the charge
for OA has recently increased after a number of years
of stability, during which time call prices have fallen significantly.
This suggests that the charge for OA is not constrained
by the availability of direct-dialled calls and that therefore OA calls
should be treated as a separate market or as part of
the access market.
2.51 Oftel would
be grateful for views on whether operator assisted calls should be regarded
as a separate
market, as part of the access market or as part of the market for calls.
Calls to mobiles
2.52 Oftel considered
the possible markets for calls to mobiles in its Review of the Price
Control on Calls to Mobiles
. However, that document focuses on the position of the mobile operator
terminating the call. The issue here is whether
there are competitive constraints on the price the originating operator
can charge for a call to a mobile phone. The position
of the originating (fixed network) operator was also considered by the
Monopolies and Mergers Commission (now the
Competition Commission) in 1998, as a result of which a price control
was imposed on the amount which BT could
retain from supplying calls to BTCellnet and Vodafone mobiles at the
2.53 The most likely
demand-side substitutes for a call from a fixed line to a mobile are
a call from a fixed line to
another fixed line or a call from a mobile to another mobile. The substitution
possibilities in the latter case are considered
in paragraphs 2.25-2.30.
2.54 It seems unlikely
that fixed to fixed calls are a sufficiently good substitute for fixed
to mobile calls to constrain
the prices of the latter. In general, there is still a substantial price
premium for calling a mobile number from a fixed line
compared to the price for calling another fixed line, particularly at
peak periods. This suggests that the two are not subject
to a common pricing constraint.
2.55 The ability
to maintain this price premium might stem from the greater probability
of immediate contact that comes
with calling a mobile compared to a fixed line. There are circumstances
in which the difference in the likelihood of obtaining
immediate contact is relatively low, for example, when the called party
is known to be at home. In this case, the caller may
well call the fixed line. On the other hand, if the called party is
known not to be at home, the caller will have no choice but
to call the mobile if immediate contact is required. The existence of
a substantial price premium for calling a mobile suggests
that the former circumstances are not sufficiently widespread to make
calls from fixed lines to other fixed lines a good
substitute for calls from fixed lines to mobiles.
2.56 A further issue
is whether at the retail level (ie from the point of view of the BT
customer) calls to different mobile
networks are in the same or separate markets. Consideration only of
demand side substitution suggests that calls to
each network seem likely to be in separate markets since, if the called
party chooses, for example, Vodafone as his
mobile network, the caller has to call Vodafone: a call to BTCellnet
is not a substitute. However, as described in paragraphs
2.39 and 2.40, this logic could lead to a very narrow market definition,
since a call to any other individual, even if they are
on the same network, is unlikely to be a substitute for a call to another.
Oftel has concluded, in the context of its review
of the regulation of mobile termination rates, that it is reasonable
to aggregate the market definition on the demand side
at the level of each operator. This is because of the inability of each
operator to price discriminate between calls to
particular individuals. The competitive constraints are generalised
across the customers of a network.
of supply-side substitution may suggest a broader market at the retail
level. The mobile operators’
general provision of wholesale call termination would suggest that,
if an operator supplied its customers with calls to
Vodafone, say, they would also be able to supply them with calls to
the other networks. A hypothetical monopolist
supplier of calls to one network would then not be able to raise prices
significantly above the competitive level without
attracting supply-side substitution by operators initially providing
calls to other networks. A further argument in favour
of a single market for all calls to mobiles is that competitive conditions
at the retail level are likely to be homogeneous
between them. Although BT charges different retail prices for calls
to the different networks, this may reflect differences
in the underlying termination rates paid to the mobile operator.
2.58 Oftel believes
that calls from a fixed line to a mobile telephone currently constitute
a separate market.
2.59 A number of
quantitative techniques exist which, in principle can be used to aid
market definition. The simpler tests
are based on analysis of price trends whilst more complex analyses are
based on fitting demand equations.
The latter in particular have quite substantial data requirements which
may make them difficult to apply in practice.
2.60 A statistical
analysis of price correlation can be used to test whether two products
are in the same economic market.
The underlying rationale is that the prices of products which are in
the same market should be closely correlated with each
other since they will be subject to the same changes in demand (and
possibly costs) and as customers shift between them
in response to any price differentials which emerge.
2.61 However, there
is no uniquely correct level of correlation which is sufficient for
two products to be regarded as part of
the same market. In addition, there is the danger of spurious correlation
if prices show common trends for reasons
unconnected with substitutability. For example, the prices of telecommunications
services generally have tended to fall in
recent years, reflecting partly declines in the underlying costs of
network equipment. In addition, the prices of services which
are subject to price control may also tend to move together, reflecting
the downward pressure of the control. Any analysis
would therefore have to account for these and other common factors influencing
the prices of telecommunications services.
2.62 An alternative
is to test for ‘Granger causality’ between price series. Despite its
name, this is a purely statistical test
of association and cannot be used to establish the existence of an economic
relationship between two variables. A lengthy
time series of data is needed to use the test. As with correlation tests,
the effect of common factors must be removed from
the data to avoid spurious association. In addition, the methodology
is subject to a number of technical problems that can
make the statistical test for significance of the association unreliable
or hard to interpret.
2.63 More sophisticated
analysis attempts to establish whether there is a long-term equilibrium
in the relative prices of
products that are re-established after a change to the price of one.
Again, adjustment for common factors and a long time
series of data are likely to be necessary.
2.64 A further drawback
with all these techniques is that they rely on an analysis of actual
prices, rather than those that
would exist if markets were competitive. Actual prices will already
reflect any market power possessed by firms in the market
and this can lead to excessively broad market definitions by a process
sometimes known as the ‘Cellophane fallacy’.
This occurs when the price for one good is above the competitive level,
because of the exploitation of market power, by a
margin sufficient to induce consumers to switch to other products which
would not be considered substitutes if the first good
were priced at the competitive level (in the eponymous case, the price
of Cellophane was raised to a level where other
packaging products appeared to be substitutes). An analysis of actual
prices can then lead to these other products erroneously
being included in the market.
2.65 Oftel believes
that the use of quantitative techniques is unlikely to be of significant
practical help in defining
Control review: key indicators
to assess and measures that Oftel proposes to use
UK consumers enjoy ‘best or near best deal’ in comparison with
consumers in similar economies:
- compare UK
prices and trends with other countries (Oftel survey of PSTN prices
consumers are satisfied with prices and the quality of service
out market research on satisfaction
prices broadly reflect underlying costs (i.e. absence of persistent
BT’s ROCE data summer 2001
- ROCE by decile and business/residential
consumers are able to access information to help make effective
number of Phonebills hits
- Research customer awareness of Phonebills
Consumers are confident/ knowledgeable in using information and
in taking advantage of market opportunities:
- Survey awareness
of alternatives especially IA and CPS
- Analysis of complaints to Oftel, consumer bodies and operators
there are barriers to consumers switching suppliers:
- general switching
- research testing disincentive caused by having two bills
- data on numbers switching, numbers porting
competition is active in price and quality and innovation:
- check whether BT prices meet or exceed cap
- assess BT prices for non-basket customers
- consider market share data by access ; revenues; call volumes
anti-competitive behaviour is absent:
trends from Oftel Compliance
impact of recent
and competitive impact of IA, CPS, C&A and LLU operators
– number of exchanges unbundled
- cable operator growth
- extent of mobile substitution (mobile/fixed penetration surveys)
limited entry barriers make the threat of entry a competitive
of inefficient suppliers
in market structure over time, especially a tendency to reduce
Indicators and Preliminary Views
3.1 In Chapter 2,
Oftel set out the market definitions which it considers are most appropriate
for the analysis of the
extent of competition facing BT in the provision of retail fixed telephony
services. In this chapter, Oftel outlines its initial
assessment of the state of competition in these markets. It must be
emphasised, however, that this is only a preliminary
examination, based on the information currently available to Oftel,
and the primary aim of this document is to invite the views
of interested parties. These, and further information as it becomes
available, will inform Oftel’s decision on the need for further
retail price controls after the expiry of the current (extended) control
on 31 July 2002.
3.2 The following
sections are structured according to the key indicators of effective
competition set out at the end of Chapter 2.
These follow the framework set out in Implementing Oftel’s Strategy:
Effective Competition Review Guidelines, August 2000.
The indicators are a mix of quantitative data, for example on market
structure and profitability, and qualitative data, for
example on customer awareness of alternative operators. Oftel will take
both into account in its assessment of market
competitiveness. In particular, the more qualitative information may
help in the interpretation of the quantitative results.
consumers enjoy ‘best or near best deal’ in comparison with consumers
places pressure on firms to price at levels closely related to costs
and to keep such costs to a minimum.
