Ofcom has announced plans to shake up the rules around wholesale broadband pricing, in a move the regulator claimed would promote both competition and investment in the superfast broadband market.
The new rule, notified to the European Commission on 15 January 2015, would mean BT would be obliged to keep a sufficient margin between its wholesale and retail superfast broadband charges and therefore, allow other providers to match its pricing while still turning a profit.
The regulator said this would let BT keep its current flexibility to set wholesale superfast broadband prices, which would give the incumbent an incentive to invest in its future fibre network. It would also mean BT would not be allowed to set prices in such a way that would prevent other operators from competing profitably for customers.
As the largest superfast broadband retail provider and national network owner, BT has to allow other operators to use its network to sell broadband to consumers in a process called virtual unbundled local access (VULA). The rule change will ensure the margin between its wholesale VULA charge and its retail price is sufficient for rivals to compete.
Ofcom said its indicative assessment was that BT was actually already doing this, and therefore the new condition was more of a safeguard to limit its ability to reduce retail margins in future and ensure any increase in its costs were reflected in its prices.
The new rule will also take into account the costs and revenues of BT’s sport channels, which are offered free to superfast broadband customers in its retail bundles.
Millions of customers
Ofcom said the changes were deemed necessary because of the massive growth in superfast broadband the UK has seen in recent years.
When it introduced the VULA requirements there were around 100,000 superfast broadband connections on BT’s network. However, this has since grown to more than three million customers and, despite the much-publicised controversies around the roll-out of superfast, other providers are offering speeds of up to 76Mbps across BT’s network.
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As customer numbers and speeds are expected to continue growing, there will need to be more investment to upgrade the superfast broadband infrastructure to offer options such as true fibre to the premises (FTTP), among others.
Ofcom’s rule changes are aimed at making sure operators can continue to compete throughout this process, and continue to innovate around their own services.
The draft measures are now subject to review by Brussels, and a final statement on the matter is set to be published in February 2015, with the new regulatory conditions coming into effect in March, if approved.
TalkTalk, which has previously called for Ofcom to consider bringing down wholesale pricing, came out in favour of the proposals.
“We are delighted that Ofcom has confirmed that from now on superfast broadband will be a price-regulated product," said a spokesperson.
"They are right to be concerned that BT could abuse its position to undermine competition in superfast broadband. Robust regulation creates a more competitive market that better serves consumers and small businesses.
“We do think, however, that consumers should be disappointed that the proposals will not lead to an immediate price reduction. Broadband is critical to our future. This must be the beginning of the journey to bring down superfast broadband pricing and make consumers and Britain better off."
Ofcom statement 'misconceived'
BT gave a mixed response, saying while it was not opposed to regulated wholesale pricing, Ofcom’s statement was nevertheless “misconceived” in a number of ways.
Sky remains largely unregulated, while further hurdles are proposed for us, the pay-TV challenger
“We’re not opposed to the principle of a test, in fact, we passed the standard Competition Act test recently and Ofcom has said our current prices will also pass this new test when it comes into force,” said a spokesperson.
“However we do not think our sports costs should be part of any assessment, and reject the notion that Sky and TalkTalk require regulatory assistance. They have more than 40% of the broadband market between them compared to BT’s 31%.
“BT is trying to ensure real competition in pay-TV sports for the first time in 25 years, yet the UK’s lopsided regulatory regime means Sky remains largely unregulated, while further hurdles are proposed for us, the pay-TV challenger.”
BT is now considering its formal response, which may include an appeal.