BT Response Section 1 and Section 2
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NON-CONFIDENTIAL VERSION BT’s response to Ofcom’s discussion document “Strategic Review of Digital Communications” 8 October 2015 Redactions are highlighted by use of the symbol Comments on this response should be sent to: Mike Fox, BT Group Regulatory Affairs, via email at [email protected] 35 1 NON-CONFIDENTIAL VERSION Contents Section Page 1. Executive Summary 3 2. Introduction 16 3. BT’s view of the market today and our vision for 2025 18 4. Comments on key issues and answers to Ofcom’s questions 42 4.1 BT’s regulated returns 44 4.2 Widespread availability of services (Section 6: Questions 1-2) 46 4.3 Extending availability through targeted public policy (Section 7: Question 3) 53 4.4 Convergence and changing market structures (Section 8: Questions 4-5) 58 4.5 Strategies for sustainable competition (Section 9: Questions 6-10) 64 4.6 Regulation to promote efficient investment (Section 10: Questions 11-12) 78 4.7 Regulating vertically integrated firms (Section 11: Questions 13-16) 87 4.8 Empowered consumers (Section 12: Questions 17-19) 115 4.9 Delivering quality of service (Section 13: Questions 20-21) 125 4.10 Targeted regulation and opportunities for deregulation (Section 14: Questions 22-25) 143 Annexes Page 1. BT’s record of compliance with the Undertakings 153 2. BT’s rebuttals of allegations made by Sky in its initial DCR submission to Ofcom 161 3. Ofcom’s powers in respect of functional and structural separation 167 4. BT Undertakings: List of provisions for deletion 171 5. The SME market in the UK 174 Consultant reports Analysys Mason “International benchmarking report” RBB Economics “Vertical integration of Openreach – the impact on competition and investment, 7 September 2015” Plum Consulting “This connect'd Isle: building on success in digital communications: A report for BT, September 2015” http://www.plumconsulting.co.uk/pdfs/Plum_September_2015_This_connect'd_Isle.pdf KPMG “Delivering Britain’s Digital Future: An Economic Impact Study, A report for BT, 22 September 2015” 2 NON-CONFIDENTIAL VERSION 1. Executive Summary Foreword 1. Ofcom’s strategic review of digital communications is timely. This is an opportunity for Ofcom to fulfil its remit as a converged regulator by looking at the converging markets holistically and coherently, to make clear how it proposes to fulfil its duties regarding proportionate, consistent and targeted regulation. It is also an opportunity to provide the regulatory foundations on which providers can meet ever rising customer expectations across the whole industry. 2. It is now ten years since Ofcom accepted BT’s offer of a new regulatory settlement in the fixed line sector as an outcome of its Telecommunications Strategic Review (TSR). Since then, the digital landscape has advanced dramatically. At the end of 2005, only 39% of UK homes had a broadband connection1 and typical speeds during the year were 1Mbps.2 Now, 83% of UK homes have access to superfast broadband3 and average residential fixed line speeds are over 22Mbps.4 In 2005, there were around 4.5 million 3G mobile subscriptions5, and Ofcom reported that mobile data was just taking off6; by the end of 2014, there were 23.6 million 4G subscriptions7, with average browsing speeds of 14.7Mbps.8 Pay TV penetration has increased from 44%9 in 2005 to c.57% in 2015.10 3. The industry has delivered these good outcomes in connectivity and broadband against a backdrop of constantly rising customer expectations and demand. Over 39 million people in the UK use the internet every day11 and we spend more than 20 hours a week on-line.12 Ofcom reported in its Infrastructure Report 2014 that the amount of data downloaded had increased by 93% in the previous year alone.13 4. Competition in the fixed line part of the industry has flourished, based on the functional separation of Openreach and access to its competition-ready network on an equivalent basis. Openreach supplies regulated products and services on an equivalent basis to over 500 Communications Providers (CPs).14 International benchmarking shows that the UK has one of the most competitive broadband markets in the world. The mobile market is also characterised by a very high level of competition between MNOs and a large number of MVNOs. 5. The issues of investment in fibre broadband access were not directly considered in Ofcom’s TSR but rather were addressed in 2009 when Ofcom introduced its regulatory framework for NGA, including the decision not to price regulate BT’s wholesale fibre access product but to impose access to the infrastructure on an equivalent basis. This policy has been a resounding success, leading to what we believe is the fastest commercial rollout of fibre broadband anywhere in the world, a highly competitive retail market and strong investment by other players including Virgin Media and CityFibre. An independent report published recently by Analysys Mason and provided to Ofcom alongside this response shows that as well as being ahead of other major European economies for superfast broadband coverage and take-up, the highly competitive broadband market in the UK means we are set to close the gap with world-beaters like Japan and South Korea. 