But it is not always easy to observe costs directly or to discover if
they are being minimised. An alternative source of evidence
on whether prices in the UK are as low as they would be in competitive
markets is by comparing them to prices for the
equivalent services in overseas markets. If UK fixed telephony markets
are competitive, one would expect UK consumers to
be getting a deal which is as good as or better than that available
to customers in similar economies overseas. For this reason,
Oftel has undertaken a series of surveys to compare UK prices and trends
with those in other comparable countries. However,
such comparisons are subject to caveats because international comparisons
are themselves prone to a number of difficulties.
These are outlined below along with the way in which Oftel has sought
to address these.
3.4 Firstly, the
results may be vulnerable to exchange rate fluctuations. This is usually
addressed, as in the Oftel survey, by
converting to a single currency at ‘purchasing power parity’ exchange
rates. Comparisons may also depend on the interaction
of the pattern of use assumed with the tariff structure used for the
comparison. Usage patterns tend to adapt to the structure
of prices, with customers naturally tending to make more calls when
the prices they face are relatively low. This means that
comparisons tend to favour the country whose traffic profile is used
as the basis of the comparison. Results may also differ
as between large and small users, or depend on the mix of peak and off-peak,
or local and long-distance calls. Oftel has
sought to address this by using a range of different usage profiles
and by reflecting the variety of packages and discount
schemes offered by operators in each country. The usage profiles cover
different levels and patterns of usage and are not
specific to the UK. Unit-based charges may still be used by some overseas
operators, which can disadvantage operators who
use per-second pricing unless adjusted for in the comparison. However,
after investigation, Oftel has concluded that unit based
charges (or other details such as minimum call charges etc) do not have
a significant effect on the results. In addition, the
quality of service and the extent of network coverage may not be readily
comparable between countries. It has not been
possible to draw any meaningful conclusions regarding quality of service
because of the absence of comparable data between
countries, although network coverage is comprehensive in all the survey
countries. Lastly, overseas markets may themselves
not be effectively competitive and prices in them may therefore be above
3.5 Oftel’s survey
attempts, as far as possible, to make fair comparisons between prices
for fixed telephony services in
France, Germany, Sweden, the UK and the USA. A range of usage profiles,
reflecting consumption by residential customers
and small and medium-sized (but not large) businesses, was used for
the comparisons, which focused on both the lowest
prices available in each country and the spread of prices.
3.6 The 2001 survey
found that PSTN price levels for UK residential consumers generally
compared favourably with prices
elsewhere. However, they were found to be on average about 10% above
the cheapest country (Sweden). France and Germany
were more expensive than the UK as were the two US states in the survey
(though California was very close to the UK average).
3.7 Price dispersion
can be seen as an indication of the extent to which some operators are
able to maintain prices above
others and hence of market competitiveness, although it may also reflect
other factors such as variations in quality of service.
All the Swedish operators in the sample tended to have relatively low
prices, whilst this was normally true of only 2 or 3 of the
UK operators. The range of prices available was therefore narrower in
Sweden than in the UK. France also displayed smaller
variation in prices whilst dispersion in the US was higher than in the
3.8 Price levels
for UK business customers were about average for the sample. They were
on average about one-third greater
than those in Sweden and 6% higher than in Germany. On average they
were similar to those in France and California
(although this varied with usage). The range of prices available in
the UK appeared similar to that in France and Germany
but greater than that in Sweden and the USA.
3.9 The results
of the 2001 survey enable trends in prices since the previous survey
in 2000 to be compared between
countries. UK prices for residential consumers have fallen by about
4% over the year which is broadly similar to the rate
of price reduction in Sweden and Germany. Prices fell more rapidly in
the US, but increased in France. For UK business
customers, the survey suggested that prices had fallen slightly faster
than in California, France and Sweden, but not as fast
as in Germany and Ohio. Generally, the UK’s relative position for both
residential and business customers was little changed
compared to 2000.
3.10 Because of
the approach taken, which was to construct a range of ‘baskets’ representing
different usage profiles and
then to price these according to the tariffs available in the survey
countries, it is not possible to use the survey to shed light
on competition in the individual service markets set out in the previous
chapter. However, the basket approach could in
principle provide some information on the degree of competition facing
different customer segments. Sweden is significantly
cheaper than the UK for all baskets, though less so for some high usage
residential customers. Germany and France also
appear to be more expensive than the UK by a relatively larger amount
for some higher usage residential customers. The
UK also appears to do relatively better for medium businesses than for
3.11 The existence
of a significant price gap between the UK and Sweden suggests that UK
markets may not yet be effectively competitive, although there is some
suggestion that the UK tends to do relatively well in
those segments which, a priori, would be expected to be the more competitive.
However, it is not possible to draw firm
inferences in the absence of an analysis of the reasons for the good
performance of the Swedish operators. Summary
statistics do not suggest that the structure of the Swedish market is
significantly more competitive, with incumbent
operators retaining high market shares. Indeed, the UK has by some way
the most developed competition in local
access provision. Given the relatively short history of competition
in France and Germany, it was perhaps to be expected
that UK operators would fare better when compared with counterparts
in these countries.
are satisfied with prices and the quality of service they receive
3.12 In February
and March 2000, a survey was conducted for Oftel to establish the proportion
of homes that had switched
their fixed telecommunications supplier. The survey attempted to obtain
information on the reasons why customers switched,
or did not switch, supplier. Respondents were also asked about their
satisfaction with their telecommunications supplier
3.13 The survey
found that overall satisfaction with the main telecommunications supplier
was high. Some 95% of
non-switchers were satisfied overall with their main supplier, as were
92% of those who had switched main supplier,
though this proportion fell to 88% among partial switchers (such as
IA users). It is interesting that changing supplier
does not appear to result in higher levels of satisfaction. However,
this does not imply poorer service by the suppliers to
which customers have switched, since it is likely to reflect customer
expectations. Customers tended to be most satisfied
with quality/reliability of service and least satisfied with price.
Partial switchers were least likely to be satisfied with the
prices charged by their main supplier. These results are supported by
similar findings in the small/medium business sector.
one quarter of the sample had changed their supplier at some time. The
main reason given was cost,
followed by wish to take up cable TV. Dissatisfaction with former supplier
was the primary reason for switching in only 12%
of cases. However, there was some variation by operator and dissatisfaction
with former supplier was the main reason
among those who had switched to BT. In addition, one of the main reasons
given for not switching was satisfaction with
current supplier; some 60% of those who had not considered switching
gave this as the main reason. This is consistent
with findings from other Oftel research.
3.15 Oftel also
conducts quarterly surveys of fixed telecommunications usage among residential
customers and small and
medium-sized businesses. The most recent survey of businesses was in
May/June 2001. This also found that overall
satisfaction was high at 95%. Again, satisfaction was highest with reliability
of service whilst value for money was less highly
rated – though still 80% of respondents expressed satisfaction with
these aspects of service. Small businesses were more
satisfied overall than medium businesses.
3.16 A survey of
residential customers in April 2001 also found high levels of satisfaction.
Some 90% of fixed line
customers rated their service as good, very good or excellent, somewhat
above ratings for mobile and Internet services.
About 70% of customers thought their fixed telephone service good, very
good or excellent value for money. Similarly,
95% of those respondents to Oftel’s May 2001 survey of residential customers
for whom the fixed telephone was the main
method of telephony, were satisfied with it.
3.17 The high levels
of satisfaction found do not suggest that any lack of competition is
harming quality of service.
However, equally, it must be borne in mind that the prices and quality
of service received by at least some customers reflect
the fact that the market is regulated. BT’s retail price control has
borne down on prices since 1984 and, whilst quality of
service is not explicitly regulated, Oftel has introduced measures,
for example, publication of comparable performance
indicators, to ensure that high quality is maintained. Nonetheless it
is interesting that price was the least satisfactory
aspect of main supplier service, and dissatisfaction tended to be higher
amongst high-spending customers.
broadly reflect underlying costs (i.e. absence of persistent excessive
3.18 As noted earlier,
competition puts pressure on firms to set prices close to cost. A firm
that tried to increase profits by
raising prices above costs in a competitive market would find that it
would be undercut by rivals and would lose sales as a
consequence. In a competitive market, therefore, one would not expect
to observe persistent excess profits above the level
needed to attract investment to the industry (this minimum level is
given by the cost of capital). Of course, profits may
temporarily be above this minimum level, if there is innovation or if
there are unexpected changes in demand. But the
competitive process would tend to eliminate any excess profits over
3.19 In the October
2000 price control review consultative document, Oftel reported a comparison
of BT’s rate of
return on capital employed (ROCE) with its cost of capital for the last
three years. The difference between the ROCE
and the cost of capital can be used as an indicator of the extent of
any excess profits and hence of the degree of
competition in the markets in which BT operates. Table 3.1 was included
in the October 2000 document.
