Play Nicely or Face an Antitrust Probe, Ofcom Tells BT

Britain’s telecom industry is delivering good products, choice and value to consumers, Ofcom said. Call rates are among the lowest in the world, there are over 5 million broadband connections and competition in fixed- line telecoms is still growing. The problem, Ofcom said, isn’t what the sector is delivering today but what it will be able to deliver tomorrow. Prospects are good in the mobile sector because 5 network operators and service providers buy capacity in the wholesale market, Ofcom said.

But the fixed telecom industry is facing “fundamental challenges,” it said, as new entrants try to compete with BT. The incumbent is “becoming more efficient and enjoys greater scale economies than its competitors. Competition has eroded margins, and BT is now proposing to invest in a state-of-the-art new core network,” the regulator said. Entrants are struggling with either having to build their own access or backhaul networks or to rely on BT to provide wholesale access to its network -- access BT hasn’t provided on an equal footing, Ofcom said. Attempts to remedy the situation have created a “regulatory mesh” that imposes many regulations on BT at the retail and wholesale levels. Given all that, Ofcom said, maintaining the status quo is no longer an option.

The consultation document sets out options for revamping the telecom sector: (1) Across-the-board deregulation. Although attractive, Ofcom said, the approach has significant practical problems. It may be constrained by the European Union’s telecom regulatory framework and “difficult to reconcile with our functions and duties.” (2) Referring the situation to the Competition Commission under the U.K. Enterprise Act, based on reasonable grounds for suspecting restriction or distortion of competition. The Competition Commission could consider whether BT’s wholesale and retail arms should be split.

The 3rd choice -- Ofcom’s preference -- would be to tackle inequality of access head-on through equivalence of products and behavioral changes by BT. At the product level, BT’s wholesale customers should have access to a similar set of regulated wholesale products, at the same prices, and using transactional processes like those of BT’s retail activities, Ofcom said. BT would also be required to: (1) Change its behavior to support such equivalence. (2) Revamp management structures, incentives and business processes. (3) Create internal information flows to let customers influence BT as much as different parts of the company influence each other. (4) Demonstrate the level of equivalence through transparency. “We look to the management of BT to provide prompt and clear proposals which will achieve such a change,” Ofcom said.

The 3rd option, if successful, could lead to less or no regulation in several markets where BT holds significant market power, Ofcom said. Fewer rules at the retail level imply that consumers would increasingly be protected by greater competition, the regulator said, so it’s crucial that competition effectively gives consumers what they want and there’s a safety net for vulnerable consumers. Ofcom floated several proposals for making consumers more aware of alternative suppliers and how to switch among them.

The consultation also makes proposals for fostering competition in key markets such as current generation broadband, voice, next-generation core networks, and next- generation access networks. Ofcom already has taken steps to open access through local loop unbundling (LLU), but it said Thurs. more action may be needed to achieve maximum success. In voice, Ofcom proposed a staged withdrawal from public switched telephone network regulation, with each stage contingent on the market meeting specific competitive outcomes.

The transition to next generation core networks based on packet-switched technology implies a need for regulation to evolve as well, Ofcom said. It will open a consultation shortly on key policy issues involved in access and interconnection arrangements for BT’s proposed 21st Century Network. And with regard to next generation access networks, Ofcom said that while such networks aren’t in place yet in any scale, it’s important that regulation not hamper their timely and efficient rollout. It asked respondents for comment on several options. Comments on these and other questions in the consultation are due Feb. 3.

BT said it’s pleased with the direction of the strategic review. “We welcome Ofcom’s call for a new settlement where regulation is tightly focused on the parts of the market that need it, with deregulation elsewhere,” said Chief Exec. Ben Verwaayen: “We will engage constructively with Ofcom and the industry during the final phase of the Strategic Review, looking forward to achieving regulatory certainty that will encourage investment and innovation.”

The U.K. Competitive Telecom Assn. (UKCTA) was “delighted to see Ofcom’s commitment to giving all competitors a fair crack of the whip.” What’s notable about the review is the “explicitness” of some language -- something the industry’s not used to from a regulator, said UKCTA Chmn. David McConnell. Non-BT industries have been pushing the model of equivalence for some time, he said, because it’s the basis on which regulations must be applied. The challenge now, McConnell said, is to hammer out what equivalence means with regard to BT’s behavior, and how Ofcom will monitor compliance.

Ofcom’s proposals should play a vital role in the debate over the European Union’s (EU’s) Lisbon plan to make Europe the world’s most competitive knowledge-based economy by 2010, said the European Competitive Telecom Assn. (ECTA). “It’s about access, stupid,” ECTA said. The association urged that Ofcom’s concept of equivalent treatment of wholesale customers be applied across the EU. The review “confirms that there is no substitute for effective regulation when dealing with dominant operators in Europe,” said ECTA Managing Dir. Roger Wilson. For countries further behind with the new telecom regulatory framework, he said, the review is a “wake-up call” that “real urgency is needed now.”

Ofcom’s proposed remedies are “very interesting” because they're voluntary “but will be turned over to the Competition Commission if BT doesn’t play ball,” said European Competitive Telecom Assn. Regulatory Affairs Mgr. Tom Kiedrowski. The regulator is also promising deregulation on a range of wholesale access services if BT complies, he said. It will need to “impose a far greater level of transparency and monitoring of BT” than the current system, which leaves the “vertically integrated operator a lot of room to maneuver.”

The Ofcom review “missed a golden opportunity to open up the U.K. communications market to greater competition, innovation and investment” by leaving it up to BT to change its behavior, said the U.K. Internet Foundation (UKIF). Ofcom should have coordinated with industry more about how to make competition work better, a UKIF spokesman said. However, he acknowledged that Ofcom is in the difficult position of needing to keep BT happy, because of its massive investment in the country’s telecom infrastructure, without upsetting other industry players. UKIF will now try to gather more industry opinion to report to Ofcom, the spokesman said.

Comments on the strategic review are due Feb. 3.