Review of the Wholesale Broadband Access Markets 2006/07
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Review of the wholesale broadband access markets 2006/07 Identification of relevant markets, assessment of market power and proposed remedies Explanatory Statement and Notification Consultation Publication date: 15 November 2007 Closing Date for Responses: 7 February 2008 Contents Section Page 1 Summary ............................................................................................................. 1 2 Introduction.......................................................................................................... 5 3 Market Definition................................................................................................ 11 4 Market Power Assessment ................................................................................ 69 5 Regulatory Remedies ...................................................................................... 104 6 Responding to this Consultation ...................................................................... 148 Annex Page 1 Notification....................................................................................................... 150 2 Retail Marketing Information............................................................................ 180 3 Independent Consumer Information ................................................................ 182 4 Geographic Data Analysis ............................................................................... 184 5 Assessment of January 2007 data................................................................... 199 6 Impact Assessments........................................................................................ 203 7 Alternative Broadband Technologies............................................................... 208 8 Consumer Research........................................................................................ 212 9 Ofcom’s Consultation Principles ...................................................................... 227 10 Consultation Cover Sheet............................................................................ 228 11 Consultation Questions ............................................................................... 230 12 Respondents to the November consultation................................................ 231 13 Glossary ...................................................................................................... 232 Review of the wholesale broadband access markets 2006/07 Section 1 1 Summary Introduction 1.1 Broadband plays a central role in communications. It is now used by many consumers and businesses to keep in touch, access information and conduct business. Developments in technology have seen broadband reaching the majority of households and businesses in the UK and this has been reflected in widespread take-up (there are now more than 14.5 million broadband connections in the UK). Competition, meanwhile, has seen service providers differentiating in terms of price, speed, quality and in terms of product bundles. For instance, some providers sell broadband in conjunction with basic telephony and/or television services. A healthy retail market is however dependent on a competitive wholesale market or regulation where competition is not yet sufficient. Ofcom needs to ensure therefore that the regulatory framework at the wholesale level is appropriate given the prevailing conditions. This review aims to do that. 1.2 Competition in the provision of retail broadband services depends on service providers having access to wholesale broadband services or local loop unbundling (LLU) to build their own services. Ofcom has identified that competition between networks based on LLU, rather than competition based on wholesale broadband products, is crucial to maintaining the UK's broadband progress. Promoting competition based on LLU continues to be central to Ofcom’s approach in making sure that consumers can access the services they demand. 1.3 LLU is not, however, economically viable on a national basis. This means that in some geographic areas there will not be direct competition between broadband networks. In these areas regulation at the wholesale level is necessary to ensure that consumers can choose between differing retail offers. Conversely, in areas which benefit from competition between networks, Ofcom must seek to remove unnecessary regulation. The November consultation 1.4 On 21 November 2006, Ofcom published the consultation document entitled Review of the wholesale broadband access markets 2006/071 (“the November consultation”) in which it set out its initial views in relation to the definition of the relevant product and geographic markets, the existence of significant market power (“SMP”) within those markets, and the regulatory remedies that should apply. 1.5 Ofcom’s initial view was that the relevant product market could be defined as: • asymmetric broadband access and any backhaul as necessary to allow interconnection with other Communications Providers which provides an always on capability, allows both voice and data services to be used simultaneously and provides data at speeds greater than a dial-up connection. This market includes both business and residential customers. 1 http://www.ofcom.org.uk/consult/condocs/wbamr/wbamr.pdf 1 Review of the wholesale broadband access markets 2006/07 1.6 In terms of the geographic market, Ofcom considered that there were four distinct geographic markets in which competitive conditions within each were broadly similar. The competitive conditions between the markets were, however, distinct. The four markets were: i) those geographic areas covered by exchanges where KCOM2 is the only operator (“the Hull area”); ii) those geographic areas covered by exchanges where BT is the only operator (“Market 1”); iii) those geographic areas covered by exchanges where there are 2 or 3 Principal Operators AND exchanges where there are 4 or more Principal Operators but where the exchange serves less than 10,000 premises (“Market 2”); and iv) those geographic areas covered by exchanges where there are 4 or more Principal Operators and where the exchange serves 10,000 or more premises (“Market 3”). 1.7 In terms of its SMP assessment, Ofcom considered that KCOM had SMP in the Hull area and that BT had SMP in Market 1 and, separately, in Market 2. However, in light of the rapidly changing competitive conditions and given the fact that Ofcom was planning a second consultation Ofcom did not believe that it was appropriate or necessary to reach a firm conclusion on the existence or otherwise of SMP in Market 3. 1.8 As a result of its SMP assessment in relation to the Hull area, Market 1 and, separately, Market 2 Ofcom proposed to impose the following regulatory remedies in each market: • requirement to provide Network Access on reasonable request; • requirement not to discriminate unduly; • requirement to publish a reference offer; • requirement to notify terms and conditions; • requirement to publish technical information; and • requirement to have accounting separation. 1.9 Ofcom invited comments on its views in relation to the product and geographic market definitions, its assessment of SMP, and the regulatory remedies proposed. Ofcom received 30 responses, 7 of which were confidential. Respondents’ views 1.10 Respondents’ views were mixed. A number of respondents suggested that there was no compelling evidence that markets were sub-national and some considered that the market review was premature. Other respondents, however, were supportive of the finding of sub-national markets. There were wide-ranging views on the appropriateness of the product market definition. A number of respondents 2 KCOM Group PLC previously named Kingston Communications (Hull) PLC 2 Review of the wholesale broadband access markets 2006/07 suggested that symmetric services should be included. Other respondents suggested that residential and large business customers might be in separate markets. 1.11 Respondents also disagreed about the competitive conditions in Market 3. A number stated that BT retained SMP in the market and that it should be required to provide wholesale broadband services. They argued that the withdrawal of regulatory obligations might prove detrimental to the retail broadband market. BT, on the other hand, stated that the market was competitive on a forward-looking basis and that no one possessed SMP in Market 3. BT stated that regulation should therefore be removed. 1.12 In terms of Markets 1 and 2, there was broad agreement that BT retained SMP. There was not, however, broad agreement on the regulatory remedies proposed. A number of respondents stated that price controls and/or cost orientation requirements should be imposed. BT took the opposite view. 1.13 Ofcom’s assessment of the geographic nature of the market in Hull or the existence of SMP was not questioned. KCOM accepted that both the market definition and SMP assessment were appropriate. It did not consider, however, that the regulatory remedies proposed were appropriate. It argued that the threat of entry acted as a sufficient constraint on its activities and that, in any case, it provided good quality broadband service at competitive prices. Ofcom did, however, receive a number of responses from residents of the Hull area who expressed dissatisfaction that their choice of broadband supplier was limited, unlike the rest of the UK. The Hull area, Market 1 and Market 2 1.14 Ofcom has not made any fundamental changes to the proposals set out in the November consultation