Table 3.1 – BT’s Return on Capital Employed
Outgoing and incoming
traffic is included in the definition of International used above. International
call products (e.g. operator
assisted dialling, payphones and PCs) are excluded.
3.20 Oftel estimates
that BT’s cost of capital is about 13.5% (before tax and in nominal
terms). Table 3.1 indicates that BT’s
actual return on capital had fallen between 1998/1999 and 1999/2000
but remained well above the cost of capital with continuing
very high returns on calls more than compensating for relatively low
returns on access. The persistence of such high rates
of return suggested that calls markets were not effectively competitive.
Rates of return were similar across the main call types.
Comparable data for international calls broken down by route were not
available, though some variation is to be expected.
3.21 BT provided
Oftel, in confidence, with a more detailed analysis of profitability,
separating business and residential
customers and breaking down the latter by decile of spend. Given the
high rates of return on calls and the low rates of return
on access it is not surprising that this shows that the most profitable
customer segments are businesses and, in particular,
higher spending residential customers. The returns on these customers
were significantly above the cost of capital. This is
slightly paradoxical since these segments are the most competitive areas
of the market and indeed the current structure of the
retail price control, with its concentration on the lowest-spending
80% of residential customers, reflects this. This suggests
that competition may not yet be effective even for higher spending residential
and all business customers.
3.22 It should also
be borne in mind that BT’s overall rate of return reflects the effects
of successive price controls which
have been set with the intention of reducing BT’s ROCE to the cost of
capital by the end of each price control period, except
to the extent that BT is able to reduce costs faster than forecast.
An observation that BT no longer made excess profits on
residential customers as a whole, for example, would not then necessarily
imply that the market for supply to such customers
was competitive. If controls were removed, it is possible that prices,
particularly to lower users, could rise.
3.23 The trend in
profitability may give an indication of whether competition is intensifying.
The figures in Table 3.1 reflect
performance in the year as a whole and do not allow trends within each
year to be identified. Comparable figures for 2000/2001
are not yet available. However, some indication of likely trends in
profitability can be gained from BT’s preliminary fourth quarter
and annual results for 2000/01 which were published on 10 May 2001 and
from those for the first quarter of 2001/02 which were
published on 26 July 2001. The ‘financial highlights’ of BT’s 10 May
press release stated that underlying group earnings before
interest, tax, depreciation and amortisation (EBITDA) were broadly maintained
in the fourth quarter and the full year 2000/01,
with ‘satisfactory’ performance from the UK business. Group EBITDA in
2001/02 Q1 was also maintained at the same level as
in the corresponding quarter of 2000/01 whilst EBITDA in BT Retail,
which includes retail price capped services, increased, as
did EBITDA in Future BT which includes both BT Retail and BT Wholesale.
Press reports suggested that the 2000/01 results
had been slightly worse than market expectations, with shares falling
7%. However, it was reported that this reflected news
of more problems in Concert as well as cancellation of the dividend,
uncertainty over future restructuring plans and the apparently
unexpected write-down of goodwill in Viag (which resulted in a paper
loss for BT). BT’s share price hardly moved on the
announcement of the 2001/02 Q1 results. This does not, on the face of
it, suggest that competition is biting very hard at the
moment in the areas covered by the retail price control. On the other
hand, BT’s press releases suggest that the volume
of BT retail local, national and international calls is falling. As
a result, Oftel would expect a significant reduction in BT’s
end to end ROCE by the end of the current price control period. However,
it also seems likely that it will remain above the
cost of capital.
3.24 Oftel intends
to examine, and would be grateful to receive, evidence of how far customers
from competition. This could include price comparisons with competitive
markets overseas, evidence of
customer satisfaction and evidence of how prices relate to costs.
are able to access information to help make effective choices
3.25 If a market
is to operate effectively, consumers must be able to exercise choice
between operators on the basis of
reliable information about prices and other aspects of service. For
example, if consumers do not know that lower prices are
available elsewhere, they may be unlikely to switch away from their
current operator, and that operator may as a result
be able to maintain prices above the competitive level.
3.26 A survey of
residential customers in May 2000 found that only 18% of respondents
felt they had sufficient information
to decide the best telecommunications supplier and tariff for them.
The March 2000 survey (see paragraph 3.12) found
that better information sources were the main factors that consumers
said would make switching easier. Over half of those
who had changed their telecommunications supplier said that easier and
more independent price comparisons would have
made the process easier.
3.27 Concern that
customers did not have the information necessary to make informed choices
led to the setting up in
December 1999 of the ‘Phonebills’ website (www.phonebills.org.uk)
by a group of operators (BT, Cable & Wireless,
Eurobell, NTL and Telewest, though others have since joined), with the
support of Oftel and consumer groups. The
website helps users to find the cheapest operator for them, by selecting
from a wide range of ‘typical’ telecommunications
usage levels and given the area in which they live.
3.28 The impact
of the availability of ‘Phonebills’ on competition will depend on how
far customers are aware of its existence
and make use of it. Oftel has therefore sought survey evidence on consumer
awareness of ‘Phonebills’. However, it is worth
noting that customers do not necessarily have to use it themselves to
benefit; it may be that the site allows better informed
price comparisons to appear in magazines and other publications. In
addition, switching by a relatively small ‘informed’
proportion of customers may be sufficient to provide a competitive constraint
on prices, which then benefits informed and
uninformed consumers alike.
3.29 A survey of
households conducted at the beginning of March 2001 found that 7% of
respondents had heard of or seen the
‘Phonebills’ website. At first sight, this may appear to be a rather
small proportion, especially as not all of those aware of the
site may actually use the information. However, given that the website
was set up only relatively recently, it is probably in
line with or better than expectations. It is comparable to awareness
levels for other similar sites or publications; for example,
the same survey found that only 5% of respondents were aware of the
existence of Comparable Performance Indicators
(quality of service statistics for various operators) which have been
published for rather longer. It is also broadly in line with
other survey findings. For example, a third of mobile customers surveyed
by Oftel in August and September 2000 did not
use any information sources to help them select their mobile. Amongst
those who did take advice, by some way the most
popular source of information (used by 28% of respondents) was family
or friends, as an earlier survey of fixed
telecommunications also found.
3.30 The availability
of sources of comparative information such as ‘Phonebills’ at least
means that customers now have the
ability to make well-informed choices between operators. However, survey
evidence suggests that customers generally still
feel that they do not have adequate information available to them and
that only a minority of customers are likely to make use
of ‘Phonebills’. Whether this minority is substantial enough materially
to increase competition between operators is not
clear. This and other qualitative information from surveys can however
help to interpret other more quantitative indicators in
order to establish the competitiveness of markets. Oftel is continuing
to investigate the scope for action to make
‘Phonebills’ more effective. It is also considering whether any regulatory
action is appropriate in relation to supporting the
further development of third party price comparison services.
are confident/knowledgeable in using information and in taking advantage
3.31 Customers must
know of alternatives to their main supplier of telecommunications if
competition is to be effective. Respondents to the Oftel surveys referred
to above were asked to indicate their awareness of alternative telecommunications
providers, particularly IA operators.
3.32 Oftel’s May
2001 survey of residential consumers found that 55% of fixed line customers
were aware of IA operators. This was a higher proportion than in previous
surveys, which suggested that only around a third of respondents were
aware of IA suppliers. However, caution should be applied before interpreting
this as an improvement in awareness as the question in previous quarters
asked whether respondents were aware of these suppliers in their area
rather than awareness of the general availability of indirect operators.
As might be expected, awareness is higher amongst higher spenders for
whom IA is most likely to be a viable option. The May 2001 survey found
that 13% of respondents actually used an IA operator.
3.33 The survey
of small and medium-sized enterprises (May/June 2001) suggested that
there was greater awareness among businesses than among residential
customers. Some 80% of small businesses and 92% of medium businesses
were aware of IA operators. Nearly two-thirds of respondents were however
using BT as their only supplier.
