Narrowband Market Review
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Narrowband Market Review Consultation on the proposed markets, market power determinations and remedies for wholesale call termination, wholesale call origination and wholesale narrowband access markets Consultation Publication date: 1 December 2016 Closing Date for responses: 28 February 2017 1 About this document The Narrowband Market Review 2017 covers five wholesale markets that underpin the delivery of retail fixed voice telephone services in the UK. The outcomes from this review are designed to promote competition and further the interests of residential and business consumers. We are reviewing three access markets: wholesale fixed analogue exchange lines (the standard fixed lines used by residential and business consumers) and two markets that enable the delivery of digital telephone services to businesses to support applications such as call centre operations. The two digital exchange line markets are ISDN30 and ISDN2. In addition, we are reviewing wholesale call origination – a complementary service to the provision of analogue and digital exchange lines, which enables consumers to make calls over those lines. This review also includes wholesale call termination, a connection service provided by a fixed telecoms provider when their customer receives a call. If consumers call a UK geographic number (a number starting 01 or 02), their provider pays the terminating provider a wholesale charge, called a fixed termination rate. This consultation considers the level of competition in each of these five wholesale markets. Where competition is not working effectively, we propose regulation that should apply for the period 1 October 2017 to 30 September 2020. We will take all responses to this consultation into account before reaching our final conclusions, which we plan to publish in a statement in September 2017. 2 Contents Section Page 1 Executive summary 4 2 Background 16 3 Retail market developments 30 4 Market definition and three-criteria test: WFAEL and WCO 45 5 Market definition and three-criteria test: ISDN30 and ISDN2 88 6 SMP analysis: WFAEL, WCO, ISDN30 and ISDN2 112 7 Remedies on BT: WFAEL, WCO, ISDN30 and ISDN2 134 8 Remedies on BT: ISDN30 and ISDN2 charge controls 171 9 Quality of service remedies on BT: WFAEL, ISDN30 and ISDN2 183 10 Remedies on KCOM: WFAEL, WCO, ISDN30 and ISDN2 203 11 Market definition and SMP analysis: WCT 229 12 Remedies: WCT 243 13 Approach to the price regulation of WCT 264 14 Cost modelling for WCT charge control 286 15 WCT charge control specification 292 16 Interconnection: approach to regulation 300 17 Remedies on BT and KCOM: interconnect circuits 315 18 Price regulation of BT’s interconnect circuits 336 19 Regulatory financial reporting 351 3 Section 1 1 Executive summary Introduction In our Strategic Review of Digital Communications (DCR)1, we highlighted how the telecommunications sector has changed since our first strategic review in 2005. Competition has delivered new services and increased choice to retail consumers: a large majority of households (87%) now have an accompanying fixed broadband connection, with an increasing proportion choosing to buy this as part of a bundle with telephony and often TV. These developments in large part reflect our regulation of the underlying wholesale markets, where the rollout of local loop unbundling (LLU) has promoted infrastructure-based competition to BT from providers including Sky and TalkTalk. This, alongside further rollout of Virgin Media’s cable network, has led to increased availability and choice of retail bundles that include voice and broadband. In the DCR, we said that in the eyes of consumers, fixed and mobile networks are becoming more and more interchangeable. While most households and businesses in the UK continue to have fixed telephone lines, the relative importance of fixed voice calls has declined. Volumes of fixed voice calls are falling, whereas we have seen continued growth in mobile calls (as shown in Figure 1.1 below). We have also seen increasing use of internet-based (IP) voice services, particularly ‘over-the-top’ (OTT) services.2 Figure 1.1: Decline in fixed call volumes Source: Ofcom Communications Market Reports. 1 Ofcom, 25 February 2016. Making communications work for everyone: Initial conclusions from the Strategic Review of Digital Communications, (DCR Statement) https://www.ofcom.org.uk/__data/assets/pdf_file/0016/50416/dcr-statement.pdf. 2 In this context, these are services that enable consumers to make and receive voice calls using an internet connection. 