DC14-087 February 28, 2014
BT calls for Sky and TalkTalk subsidies to end
New report warns pricing distortion could reach £1 billion
BT today called on Ofcom to level the playing field in the wholesale broadband market. The company believes that Ofcom has now achieved its policy goal of driving competition deeper into the network and that it no longer needs to set prices that favour some operators over others.
Ofcom has successfully created one of the most competitive broadband markets in the world. BT's share of the retail broadband market now stands at around 31 per cent, compared with 41 to 52 per cent for other ex-incumbents in Europe 1.
BTs call for action came as a new report from Plum Consulting revealed how companies such as Sky and TalkTalk have benefited from this pricing distortion by £623 million over the past nine years. This is because such companies are allowed to pay below cost for their main regulated service whereas others, who rely on a different regulated service, are forced to pay above cost 2.
BT is urging Ofcom to close the current pricing gap now thereby fulfilling the policy it set in 2009 rather than over the next six years as is being proposed. Plum estimate such a delay would add a further £369 million of distortion, taking the total impact to around one billion pounds.
Speaking today, John Petter, BT Consumer CEO said: TalkTalk and Sky have enjoyed subsidies for the best part of a decade but it is time for that to end. Both are successful companies and both are more than capable of standing on their own two feet. It is particularly unfair that BT has to give Sky a commercial leg up when they consistently refuse to provide us with fair access to their own services.
Ofcom should be given credit for driving competition deeper into the network but that success needs to be reflected in current regulation. We know that Ofcom want to tackle this distortion but we want them to act now given this is a highly dynamic and competitive market. All we are asking for is a level playing field where prices reflect costs and consumers benefit as a result.
The current situation has its roots in 2005 when Ofcom decided to promote local loop unbundling (LLU), a process whereby other companies can install their own equipment in BT exchanges in order to offer broadband and phone services. They have done so over the years by setting the price of the fully unbundled service 3 below cost whilst inflating prices for the alternative option 4 where companies take a direct wholesale service from BT.
Ofcom's policy has achieved its goals with the number of fully unbundled lines now standing at 7.6 million compared with less than 50,000 in 2005. The main beneficiaries have been Sky and TalkTalk who now have more than nine million broadband customers between them, around half of all the broadband connections carried over BT's network.
The policy has however made life difficult for smaller ISPs, many of whom didn't have the capital to invest in LLU, and who have suffered a competitive disadvantage as a result.
Ofcom recognised the potentially harmful effects of their policy on efficient broadband provision, investment and competition in 2009 when they said prices should reflect cost differences by 2012/13. Their current proposal is to reduce the gap between the relevant products from £19 per annum to £10 over the next three years. This is despite them estimating the true cost difference to be between £0 and £4.
The new report from Plum Consulting, which BT commissioned, says prices should be based on cost with immediate effect given the success of LLU.
The report forms part of BT's response to Ofcom's Fixed Access Market Review (FAMR), specifically its proposals around the next price cap for Openreach's regulated copper products.
The full report can be accessed here:
www.plumconsulting.co.uk/pdfs/Plum_Feb2014_mind_the_gap_MPF_vs_WLR_and_SMPF.pdf
Ends
1 Retail broadband market shares for ex-incumbents in Germany, France, Italy and Spain. Source; Source: Analysys Mason Fixed Broadband Quarterly Metrics
2 Cost, in this context, means Fully Allocated Cost.
3 MPF Metallic Path Facility
4 Based on a combination of Shared Metallic Path Facility (SMPF) and Wholesale Line Rental (WLR)
About Plum Consulting:
Plum Consulting offers strategy, policy and regulatory advice on telecoms, spectrum, online and media issues. Plum is based in London with a global client base, and advises regulators, governments and companies.
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DC14-087 February 28, 2014 