3.34 Another indicator
of consumer ability to take advantage of market opportunities is the
number and type of complaints to
Oftel, consumer bodies and operators. Almost a third of respondents
to the February 2001 survey of small and medium-sized
businesses had made a complaint to one of their telecommunications suppliers
(including mobiles). Of these, only 49%
were happy with the way it had been handled. Similarly, a quarter of
UK residential customers surveyed in February 2001
had made a complaint to a (fixed or mobile) telecommunications company
and one half of those were not at all or not very
satisfied with the way it had been handled.
3.35 The number
of complaints reaching Oftel increased from 53,150 in 1999 to 119,200
in 2000. However, this is likely to
reflect a number of factors rather than increasing dissatisfaction,
notably market growth, highly publicised problems including
those related to Christmas 1999 mobile sales and internet availability
and long lead times for the operators to respond to
increasing complaint numbers. Initial information for 2001 suggests
that the upward trend has been arrested. The single
main cause of complaint is quality of customer service, at just over
one quarter of the total, although if all categories of
billing and charging related complaints were aggregated, these would
also account for over one quarter of the total.
3.36 One might expect
the number of complaints in a competitive market to be lower than in
a non-competitive market,
as the former should ensure that customers benefit from low prices and
good quality of service. However, it will also depend
on other factors such as the complexity of the product in question.
Oftel has therefore compared the number of complaints
per thousand telecommunications subscribers per month with figures from
other markets. Gas and electricity have been
chosen as examples of regulated markets whilst personal computers is
intended to represent a technology/consumer
electronics product in a competitive, unregulated market. This comparison
is shown in Table 3.2.
Table 3.2 – Estimated
monthly complaints per 1000 customers or subscribers
received by regulator
received by Trading Standards Officers (per OFT)
Sources: Oftel (data
for January-December 2000), OFGEM (data for October 2000) and OFT (data
3.37 Some caution
is needed because the data for these industries may not have been collected
in a strictly
comparable way. Nonetheless, the data suggest that the average rate
of complaints about telecommunications
operators is somewhat higher than for energy companies (which is similar
to rates achieved by the best-performing
large telecommunications operators) but is well below that for personal
computers. On the face of it, therefore, the
number of complaints generated by telecommunications customers does
not strongly indicate that a lack of competition
is leading to poor customer service. However, it is apparent that the
performance of some operators at least could be
improved. In particular, although it is not identified separately Table
3.2, the number of complaints from BT customers per
1000 lines was slightly above average in 2000 whereas in previous years
BT had performed better than average.
are barriers to consumers switching suppliers
may be impeded if it is difficult for customers to change operators
in response to price differences.
A market is less likely to be effectively competitive, therefore, if
there are significant barriers to customer switching.
This may be particularly the case if the market is (initially) dominated
by one large supplier and is growing slowly,
as entrants will then be able to grow only by attracting customers from
the dominant firm. Controls on BT’s retail prices
are more likely to be necessary if customers find it difficult to switch
to competing operators.
3.39 Many markets
will have some barriers to switching, for example, due to the prevalence
of long-term contracts or
supplier-specific equipment. It may also be that a number of barriers
specific to telecommunications have discouraged
consumers from switching operator. These may include the disruption
caused by changing the physical connection
between the premises and the network when switching access supplier
(eg to a cable company) and the need to pay two
bills when using an IA operator. In the past, the need to change number
when changing access supplier and the need to dial
extra digits when using an IA operator may have been further barriers
to switching, but these have now been addressed
by the availability of number portability and carrier pre-selection
respectively. The evidence summarised below, which
draws on Oftel surveys, suggests that the main remaining barriers may
relate to lack of awareness both of alternatives and
of the true extent of other barriers.
3.40 As noted in
paragraph 3.14, approximately one quarter of the sample surveyed in
February and March 2000 had
changed their supplier at some time, including approximately 6% using
more than one supplier (of which 4% were using
IA and the remainder BT and cable). This was broadly in line with other
markets including mobile telephony, although a
little behind gas and Internet provision where about one third of consumers
had changed supplier. However, given the
longer history of competition in fixed telecommunications, one might
have expected the proportion of customers who
had at some time changed telecommunications operator to have been relatively
high and this may indicate the existence
of barriers to switching in fixed telecommunications markets. Two thirds
of those who had switched completely had switched
from BT to cable. Data from February 2001 suggest that 9% had switched
in the previous 12 months.
3.41 Higher users
were more likely to have switched. This is to be expected since the
savings available are likely to be greatest
for those with higher telephone bills. Switching was lowest among those
with medium-sized quarterly bills of between
£50-£110. This spend level would roughly correspond to the upper end
of the current focus of the retail cap, which is on the
lowest-spending 80% of residential customers. Consistent with this,
consumers who had never considered switching
tended to have smaller quarterly bills (less than £70 on average). This
is broadly supportive of the current structure of the
retail price control.
3.42 Four main reasons
were given for not switching: satisfaction with current supplier; intertia/disinterest;
perceptions of insufficient savings achievable; and lack of awareness
of alternatives. The last three, at least, may be
associated with barriers to switching and, in particular, a lack of
information about potential savings, about the process of
switching and the degree of effort involved and about the existence
of competing suppliers.
the switching process itself was considered easy by most of those who
had switched, though not as easy
as switching mobile network or Internet service provider. On the other
hand it was considered easier than switching supplier
of gas, electricity, bank and, to a lesser extent, credit card provider.
The main perceived difficulties were installation problems
and delays and the amount of time and effort required, although a small
number reported problems with contracts or other
problems with their existing supplier. However, this was not reflected
in the factors which most respondents thought would
make switching easier in future. Better information was the main requirement
and over half of switchers said that more
independent price comparisons would have made the process easier.
3.44 Oftel’s survey
of small and medium-sized business customers suggests that about 20%
of the former and 40% of the
latter have changed their fixed telecommunications supplier at some
time in the past. Again, the majority who have
changed supplier found the process easy. However, a significant proportion
had difficulty comparing prices (54%) and quality
of service (48%).
3.45 The 2000 survey
findings suggest that the take-up of number portability is low; only
one switcher in five had kept their
old number. Most of those who changed number did so by choice. However,
a quarter of switchers experienced problems
with number portability and would have liked to keep their number but
were unable to do so. There also appears to be some
lack of awareness that number portability is available. A survey of
residential customers in August 2000 found that 2 in 5
respondents were unsure or thought that they would have to change their
existing number if they switched supplier. Data
from February 2001 suggests that, of the 9% of residential customers
who had switched supplier in the last twelve months,
56% had kept the same number. However, only a small proportion of the
remaining 44% said that they wanted a new number.
The main reason given for changing number was that their new company
told them they would have to whilst others were
not aware that number portability was possible or were put off by the
perceived expense, time or effort involved.
3.46 The 2000 survey
does not provide any evidence on the importance of the need to receive
two bills as a barrier to the
take-up of IA. However, the May 2001 survey of residential customers
asked those who were aware of indirect operators
but did not use one to say why. Insufficient savings or not making international
calls were the main reasons given for not
using indirect suppliers, highlighting consumers’ perceptions that these
companies are primarily for international calls,
despite the fact that many now offer savings on a range of call types.
Familiarity with brand names, and trusting a company
were issues for some consumers, particularly older customers. Billing
arrangements were identified as another barrier to take
up of indirect suppliers for about 1 in 10 consumers, and included complicated
billing (such as having to set up an account
and pay a deposit in advance) or having to pay two bills. The May/June
2001 survey of small and medium-sized businesses
found that the main reasons for not using IA operators, after satisfaction
with current supplier, were the need to dial extra
digits and insufficient savings (both mentioned by 10% of the sample).
Billing appeared to be less important for businesses
than for residential customers, mentioned by only 3% of the former.
3.47 In addition,
it may be possible to draw some inferences from experience in Germany.
The main relevant features of
the German regulatory environment are:
- A low interconnection
charge with limited requirements for infrastructure build;
- Deutsche Telekom’s
(the incumbent) retail call charges above costs; and
- Deutsche Telekom
is obliged to bill on behalf of new entrants.
is similar to the UK with the exception that German IA customers do
not have to receive two bills. Perhaps partly
as a result, in Germany new entrants have gained market share for long
distance and international calls very rapidly.
Whilst Deutsche Telekom retains a higher share of access and local call
markets than BT, reflecting the comparative lack of
infrastructure competition, entrants in Germany have achieved shares
of long distance call markets comparable to those in the
UK despite a much later start to competition. In addition, the low prices
charged by new entrants have forced Deutsche
Telekom to respond by cutting its own prices and this has led to very
sharp falls in prices for long distance/international
calls (tariffs for long distance calls have fallen by 70%), although
this may partly have reflected a high starting point. Whilst
clearly this evidence cannot be conclusive, the impact of competition
in Germany is consistent with the view that the need
to pay two bills has restricted take up of IA in the UK.
