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Summary

1.1 On 22 September 2005, Ofcom published a statement setting out its conclusions from its Strategic Review of Telecommunications (Telecoms Review) and accepting undertakings offered by British Telecommunications plc (BT) in lieu of a reference under Part 4 of the Enterprise Act 2002 (the Undertakings). The Undertakings were aimed at delivering equality of access to BT’s enduring economic bottlenecks in order to provide a platform for effective and sustainable deep level infrastructure competition, and hence to deliver the benefits of competition and innovation to UK consumers and businesses.

1.2 Over the last year BT has started to implement these Undertakings, with involvement from Ofcom and industry. This report is an evaluation of the impact of the Telecoms Review on the fixed telecoms market to date. This report is intended primarily as a review for industry stakeholders. A document looking more widely at consumers’ experiences will be published next month.

1.3 Our key conclusions are described below.

1.4 BT has shown itself committed to the delivery of the Undertakings. It has expended an enormous amount of effort and resource in implementing them. Achievements include:

• the formation of Openreach; a new business unit operating the access and backhaul network with around 30,000 employees drawn together from BT Wholesale, BT Retail and outside of BT;
• the implementation of key aspects necessary to achieve operational separation of Openreach, such as a new leadership team, a new brand rolled out across the organisation and vehicle fleet, new account management, a separate operating model and a new remuneration model;
• the development and launch of a new platform (the equivalence management platform) to interface with external customers and with other parts of BT on an equivalent basis;
• improvements in some areas of service performance such as on Backhaul Extension Circuits (BES ) circuits and co-mingling, which with other measures, has helped Local Loop Unbundling (LLU) to reach close to one million lines;
• implementation across other parts of BT of new organisational structures, improved transparency, and implementation of new codes of practices and Chinese Walls; and
• establishment of the Equality of Access Board (EAB) which has, and is continuing to, build its credibility as an effective and independent monitor of BT.

1.5 However, the actual implementation, particularly of equivalence, has raised a number of issues, for instance in the way in which equivalence was applied and the quality of the equivalence management platform used to deliver equivalence. In addition, during the implementation of the Undertakings over the last 12 months, service performance across a range of wholesale products has at times been poor, and promised improvements have not always been fully delivered, or maintained. Whilst service performance is not strictly an Undertakings obligation it is still very relevant to this report into the impact of the Telecoms Review, since it significantly affects the ability for effective and sustainable competition to develop. It’s important to note, however, that most of these operational issues affect BT’s downstream divisions, as well as external communications providers, and therefore, BT has an incentive as a result of equality of access, to address these issues.

1.6 Many of the initial issues have, we believe, been identified and have either been resolved or there is a process to achieve resolution. The areas where we believe further progress is required are:

• Continuing and rapid improvements in the capabilities and quality of the equivalence management platform, the operational support system which underpins the delivery of equivalence by Openreach.
• A move to BT’s retail business using exactly the same IPStream product bundle as other ISPs. This will begin to be achieved from January 2008 when a revised IPStream product is launched and the new 21st Century Network (21CN) product wholesale broadband connect is rolled out.
• A pricing strategy for Openreach’s wholesale ethernet product portfolio in which the availability of end-to-end products does not undermine the application of equivalence to unbundled Ethernet access and backhaul, or reduce incentives for deep infrastructure competition.
• Further significant and sustained improvements in the service performance for key Openreach products such as BES, Wholesale Extension Service (WES) and LLU provisioning and repair, and co-mingling delivery.
• Progress towards introduction of a fit-for-purpose Wholesale Line Rental 3 (WLR3) product that is robust enough for both BT Retail and competitors to use.
• Resolution of various boundary issues between Openreach and BT Wholesale, such that planning activities which span the two divisions of BT are carried out in an efficient manner, but without compromising the delivery of equivalence. Examples include planning activities for SDH and Ethernet private circuits, and space and services in local exchanges.
• A more proactive, transparent and customer focussed approach and culture to addressing wholesale customer issues such as migrations processes, new products and other developments.
• Agreement on a roadmap for operational separation of Management Information Systems (MIS) and Operational Support Systems (OSS) systems.

1.7 There is clearly a significant amount of work still to do both in terms of addressing outstanding issues as well as on the delivery of upcoming milestones. Ofcom will remain focussed on working with Openreach, BT and other industry participants to ensure successful delivery.

1.8 In terms of the impact the Undertakings are having on industry, there are indications of increasing infrastructure-based competition in broadband and fixed voice markets, resulting in greater choice and improved pricing for consumers. This can be attributed in part to the outcome of the Telecoms Review. However, there are fewer signs of developments in services based on fibre (e.g. little growth in take-up of partial private circuits).

1.9 Ofcom remains fully committed to the Undertakings and its strategy for regulating fixed line telecoms. We continue to believe the Undertakings have the potential to encourage further sustainable competition, more services, lower prices and greater consumer choice.

1.10 The key objectives of the Telecoms Review, and progress achieved against them to date, are summarised below. There are three broad areas we cover: whether the Undertakings have been effectively implemented; whether the Undertakings is helping to deliver more effective and sustainable competition; and the impact on consumers.

Effective implementation of the Undertakings

1.11 Effective implementation requires BT, at a minimum, to comply with the Undertakings that it has committed to. This includes meeting the milestones laid out in the Undertakings, for example on operational separation and ‘Equivalence of Inputs’ dates, and on-going compliance. Furthermore, there is an expectation that BT should deliver the broader intention of the Undertakings to achieve equality of access to BT’s infrastructure for BT’s competitors, particularly through appropriate organisational behaviour.

1.12 A key element of the Undertakings was the establishment of Openreach. Openreach was established on time and Ofcom and other stakeholders have generally been impressed by the enthusiasm and commitment of its senior management.