4 We also said that we would consider how far we can deregulate the traditional fixed voice markets, in particular whether it is possible to remove some of the existing market-wide regulation of call origination, and replace it with targeted protection for those consumers who still need it.3 We explained that in the longer term we anticipate traditional voice telephony being replaced by voice services carried over broadband, and that this will be facilitated by the ability to purchase broadband without traditional voice services.4 This consultation sets out the provisional conclusions of our review of wholesale markets for voice services and lines, and represents an important stage in delivering on this strategy. In summary, in light of the market analysis we have undertaken we propose to significantly reduce the wholesale regulation that we apply to BT in these markets. In particular, we propose to: remove regulated cost-based charge controls for wholesale fixed telephone lines and call origination; remove regulation from the new supply of digital voice lines (known as ISDN), but retain regulation to protect existing business consumers of these services; and remove the ‘no undue discrimination’ regulation which currently restricts the terms upon which BT can sell wholesale call origination to other telecoms providers. As envisaged in the DCR, regulation of voice services may no longer be appropriate in future. Therefore, in subsequent reviews it may be possible for us to entirely remove wholesale regulation of lines and calls, if we find that competition is delivering for all consumer segments as a result of the relevant wholesale markets being effectively competitive, or because other forms of protection are sufficient or appropriate. However, in this market review period, given BT’s significant market power, regulation of BT’s narrowband services is still needed to support competition for various groups of consumers and in areas where alternative wholesale infrastructure has had less of a competitive impact. This includes fixed voice-only consumers (those who do not take broadband or other bundled services), business consumers, and consumers in areas where cable and LLU-based competitors are unavailable. In relation to fixed voice-only consumers we are particularly concerned that, notwithstanding wholesale fixed voice regulation, there may be features of the retail market which mean that competition is not working well for them. As we set out in the DCR and as shown in Figure 1.2 below, there have been significant increases in retail line rental prices, which have a particular impact on those consumers who take fixed voice-only services and do not benefit from competition in bundled services.5 3 DCR Statement, paragraph 8.4. 4 DCR Statement, paragraph 8.7. 5 DCR Statement, paragraph 7.9 and paragraph 8.3. 5 Figure 1.2: Wholesale and retail line rental price movements (£/month in October 2016 prices) Source: Ofcom/Pure Pricing UK Broadband Updates. While the charges for key wholesale inputs to these services have fallen by up to 25% in real terms, retail line rental prices have risen by between 28% and 41% since 2010. This trend is observable across all major providers of landline services – not just BT. It may be a consequence of providers focusing on marketing bundles where the line rental price is given less prominence compared to other parts of the bundle, such as broadband and TV, though at least in part may also reflect the decline in revenue from calls. The Advertising Standards Authority has recently decided that broadband providers may no longer advertise the price of broadband and line rental separately, so as to increase price transparency. While this may benefit consumers taking bundles, and may reduce incentives to increase line rental charges, we do not consider that, in itself, it is likely to lead to a reduction in retail line rental charges for fixed voice-only consumers over time, due to the apparent lack of competition within the market. We also note that a significant share of residential fixed voice-only consumers are elderly or do not use a mobile (particularly in comparison to residential fixed voice consumers who have broadband). Figure 1.3 below provides an indicative breakdown for residential fixed voice-only consumers. 6 Figure 1.3: Residential fixed voice-only consumers by age group and mobile adoption Aged below Aged 75+ and Aged below Aged 75+ and do 75 and have a have a mobile 75 and do not not have a mobile have a mobile mobile 18% 12% 20% 50% Source: 2015 Jigsaw residential survey (wave 1). Consistent with our strategy set out in the DCR, deregulation of legacy services is appropriate when competition is effective and acts to safeguard the interests of consumers.6 However, we are also keen to ensure that those consumers, who are not the focus of competition and/or more susceptible to price increases, are not left exposed. For these reasons we have commenced a separate review of retail fixed voice-only services and subject to our analysis intend to publish a consultation in the new year. Proposals Background The Narrowband Market Review (NMR) 2017 considers the following five wholesale markets: wholesale fixed analogue exchange lines; wholesale ISDN30; wholesale ISDN2; wholesale call origination; and wholesale call termination.7 Wholesale fixed analogue exchange lines (WFAEL) are standard fixed lines used by residential and business consumers. ISDN (Integrated Services Digital Network) is a 6 DCR Statement, paragraph 1.65.