BT Response to Consultation Non-Confidential Version
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NBMR and NCC – BT Response to Consultation Non-Confidential Version BASIC DETAILS Consultation title: Review of the fixed narrowband services markets: Consultation on the proposed markets, market power determinations and remedies –Published5 February 2013 To (Ofcom contact): Keith Hatfield ([email protected]) Name of respondent: Tony Fitzakerly Representing (self or organisation/s): BT plc Address (if not received by email): CONFIDENTIALITY Please tick below what part of your response you consider is confidential, giving your reasons why Nothing Name/contact details/job title Whole response Organisation Part of the response If there is no separate annex, which parts? If you want part of your response, your name or your organisation not to be published, can Ofcom still publish a reference to the contents of your response (including, for any confidential parts, a general summary that does not disclose the specific information or enable you to be identified)? Declaration I confirm that the correspondence supplied with this cover sheet is a formal consultation response that Ofcom can publish. However, in supplying this response, I understand that Ofcom may need to publish all responses, including those which are marked as confidential, in order to meet legal obligations. If I have sent my response by email, Ofcom can disregard any standard e-mail text about not disclosing email contents and attachments. Ofcom seeks to publish responses on receipt. If your response is non-confidential (in whole or in part), and you would prefer us to publish your response only once the consultation has ended, please tick here. Name Signed (if hard copy) Page 1 NBMR and NCC – BT Response to Consultation Non-Confidential Version BT’s response to Ofcom’s consultation Document “Review of the fixed narrowband services markets: Consultation on the proposed markets, market power determinations and remedies” NON-CONFIDENTIAL VERSION Page 2 NBMR and NCC – BT Response to Consultation Non-Confidential Version 1.) Contents 1. Contents 2. Executive Summary 3. Market developments in retail services excluding the Hull Area 4. Market developments in retail services in the Hull Area 5. Wholesale call origination 6. Wholesale fixed geographic call termination 7. Transit and conveyance services 8. Price regulation of termination and origination markets 9. Cost modelling for call conveyance services 10. Interconnection 11. Charge control specification 12. Glossary Annexes 1. Economic review of Retail Markets 2. Report by Dotecon: Overview on Retail market Boundaries 3. Report by Copenhagen Economics: Review of Ofcom’s SMP Assessment and Remedies for Call Origination 4. Bell Labs Analysis for BT - End to End – Next Generation Voice Network Architectures 4 April 2013 5. Bell Labs analysis for BT “PSTN Industry Analysis and service provider strategies: Synopsis”, April 2013 Bell Labs 6. Bell Labs Analysis for BT – PSTN Service Mapping – Full Listing 04 April 2013 7. Bell Labs Analysis for BT – PSTN Service Mapping Analysis 04 April 2013 8. Analysys Mason report “Narrowband Market Review – International Review and Analysis of Ofcom’s fixed LRIC model April 2013 9. Deloitte’s Report for BT - Regulated FTR Benchmarking Analysis 10 April 2013 10. Cullen Table 1 - Fixed termination rates (FTRs) – pure LRIC Last update: March 2013 Page 3 NBMR and NCC – BT Response to Consultation Non-Confidential Version 2.) Executive Summary Overview There has been radical change in these markets since the last market review. Mobile networks, MPF and cable TV operators are all competing to provide voice services at ever-lower prices, while both residential and business customers increasingly buy voice as part of a larger bundle of services. In assessing these markets Ofcom has a responsibility to take a forward look at competition and demonstrate that any regulation imposed is both necessary and proportionate. In this consultation, however, Ofcom is proposing simply to re-impose most of the same regulatory regime that has existed for over a decade, apparently ignoring the impact of this change on the real choices available to customers. There is a clear opportunity to enhance Ofcom’s deregulation agenda by recognising the impact of bundled purchases and adopting lighter touch regulation where there is already strong competition. While there are welcome changes to some aspects of non-price regulation (CPS, IA and Single Transit), the key issue remains that Ofcom has taken a “one size fits all” approach to the application of charge control and non-discrimination remedies. The many layers of competition in fixed markets face significant disruption from rapid changes to the structure of network charges. Ofcom has recognised that there will be no clear benefit to consumers from reductions in fixed termination rates, which are already among the lowest anywhere. But there will be costs for some businesses, especially in the NTS sector, that will not be easily