3.48 A consistent
picture is emerging from survey evidence that consumers still do not
feel confident that they have adequate
information to make effective choices between competing operators. This
is supported by evidence of low awareness among
households of the ‘Phonebills’ website and of the range of alternative
operators available. Lack of awareness and information
also emerges as the main remaining perceived barriers to switching.
This might suggest that fixed calls markets are at least
potentially competitive, if the issue of awareness can be addressed,
though it might also be consistent with a finding that,
in general, competition is not yet effective, if this were supported
by other indicators. There is some evidence that the need
to pay two bills may also be a deterrent to the take-up of IA, and potentially
therefore also of carrier pre-selection in the
future, particularly for residential customers.
3.49 Oftel will
examine, and would be grateful to receive, evidence of how far customers
have access to the
information needed to make effective choices between operators, how
far they are aware of this and
how far they make use of it in practice. Oftel will also consider the
scale of barriers to switching and how far
these reflect lack of information and other factors such as the need
for IA customers to pay two operators’ bills.
is active in price, quality and innovation
3.50 If competition
for customers is active, one would expect to observe prices falling
as operators undercut each other in
an effort to attract business. However, an observation of falling prices
would not in itself be sufficient to establish whether
fixed telecommunications markets were competitive because BT is required
to reduce prices under the price cap. It is
however possible to draw some inferences from the way in which BT has
targeted its price reductions, particularly compared
to expectations at the time the current cap was set which were reflected
in Oftel’s financial modelling.
3.51 Table 3.3 shows
the nominal price changes which BT has made in its main price controlled
services over the period of
the current retail price cap. Two figures are shown for access (the
line rental), depending on the treatment of the inclusive call
allowance (ICA), which allows calls up to a certain value to be made
without incurring additional charges over and above the
line rental. In the top line, the ICA is treated as a reduction in the
line rental, whilst the second line shows the change in the
line rental before subtracting the ICA. Note however that this is for
the purposes of illustration and does not imply that the
ICA should be regarded as a reduction in the line rental in the context,
for example, of competition investigations, where it
might be more appropriate to regard it as a reduction in call prices.
3.52 This suggests
that reductions in BT’s call prices have been relatively modest over
the current price control period.
This has meant that, in order to comply with the price control (which
applies to a weighted average of call prices, the line
rental and connection charges), increases in the line rental have also
necessarily been kept to modest levels. By contrast,
it was expected when the cap was set that competition would force BT
to reduce call prices substantially, offset by relatively
large increases in the line rental in order to increase the contribution
to common costs made by access as call profits fell. In
fact, the rental has barely increased in real terms even if no account
is taken of the introduction of ICAs whilst, if the latter are
included, it has actually fallen.
3.53 However, significant
price reductions have been given in the form of enhancements to discount
packages which are
not shown in Table 3.3. Nearly 90% of residential customers now benefit
from some form of discount package (including LUS).
When discounts are included, the rate of reduction in prices appears
rather faster as shown in Table 3.4.
3.54When ICAs are
also treated as reductions in the call price, the rate of decrease appears
faster still, as shown in Table 3.5.
The rate of increase in the line rental excluding the ICA is also shown
for ease of reference.
3.55 Over the whole
period since 1997/1998, rates of call price reduction appear to have
been slower than expected by Oftel,
even taking into account improvements to discounts and the introduction
of ICAs. The relatively low rate of call price reductions
is consistent with the persistence of high profits on calls noted earlier.
However, there appears to have been some
acceleration in the rate of price decrease (mainly given in the form
of discounts and ICAs), which in 2000/2001 appears to
have approached the level expected by Oftel. Together these figures
suggest that competition has not developed as rapidly
as expected when the current cap was set but that competitive pressure
may now be increasing.
3.56 Another indication
of the development of competition is how far the price reductions made
by BT have exceeded the
requirements of the cap. If competition rather than the cap were the
binding constraint on prices, one might expect to see
that the price reductions actually received by customers were greater
than required by the cap. Table 3.6 shows the price
reductions actually received by different customer groups expressed
in the form of an ‘average effective value of ‘X’’ for each
year of the current control including the effects of discounts. This
is shown both for customers within the main focus of the
current controls (the lowest-spending 80%) and for those outside it.
An effective ‘X’ of 5.0 for example, means that average
prices for the customer group and year in question increased by 5% less
than the rate of inflation, indicating that this
group has enjoyed lower prices than required by the control (which would
have permitted prices to rise by 4.5% less than
by level of spend
Value of ‘X’ including discounts
3.57 It can be seen
that customers in deciles 1-8, on whom the cap is focused, have done
slightly better than the control
requires. This also means that they have done better than under previous
controls, when price reductions favoured higher
spenders and business users and to this extent the structure of the
current cap has achieved its objectives. However, it
appears that higher spending customers have not enjoyed reductions as
great as expected when Oftel set the retail price
cap even when improvements to discounts are included. Oftel anticipated
that their bills would fall in line with about RPI-11.5
(see paragraph 3.7 of Price Control Review: A consultative document
issued by the Director General of Telecommunications
on possible approaches for future retail price and network charge controls,
March 2000). This is consistent with the analysis
of price trends which suggested that competition had not driven call
prices down as fast as expected when the cap was set.
However, as also noted earlier, there are signs that the rate of price
reduction is now increasing.
Price of operator
3.58 It was noted
earlier that the prices of operator assisted calls have recently increased
after a long period of stability.
The number of such calls is now very small however; so small that the
service in effect has a zero weight in the price control
basket. This calls into question the effectiveness of inclusion in the
main basket as a means of controlling the prices of
operator assisted calls, as it would be possible to make large proportionate
increases in the prices for these calls without
materially affecting compliance with the control or requiring offsetting
reductions elsewhere. Whilst only a few international
destinations can now not be reached by direct dialling and these may
well be relevant for only a few customers, their
significance may be greater for those customers who call these destinations
regularly. Therefore, if it is desirable to control
the price of these calls, it may be that inclusion in the main price
control basket is no longer the most appropriate way of
Price of calls
3.59 BT is subject
to a separate control on its retail retention on calls to BTCellnet
and Vodafone (that is, the control
applies to the price net of the outpayment made to the mobile operator).
The maximum increase in the retention is limited
to RPI-7% per annum. In practice, the reductions which BT has made have
been somewhat greater than those strictly required
by the cap. However, this again seems likely to reflect the difficulty
of accurately predicting the impact of a given price
change and with carryover price reductions greater than required can
be recouped in subsequent years. In addition, BT
might have not have complied with the non-discrimination requirements
of the control and this is being looked into by Oftel.
3.60 Analysis of
market shares can also give some idea of how competition is developing.
A market share of 50% or more
is usually considered as prima facie evidence that a firm is dominant,
for example, although of course other factors must
be taken into account before concluding that this is the case. In addition,
trends in market shares over time may be a better
indicator than a static snapshot. A market is more likely to be competitive
if market shares are changing over time,
particularly if there is a trend to reduced concentration. On the other
hand, market shares which are essentially static
may suggest that competition is relatively muted, particularly if prices
are also stable.
3.61 The main competition
to BT in the provision of access lines, particularly for residential
customers, comes from
the cable operators whose networks now reach more than half of UK homes.
Businesses are also likely to be able to
choose from operators of regional networks such as Colt or Torch. Table
3.7 shows the shares of line numbers of each
type of operator. Kingston Communications Ltd, the incumbent access
provider in the Hull area, is shown separately.
share (no. of lines)
share (no. of lines)
Source: Oftel Market
3.62 BT continues
to have high market shares in both the business and residential sectors,
as Table 3.7 shows. However,
there has been a significant decline in its share of both residential
and business lines over the past year, particularly in favour
of cable companies (which include C&W for these purposes). Given
the limited geographic coverage of cable networks,
this suggests that cable penetration in the areas served by these operators
is increasing to levels approaching 40%.
In principle, competition in some areas could be sufficient to constrain
prices nationally given that BT charges uniform
prices countrywide. But in previous consultations, some respondents
have expressed doubt that local competition between
two operators (BT and the local cable operator) could provide adequate
protection for customers.
3.63 In addition
to competition from alternative access providers, BT faces competition
in calls markets from IA operators.
About 150 such operators offer service to customers throughout the country.