1.13 However, there were some early problems. Some of these have been resolved - for instance, the Customer Business Management function is now fully resourced and communications providers have account managers and a WES repair function in Openreach has been created. Of continuing concern is the poor service performance for key Openreach products such as BES and LLU provisioning and repair, and co-mingling delivery.

1.14 A number of key dates relating to achieving equivalence of inputs have now passed, and on each occasion BT has stated that it delivered ready for service equivalence of inputs as required.

1.15 Nonetheless, Ofcom has expressed some concerns regarding these deliveries in its quarterly implementation reports – for example, we are concerned about the number of significant updates and downtime of the equivalence management platform used for LLU that were necessary after 30 June 2006, requiring, in some cases, significant outages.

1.16 BT has met its commitment to publishing quarterly key performance indicator (KPI) reports. While the data show the absolute level of service delivery differs substantially by product, they also suggest external communication providers often get a different service level to BT itself, but the service is not systematically better or worse.

1.17 The Undertakings set a framework for the development of network access for BT’s Next Generation Network (NGN – referred to as 21CN). While BT continues to be committed to its investment in 21CN, some communication providers are concerned over the Consult 21 process and the level of influence they have over it. BT is continuing to try and improve the process to reduce the resource burden on communication providers, and the establishment of NGNuk, which BT committed to in its Undertakings, is expected to be a positive step in this regard.

1.18 The Equality of Access Board (EAB) was established on 1 November 2005, ahead of time, and published its first annual report in May 2006.

1.19 Ofcom believes the EAB is a valuable organisation capable of effectively monitoring the implementation of the Undertakings and dealing with complaints from communication providers. Industry stakeholders also see the potential value of such an organisation. While we believe the EAB has made a good start, we also recognise that it has not been fully tested yet.

Achieving effective and sustainable competition

1.20 There are a number of outcomes Ofcom has identified, which assess the extent to which Ofcom’s regulatory approach is creating the conditions for effective and sustainable competition and the right incentives for timely and efficient investment.

1.21 Take-up of wholesale products provides one indicator of the degree of competition in the market. For copper-based products (primarily used to provide services to the residential and Small and Medium Enterprises (SME) markets), wholesale take-up has continued to grow. Take-up of LLU has increased to 0.85 million by the end of September 2006, and appears to be on track to reach 1.5 million lines in the first few months of 2007, and the proportion of end users served by an LLU exchange now exceeds 50%. The Telecoms Review particularly aimed to encourage investment deep in the network and in this context the take-up of LLU is considered a particularly important indicator.

1.22 For fibre-based products (typically leased lines used for business applications), however, progress has been relatively slow. Access products such as Wholesale Extension Service Access (WESA) and Traditional Interface Leased Line Access Product (TILLAP), which will allow deeper infrastructure based competition are not available yet, although there has been some progress towards product development.

1.23 Merit-based deregulation was an important element of the TSR strategy. The objective was to ensure that as competition took hold, ex ante regulation was withdrawn leaving the market to determine outcomes. The degree to which Ofcom determines there is a case for deregulation depends upon the development of sustainable competition. Over the last year, Ofcom has conducted, or is the process of conducting, a number of market reviews. We have de-regulated where it is justified and begun to put in place clear frameworks that will allow appropriate de-regulation going forward as competition develops.

A well-functioning telecoms market

1.24 Better experiences for citizens and consumers are the ultimate goal of all Ofcom’s regulation. We are still at an early stage for measuring the impact of the Telecoms Review on final market outcomes for citizens and consumers. While the impact of the findings of the Telecoms Review is difficult to measure directly, nonetheless, it is expected that Ofcom’s new approach to regulation will influence the way the market develops and experiences for consumers and businesses.

1.25 The data presented suggest:

• UK customers for fixed telecoms services continue to see better services, more choice and reducing prices;
• there are early signs that communication providers are providing customers with low cost bundled products, and with a wider range of broadband speeds, driven to a large part by deeper infrastructure investment (particularly LLU); and
• business and residential consumers mainly appear satisfied with their fixed line and internet services.

1.26 However, there are also areas where there is a need for improvement:

• some business and residential consumers find comparing price and quality of communications providers difficult; and
• large business consumers found switching advanced data services was often difficult.

1.27 Ofcom is also planning to publish the following documents, which will look in more detail at consumer experiences:

• Ofcom will publish its first annual report on “The Consumer Experience” in November 2006. This report will present indicators for small business and consumer experiences across all communications markets;
• We are publishing a research report based on a survey of large businesses regarding their use of telecoms services in parallel with this report; and
• A report “International Communications Market 2006” will be published before the end of 2006. This will contain a range of international comparison data for the communications market.

Next steps

1.28 Ofcom will continue proactively to scrutinise the ongoing delivery of the Undertakings and address issues that arise to help ensure a robust environment for the development of effective and sustainable competition. In parallel, we will continue to work on related areas such as BT exemptions from specified Undertakings and MIS separation.

1.29 Ofcom intends to continue to publish quarterly implementation reports providing information on BT’s progress towards implementation of its Undertakings. It is our expectation that we will also publish further evaluation reports like this one at appropriate points.

1.30 Ofcom considers that the Undertakings remain an appropriate and comprehensive solution to its competition concerns laid out in its Telecoms Strategic Review. We intend to continue to pursue full implementation of BT’s commitments.

1.31 Should you wish to discuss this report, or have comments on it, please contact Sarah Evans on 020 7981 3761, or via e-mail to: sarah.evans@ofcom.org.uk.

The full document is available below:

• Evaluating the impact of the Telecoms Review - An interim report one year on [pdf]
  Full Print Version

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