6. By contrast, Pay TV customer outcomes have lagged behind, and competition problems have not been addressed: Ofcom’s December 2014 International Communications Market Report showed the UK had the second highest prices for premium Pay TV among the comparator countries; BT estimates that Sky’s share of retail Pay TV subscription revenues has been in excess of 74% since 200415; and switching rates in Pay TV are only 2%, the lowest of any of the communications markets surveyed by Ofcom.16 Ofcom should seek to produce the same competitive forces in Pay TV that have benefited consumers and businesses in the broadband market. A lack of action brings the risk that unchecked market power in Pay TV will distort competition in the broadband market. 7. The industry needs to invest now to meet further substantial growth in customer expectations and demand over the next decade to 2025. BT has played a vital role by investing £20 billion of capital over the last 10 years in its networks.17 £10.5 billion of that money has gone to Openreach18, so that the whole industry, and the whole country, can benefit from a properly maintained and upgraded network, a 35 3 NON-CONFIDENTIAL VERSION network that is open to all CPs wishing to provide voice and broadband services on equal terms. Openreach’s investment in the access layer benchmarks favourably against its peers, with its last mile and aggregation capex being over 50% higher than the European average.19 8. BT stands ready to make further investments over the next ten years, subject to having a regulatory regime that continues to support the required investment and innovation by all operators. We need Ofcom to focus its regulation, to make long-term commitments, and to leave markets to operate. BT’s investment will continue to be critical in driving improved customer outcomes and in underpinning the UK’s digital economy for the benefit of all CPs and end customers. 9. Our vision for Britain’s digital future, announced on 22 September, will see fibre extended beyond 95% of UK premises and 10 million homes and businesses enjoying access to ultrafast broadband at 300- 500Mbps by the end of 2020. We stand ready to deliver 5-10Mbps universal broadband if Ofcom and the Government act to make such a commitment commercially viable, permit the technological innovation necessary and provide support on planning. We will also aim to achieve on-time installations for consumer customers of 95% by 2017. 10. Regulation should ensure customers’ needs are met by supporting efficient investment and delivering effective competition across the whole of the industry, including Pay TV as well as communications. We believe that to fulfil its duties, set out in Section 3 of the Communications Act 2003, Ofcom needs to act in the six key areas set out below: - Long-term commitment: Ofcom should make long-term commitments in regulation to secure the long-term investments necessary to meet future customers’ needs. An example here is Ofcom’s very successful approach to regulating superfast fibre broadband access. All communications providers need policy certainty to invest with confidence. - Support for investment: The viability of long-term investments, the incentives to make them, and management of risk are critical issues. Ofcom should not price regulate services that depend on new investment before payback has been achieved. Ofcom itself recognises that vertical integration may provide vital investment coordination incentives, avoid the problem of investment hold-up and so facilitate major infrastructure projects. Britain has gained, and will continue to gain, from Openreach as a part of BT – benefiting from more investment, coverage and speed. Ofcom should reject calls for the structural separation of BT at the earliest opportunity. - Consolidation: To meet the challenges of declining revenues and rising investment demands, firms will look to consolidate to support investments and reduce costs. We believe Ofcom should support consolidation that promotes investment and competition. - Balance between service quality and price: Customers do not simply want ever cheaper broadband: they want faster, better broadband, with high service standards. We believe Ofcom should carry forward the model it adopted in the last Fixed Access Market Review and associated charge control, treating service as a third pillar alongside price and competition, and taking customers’ service needs into account when setting price controls. - Level playing field: In a world where customers increasingly buy bundles of fixed, mobile and Pay TV services, we believe Ofcom needs to ensure a level playing field of competition across the whole industry and not allow disparities in regulation to distort market outcomes.