The impact of such operators has been difficult
to assess in the past because of gaps in Oftel’s data. However, Oftel
has taken steps to correct this and can now give a
more accurate picture of how competition from IA operators is developing,
at least in terms of volumes, although it is still
possible that some operators’ revenues are not fully recorded. This
tends to confirm BT’s view that there has been a recent
acceleration in the rate of growth of IA traffic and that volumes of
IA traffic in earlier periods were higher than Oftel’s figures
suggested. As a result, BT’s market share now appears lower than previously
thought. Table 3.8 shows latest estimates of
BT’s shares of main call markets by volume and revenue (for these purposes,
Concert is included with BT).
% Market Share
July - Sept 1999
% Market Share
July - Sept 2000
Calls to Mobiles
Calls to Mobiles
Source: Oftel Market
Information. Market shares have been adjusted to allow for the fact
that some operators do not provide
separate data for business and residential customers. In addition, Worldcom’s
submitted national minutes and revenues have
been apportioned between local calls, national calls and calls to mobile.
3.64 A number of
points emerge from Table 3.8. First BT could be said to retain a dominant
share in all residential calls
markets (with the caveat that, as data for international calls are aggregated,
any variation in shares by route is not apparent)
and at least in business local calls and calls to mobiles markets. Moreover,
BT’s shares of revenues are generally higher
than its shares of minutes and this is consistent with its prices being
higher than other operators, although it may also reflect
differences of call mix (and note the caveat above about the under-recording
of some operators’ revenues).
3.65 On the other
hand there is evidence that competition is increasing. BT’s share of
all calls markets is now declining quite
rapidly and there is some suggestion that the decline in BT’s share
of long distance voice calls is accelerating. It is also
apparent that IA operators are taking a significant share of local calls
and are not restricted to the supply of national and
international calls. Oftel estimates that 19% of residential IA traffic
is composed of local calls, as against 25% national calls,
13% international calls and 4% calls to mobiles. Comparable proportions
for BT would be: local calls - 37%, national
calls - 15%, international calls - 1.4%, calls to mobiles - 4.5%. This
is consistent with the results of Oftel market
research which shows that an increasing number of customers are choosing
IA operators for all types of calls. Almost one
half of the IA users included in the February 2001 survey of residential
customers used the IA operator for all of their calls.
The remainder said that they tended to use BT for their local calls.
3.66 Oftel believes
that competition to BT is increasing but is not yet fully effective.
Competition is likely to be
stronger in the provision of some services and for some customer groups
behaviour is absent
3.67 The competitiveness
of markets is not simply a function of structural indicators such as
market shares. It is primarily
influenced by firms’ behaviour. One of Oftel’s functions is the prevention
of practices by telecommunications companies
which could damage or distort competition. Such practices should not
occur in effectively competitive markets since only
firms with market power are capable of behaving anti-competitively and,
in an effectively competitive market, no firm can
have market power. However, a market which otherwise appeared to be
competitive might be distorted by leverage from
other markets where market power still exists. The extent to which Oftel
has been required to intervene can therefore
provide some evidence of the extent to which leverage is occurring.
3.68 Table 3.9 is
derived from Oftel’s management plan and shows the action that Oftel
has taken in 1999 and 2000 to
ensure compliance with licence conditions (which, amongst other things,
concern competitive behaviour).
of Oftel’s Competition bulletins - concluded cases
3.69 In a large
proportion of cases where some action (including co- and self-regulation)
was taken, the complaint related
to leverage in some way of BT’s market power at the wholesale level
into related markets, either by refusal to supply a
wholesale service, by unfair charging for a wholesale service or by
undue preference of one of BT’s own businesses. There
was also one case of misuse of customer information.
3.70 The competition
case statistics suggest that there is a continuing need to control BT’s
ability to abuse its market
power at the wholesale level. However, this would not necessarily imply
that retail prices also need to be directly controlled,
since competition at the retail level could in principle provide protection
for consumers, given adequate controls on wholesale
market power. The data could therefore also be consistent with greater
reliance on ex-post remedies, including actions
under the Competition Act, as well as measures to increase competition
at the retail level, for example the proposal floated
in earlier Oftel consultation documents for resellers to have rights
to use BT’s network on cost-based terms.
3.71 As noted above,
IA operators have been increasing their share of the residential market
for all call types. Some of the
more recent entrants to the market, in particular, have been expanding
rapidly. One reason may be that IA now appeals
to a broader range of customers than previously. Oftel has attempted
to identify the segments of the residential market
which could potentially be addressed by IA operators by calculating
the maximum discount which an IA operator could
offer relative to BT’s prices, given its likely costs, and taking account
of the fact that customers need a minimum saving on
their bills if they are to be induced to switch.
IA operators could not profitably offer local calls and this limited
their appeal to most customers. However,
since about 1996/1997, the margin between the wholesale charge for call
origination and BT’s retail local call price has been
sufficient to allow IA operators to compete despite the extra switching
involved. Prior to 1996/1997 IA operators could probably
have addressed the top four deciles of customers profitably. Since then,
the margin on individual call types is likely to have
increased. However, BT has improved its discount schemes and, in particular,
ICA in return for increases in the quarterly
line rental. These are likely to have made IA appear less attractive
for some customers and Oftel’s analysis suggests it is
still likely to be most relevant to the top four or five deciles of
residential customers by spend.
3.73 An analysis
of BT’s discount schemes also suggests that most competition is faced
for higher spending customers.
BT’s ‘BT Together’ scheme could be worthwhile even for customers in
the fourth decile but the savings are likely to be modest
for spend levels below about the median. The potential savings for the
highest spending customers are however more
3.74 In Proposals
for Network Charge and Retail Price Controls from 2001, February 2001,
Oftel set out the reasons
underlying its decision to extend the current retail price control until
the end of July 2002, a decision which was supported
by most respondents to Oftel’s earlier consultation on this proposal.
The main reason was the expectation of significant
changes in the market over the coming year which were expected to increase
competitive pressures further. Two of the
main relevant developments were the introduction of full carrier pre-selection,
which would enable customers to use an
IA-type service without having to dial a four or five digit access code,
and the rolling out of higher bandwidth technology,
in particular by the unbundling of BT’s local loop (LLU).
3.75 Full carrier
pre-selection may finally remove one of the main deterrents to using
IA operators as an alternative to BT:
the need to dial additional digits to do so. Carrier pre-selection is
being implemented in the UK in two stages; first by
an interim solution involving the use of auto-diallers (ICPS), which
will cease to be available at the end of 2001, and then by
‘permanent’ carrier pre-selection (PCPS). It is the latter which is
expected to have the greatest impact on competition.
3.76 Take-up of PCPS was initially relatively slow as a result of teething
problems with call routing and inter-operator billing. The technical
problems have now been resolved and forecasts are for strong growth
in customer numbers over the next six months. Oftel hopes therefore
that the impact of PCPS will begin to become apparent during the consultation
3.77 As noted in
earlier consultative documents, the impact of service providers using
Calls and Access has so far been limited.
One factor is likely to have been the slim margins available, since
the charges for using Calls and Access are based on
BT’s retail prices less a discount to allow for the costs saved by BT
in not serving retail customers. The possibility of allowing
service providers to use BT’s network at charges based on BT’s costs
would address this. It is also possible that other
aspects of BT’s service delivery have hampered take-up and another option
would be to concentrate on making the non-price
aspects of Calls and Access more attractive. One advantage of the product
is that it avoids the two-bills problem of IA. It
may be of particular interest to companies with well-known brands from
outside the telecommunications industry and Oftel is
undertaking research to assess consumer willingness to switch to resellers
with established brands from other markets.
3.78 The development
of broadband services is relevant, not because broadband services are
themselves considered as
candidates for price control, but because new operators may enter the
market to provide such services. They may also want
to provide a package including basic services as well, and thus competition
to provide the latter could be increased. There
are four main ways of providing competing broadband services to BT;
by means of its wholesale ADSL service, by LLU,
by cable modems, and by broadband wireless access (BWA). However, the
market for broadband services is still at a very
early stage in the UK. At present, some providers are focusing on the
business market rather than residential customers,
amongst whom narrowband unmetered dial-up access is proving increasingly
3.79 Over 170 operators
and service providers have taken BT’s wholesale ADSL service, and so
far over 70,000 customers
have had ADSL installed, including those using BTOpenworld. This is,
however, double the number of ADSL end-users
connected at the end of February, so customer numbers are growing rapidly.