rebalanced, if at all. This will lead to huge disruption and, potentially, business casualties, if Ofcom does not give these businesses time to adjust. To enable a smoother transition to the new charging regime, there should be a glide path to pure LRIC termination, as was allowed in the mobile industry. We also point out that Ofcom has made a number of modelling errors that lead to an understatement of the level of costs involved in call origination and termination, and is not allowing BT to recover its efficiently-incurred costs. Market definition and market power Narrowband markets are increasingly competitive Both volumes and revenues from fixed voice telephony have fallen since the last market review, as customers have a wider choice of supply. In 2011, mobile call volumes outstripped fixed by 52% to 48%, and this trend is continuing. BT’s share of retail fixed call minutes has fallen below 40% and continues to decline. Alongside the familiar trend of fixed-mobile convergence, traditional voice suppliers also face competition from MPF, cable and “over-the-top” voice applications and non-voice Page 4 NBMR and NCC – BT Response to Consultation Non-Confidential Version new media – and 15% of households no longer have a fixed voice line at all1. We present detailed analysis of changes to the retail markets in Annex 1 and in our answers to Ofcom’s consultation question 3.1. We consider this evidence supports the case for a converged voice market, or at the very least, the need to reflect the strong pricing constraints that mobile and other technologies impose on fixed voice services. Most customers buy voice as part of a bundle of services The most significant development in recent years has been the increase in the number of consumers buying voice service as part of a package of services, rather than as a stand-alone product. Research commissioned by BT shows that 74% of all UK households now buy voice service as part of a bundled offer, together with broadband and, often, pay-TV2. We expect this proportion will continue to rise throughout the market review period. Call minutes are generally bundled in at very low prices and it is actually more expensive to take a broadband package without the voice service from some suppliers. In parallel, business customers are also increasingly purchasing bundles of access, calls and data. Specifically, Ofcom’s analysis understates the importance of MPF operators providing voice calls. Where Ofcom has already deregulated wholesale broadband, (WBA Market 3), it follows that voice should also be deregulated, when sold as part of a bundle. Regulation should recognise the variances in market conditions It is evident that market conditions are not uniform across the UK. For most households, consumers have a choice of narrowband, broadband or mobile service. As Ofcom has already established in its review of the broadband market, market conditions for the purchase of broadband packages are effectively competitive for the large majority of UK premises – over 77% in the last review – and these operators are offering bundled voice and broadband packages. This is likely to rise when the market is reviewed again next year. No single player has market power in this footprint, and it is neither necessary nor reasonable to impose the full range of ex ante obligations on BT when selling voice services as part of a bundle. Ofcom has taken a static view of a dynamic market Despite the evidence of market convergence, increased competition on the supply side and changing purchasing patterns by businesses and consumers, Ofcom has maintained a static view of the market, rather than taking a forward-looking view. Although Ofcom acknowledges the limitations of the traditional Hypothetical Monopolist Test (HMT), it appears to have been applied in a mechanistic way. Ofcom’s survey is not a reliable basis for determining economic markets as it is very limited in scope, and the results are not conclusive. The effects of fixed-mobile substitution and the influence of MPF services have been ignored and, in its analysis of SMP, Ofcom makes no allowance for 1 Source: paragraph 3.30 and Figure 3.5 from Ofcom’s consultation document “Review of the fixed narrowband services market: Consultation on the proposed markets, market power determinations and remedies” published 5 February 2013 2 Source: “BT Flows research Wave 10 (July-December 2012)”, carried out by ICM Research Page 5 NBMR and NCC – BT Response to Consultation Non-Confidential Version constraints from a wide variety of alternatives which are essentially competing for fixed services, mainly on the basis of price. The evidence shows that there is already a case for deregulating this market as a whole, but even within the confines of current market definitions, Ofcom should recognise that lighter touch regulation is appropriate in competitive areas. The limitations of the traditional approach to market definition and market power assessment are explored in the paper by Dot.Econ (Annex 2) and our answers to questions 3 and 5 of the consultation.