At present, the number of exchanges able
to deliver wholesale ADSL cover 50% of UK households and this figure
is expected to rise to 60% by the end of September.
Some analysts have however suggested that take up of broadband access
by residential customers will be gradual,
with only some 14% of European households predicted to be using broadband
by 2005. Take-up by businesses is likely to
be more rapid, with survey evidence suggesting that about 3% of businesses
may have been accessing the Internet via
DSL in February 2001, up from less than 0.5% in November 2000.
3.80 LLU enables
competing operators to install their own equipment in BT’s exchanges
so that they can offer their own
broadband services to customers rather than reselling BT’s ADSL service.
Since May 2001, operators have been able to
place orders for co-location at any of BT’s exchange sites at any time,
as with other wholesale interconnection products.
In addition, operators have been able to order distant co-location on
this ‘business as usual’ basis since December 2000.
The first commercial LLU operations began in April with more orders
expected in the near future.
3.81 Both NTL and
Telewest offer high-speed Internet access via cable modems, though not
yet in all their franchise areas.
Publicly available figures suggest that together, the two had about
51,800 cable modem customers at the time of writing. NTL
recently published a target of 100,000 cable modem customers by the
end of 2001. Tele2 currently offers BWA data-only
services in the Thames Valley, Leicester, Nottingham, Leeds and Bradford.
Atlantic Telecom also uses wireless access,
mainly to customers in Scotland. Whilst it is licensed to serve 50%
of UK customers, Atlantic is among those operators
which has recently scaled back its investment plans.
3.82 Further spectrum
to provide BWA was auctioned by the government in December 2000. Although
the outcome was
seen by some as disappointing, in that a number of available licences
were unsold and receipts were lower than expected,
six operators won licences in seven regions covering 60% of the UK population.
It is not clear when services are likely to be
launched. Additional tranches of spectrum have also been allocated to
BWA, for future assignment if demand arises.
3.83 In principle,
another potential source of competition to BT is the mobile networks.
However, for the reasons set out in
the Chapter 2, Oftel’s view is that fixed and mobile services are in
separate markets. This means that mobile access and
call prices do not significantly constrain the prices which BT is able
to charge for its fixed services. Oftel believes that
this is likely to remain the case for the foreseeable future.
3.84 This view is
supported by evidence from recent surveys carried out for Oftel. Respondents
appear to consider the
fixed telephone ‘a necessity’ in any home and most believe that it would
be very difficult to replace it with a mobile phone.
The fixed telephone appears to represent the ‘default option’ and will
generally be used for calls from home and particularly
for longer ‘chats’.
3.85 Although there
is clearly some substitution on a call-by-call basis, mobile usage is
generally perceived as more
expensive than using a fixed line. The recent introduction of fixed
line packages in which some calls are in fact free at the
margin has contributed to this perception. Even so, more than three
quarters of respondents who had started using BT’s
Talk Together package (which includes all local evening and weekend
calls in return for a fixed monthly subscription) had not
changed their mobile usage as a result. Less than 3% said that they
were using their mobile a lot less and this suggests
that the extent of mobile substitution to take advantage of lower prices
may have been relatively limited. The mobile provides
additional convenience – creating ‘calling options which could not be
considered from home’ – and its usage appears
largely complementary to that of the fixed phone.
3.86 How far
do you expect the prices of BT’s basic fixed services to be constrained
by existing and new
sources of competition, in particular from CPS, broadband and mobile
operators, over the next 2-3 years?
3.87 The threat
of potential entry may prevent incumbent firms from raising prices above
competitive levels. However, if there
are significant barriers to entry, this threat may be weak or absent.
Incumbent operators may then be able to raise prices
and make persistent excess profits without attracting additional competition
which would reduce them again.
3.88 One of the
most important types of entry barrier is sunk costs. Sunk costs are
those which must be incurred to enter
an industry but which cannot be recovered on exit. A potential entrant
will only incur the sunk costs of investment in an
industry if it expects to cover these sunk costs as well as the avoidable
costs of production from revenues earned. The
incumbent on the other hand, has already made its sunk investments and
so will stay in the market as long as it can
cover its avoidable costs. The incumbent may then be able to exploit
this asymmetry by signalling to the entrant that,
if it were to enter the market, prices would be too low to cover sunk
costs. Entry would then be deterred.
3.89 Sunk costs
are particularly relevant to telecommunications because a very large
investment is needed to create an
efficient telecommunications network and it is likely that little of
this could be recovered if the entrant later decided to leave
the market. This is likely to be exacerbated by the significant economies
of scale and density which characterise
telecommunications networks. These mean that a large network is always
likely to have lower costs than a smaller one,
with the result that an entrant would need to take a large share of
the market if it was to be able to compete. But in
order to gain such a large market share, it is likely to have to price
well below the incumbent, which would make it more
difficult to recover sunk costs. Therefore barriers to entry by competing
network operators are likely to be high.
3.90 Entry may be
easier where entrants can benefit from an economy of scope – the cable
companies being an
example of this – or where the entrant can make use of the incumbent’s
network. The barriers to entry into retail voice
calls by IA operators and resellers are significantly lower than for
operators rolling out networks, because such suppliers
do not need to incur the large sunk costs of building direct access
networks. Whilst IA operators depend on the regulatory
framework which enables them to obtain wholesale call origination and
termination from BT at cost oriented charges,
they have been given certainty to plan their future business to 2005
via the new Network Charge Control.
3.91 However, as
described earlier in this chapter, there is some evidence that barriers
to switching exist, which
prevent customers changing suppliers to take advantage of competing
offers from cable and IA operators. A potentially
enduring barrier to switching is provided by the perceived quality of
service and reputation of alternative suppliers.
Experimentation with alternatives is sometimes perceived as risky and
this can give rise to switching costs where
customers are not well informed about the service quality of rival operators.
Survey evidence suggests that lack of
awareness and information remain barriers for some customers.
3.92 In an effectively
competitive market, the pressure of rivalry between operators will force
them to minimise costs.
An operator whose costs were higher than its rivals’ would find its
prices undercut, as more efficient operators sought to
gain customers by cutting prices to the level of their own costs. The
inefficient operator would not be able to make an adequate
return and would be forced to improve its own efficiency or exit the
3.93 By contrast,
if a market is not competitive, prices may be above the efficient level
of costs to an extent which
allows inefficient operators to remain in the market. These operators
take the benefits of muted competition in the form of
high costs rather than high profits. This phenomenon is well-recognised
by economists who often refer to it as ‘X-inefficiency’.
Significant, persistent inefficiency is inconsistent with an effectively
3.94 As described
in Chapter 4 of Proposals for Network Charge and Retail Price Controls
from 2001, February 2001,
Oftel commissioned, as part of the review, a study of BT’s efficiency
relative to that of the US local exchange carriers
(LECs). The study concluded that BT was between 1.2% and 4% less efficient
than best practice, the range reflecting
differences in the methodologies used.
3.95 One reason
why the US LECs make good comparators is the availability of detailed
cost data for these companies.
It might however be objected that, as regulated dominant operators,
they may face little competitive pressure to reduce
costs and therefore may not themselves be operating efficiently. However,
many are now subject to price control (RPI-X)
rather than rate of return regulation, which provides better incentives
to reduce costs. It should also be borne in mind that
the comparison is with the best-performing LECs in the sample, who are
likely to be a suitable benchmark.
3.96 The evidence
of this study, therefore, does not suggest that BT is harbouring very
high levels of X-inefficiency.
However, Oftel would be interested to consider comparisons with other
overseas operators if data were available and other
possible indicators of BT’s efficiency.
Market Structure over Time
3.97 The discussion
in paragraphs 3.60-3.66 focuses on BT’s share of access and calls markets.
It shows how BT’s
market shares remain generally high, although they have tended to decline
over time. Market structure is not simply a
matter of the largest firm’s market share however. The competitiveness
of a market, to the extent that this is affected by market
structure, will also reflect the number of other firms competing in
it and their relative strengths.
3.98 A commonly
used measure of market concentration which reflects the shares of all
firms in a market is the
Hirschman-Herfindahl index (HHI). This is given by the sum of the squares
of all the firms’ market shares. Under certain,
though unrealistic, assumptions it is even possible to relate the competitiveness
of a market directly to the HHI,
though empirical evidence is less clear-cut. However, the guidelines
on mergers used by the US (and now EU) competition
authorities contain explicit thresholds defined in terms of the HHI.
A market with an HHI of below 1000 is regarded as
‘unconcentrated’, a market with an HHI of between 1000 and 1800 is regarded
as ‘moderately concentrated’ whilst a
market with an HHI of above 1800 is regarded as ‘highly concentrated’
(in which case a merger will be subject to further
scrutiny). A monopoly would have an HHI of 10000, which is therefore
the maximum possible value of the index.
3.99 It can be seen,
simply by squaring the BT market share figures from Tables 3.7 and 3.8
(which gives a minimum
value for the HHI, on the assumption that the shares of all other firms
in the market are negligible) that the markets for all
price controlled services would be considered as highly concentrated
with the possible exception of international calls for
business customers. This is confirmed by Table 3.10, which shows values
of the HHI for each of the main PSTN markets,
calculated from Market Information data (with the adjustments described
earlier). Cable operators, with the exception of
C&W, have been treated as a single operator, whilst ‘other operators’
(apart from Worldcom), for which individual data are not
published, have been excluded from the calculation (effectively treating
the share of individual operators within this category
Calls to Mobiles
Calls to Mobiles
Source: Oftel Market
HHIs are affected by the NTL takeover of C&Ws Consumer Division
during July-September 2000, which
will tend to raise HHIs for this period relative to those for July-September
1999. The HHIs on a consistent basis generally
show a clear downward trend over the period. In the case of business
international call volumes, the rise in the HHI appears
to reflect an increase in Worldcom’s market share at the expense of
3.101 This Chapter
has set out the framework which Oftel proposes to adopt for the review
of competition in retail
telecommunications markets and the indicators which it intends to consider.
It has also set out the data which it currently
has available. Oftel would welcome comments on the following questions:
3.102 Is the
framework which Oftel has set out for its competition analysis appropriate?
Is Oftel considering the
most appropriate set of indicators for this purpose? How should these
indicators be interpreted and combined
in Oftel’s overall assessment of market conditions? Which markets do
you expect to become effectively
competitive in future and over what timescales? What implications does
this have for future controls on BT’s
Oftel would welcome comments on its proposed market definition and on its preliminary analysis of competition against its key
indicators. Oftel would also welcome any other data that potential respondents believe would help Oftel assess competition in
the provision of basic telephony services.
Oftel seeks the
views of consumers and industry by 2 October 2001. There will
then be a 2-week period to 16 October 2001
during which comments on the representations made during the first phase
of consultation are invited.
Comments on the
proposals should be made in writing and sent to:
50 Ludgate Hill
Tel: 020 7634 8869
Fax: 020 7634 8924
should not be sent via the Internet. Written comments will be made publicly
available in Oftel’s Research and Intelligence Unit except where respondents
indicate that the response, or parts of it, is confidential. Respondents
are therefore asked to separate out any confidential material into a
clearly marked annex. In the interests of transparency, respondents
are requested to avoid confidential markings wherever possible. Appointments
to view written comments in Oftel’s Research and Intelligence Unit must
be made in advance (tel: 020 7634 8761, fax: 020 7634 8946).
This document is
available on Oftel’s website at www.oftel.gov.uk. Oftel would like to
set up a link between this document and any responses placed on respondents’
own Internet pages. Please contact Jo Hamilton at Oftel on 020 7634
8755 or by e-mail at email@example.com to arrange this.
Oftel has a free
e-mail based mailing list to help people stay informed about the work
that Oftel is doing. Each time an Oftel document is published and placed
on Oftel’s website at www.oftel.gov.uk, subscribers to the list receive
an e-mail informing them about the document. To register, please go
to the What’s New section of the website and link to the electronic
Copies of this consultation
document are available on disk. Accessible formats such as large print,
Braille and audio cassette can be made available on request.
Please contact the
Oftel Research and Intelligence Unit on 020 7634 8761 or by e-mail at
firstname.lastname@example.org for more information.
that this document meets the Cabinet Office code of practice on written
consultation documents. The code is reproduced below for convenience.
If you have any comments or complaints about this consultation process
for the code of practice:
50 Ludgate Hill,
London EC4M 7JJ,
tel: 020 7634 5350
fax: 020 7634 8943
1) Timing of consultation
should be built into the planning process for a policy (including legislation)
or service from the start, so that it has the best prospect of improving
the proposals concerned, and so that sufficient time is left for it
at each stage.
2) It should be
clear who is being consulted, about what questions, in what timescale
and for what purpose.
3) A consultation
document should be as simple and concise as possible. It should include
a summary, in two main pages at most, of the main questions it seeks
views on. It should make it as easy as possible for readers to respond,
make contact or complain.
4) Documents should
be made widely available, with the fullest use of electronic means (though
not to the exclusion of others), and effectively drawn to the attention
of all interested groups and individuals.
5) Sufficient time
should be allowed for considered responses from all groups with an interest.
Twelve weeks should be the standard minimum period for consultation.
6) Responses should
be carefully and open-mindedly analysed, and the results made widely
available, with an account of the views expressed, and reasons for decisions
7) Departments should
monitor and evaluate consultations, designating a consultation co-ordinator
who will ensure that all the lessons are disseminated.
The physical characteristic
of a telecommunications system that indicates the speed at which information
can be transferred. In analogue systems, it is measured in cycles per
second (Hertz) and in digital systems in binary bits per second (bit/s).
BT’s Retail Systems
Business (or BT Retail)
The business containing
all the costs, assets and liabilities which are comprised in the Systems
Business which are not comprised in the Access Business or the Network
Business. A full description is provided in the Accounting Documents.
service consisting of conveyance from the local exchange/concentrator
to the point where the call exits the local switch (digital local exchange).
This interconnection service enables operators to offer call services
to the originating operator’s customer.
service consisting of conveyance of a telecommunications service from
the local exchange closest to the called customer’s premises to the
concentrator serving the called customer.
Calls and Access
A wholesale product
available from BT which allows service providers to rent a BT telephone
line and then supply the line and calls over it to the service provider’s
own customers. The service provider sets the tariffs charged to the
customer and is responsible for all customer service. BT continues to
own and maintain the line.
A facility enabling
customers to choose their carrier for certain defined classes of call,
by selecting the operator of choice in advance (and having a contract
with the customer), without having to dial a routing prefix or follow
any other different procedure to invoke such routing. CPS will be introduced
on BT’s network with effect from 1 April 2000.
Costs that are incurred
in the supply of all or a group of products or services provided by
the company and that do not arise directly from the production of a
single good or service.
Cost of capital
A firm’s cost of
capital can be defined as the rate of return that could be earned in
the capital market on securities of equivalent risk. In general, the
higher the riskiness of the firm’s activities, the higher its cost of
capital, since investors typically require compensation for greater
risk. For a firm financed by debt and equity, the cost of capital will
be a weighted average of its cost of capital from both sources.
The situation where
a customer is directly connected to a telecommunications operator other
than BT by a wire, fibre-optic or radio link.
by averaging the costs of network elements across the country so that
customers in different areas of the country do not pay different rates.
between operators enables a customer to transfer from one operator to
a second operator and retain the same number provided the customer remains
at the same address.
Where a customer’s
call is routed and billed through operator A’s network even though the
call originated from the network of operator B.
means the physical and logical connection of two operators’ networks
thereby allowing customers of one system to connect with customers of
the other, or to access services provided from the other system.
Refers to the special
network arrangements required for transmitting data over the Internet.
Local loop unbundling
A process by which
BT’s exchange lines are physically disconnected from BT’s network and
connected to other operators’ networks. This enables operators other
than BT to use the BT local loop to provide services to customers.
A service or connection
allowing only a limited amount of information to be conveyed, such as
for basic voice telephony. This compares with broadband which allows
a considerable amount of information to be conveyed. See also bandwidth.
charging regime introduced on 1 October 1997. BT is free to set charges
for competitive and new interconnection services. Charges for interconnection
services that are not yet competitive are subject to charge controls.
Prior Year Revenue
The basket weight
for BT’s price and charge controls have been set equal to the proportions
of basket revenue accruing to the relevant services in the year before
that in which the price changes take place.
providing services to the public with powers granted by the Secretary
of State for Trade and Industry, under the Telecommunications Act 1984,
to enable them to install their systems on public and private land,
The system of price
control where average annual price changes for the price-controlled
services are limited to the increase in inflation (as measured by the
Retail Price Index) less a specified number (X).
Provider of telecommunication
services, or services with a telecommunication service component, to
third parties whether over its own network or otherwise.
A provision in some
Telecommunications Act licences requiring the licensee to provide certain
services to all specified persons. For example, BT is currently required
to provide basic voice telephony and certain other established telecommunications
services to anyone who may reasonably request them.