Impact of the Telecoms Strategic Review
Impact of the Telecoms Strategic Review Evaluation
Statement Publication date: 10 December 2007
Impact of the Telecoms Strategic Review
Contents
Section Page 1 Foreword 2 2 Executive summary 4 3 The Telecoms Strategic Review 14 4 Outcomes for consumers 16 5 Outcomes for industry 29 6 Delivery of the Undertakings 43
Annex Page Survey of BT Wholesale and Openreach customers 64
1 Impact of the Telecoms Strategic Review
Section 1 1 Foreword
This is the second report evaluating the impact of our Telecoms Strategic Review. The goal of the Telecoms Strategic Review was to promote the development of a communications market that produces lower prices and a choice of high quality and innovative services for both business and residential consumers. Delivering these benefits for consumers involves promoting sustainable competition, ensuring incentives for timely and efficient investment, and removing regulation which is no longer necessary.
The Telecoms Strategic Review led to a fundamental change in regulation in the form of the Undertakings made by BT Group plc under the Enterprise Act 2002 in September 2005. These Undertakings were made in lieu of a reference to the Competition Commission. They were designed to address long-standing barriers to investment and competition through the functional separation of BT. This involved the creation of a new organisation, Openreach, which is separate from the rest of the BT Group and provides most of the wholesale products that are delivered by BT on an equivalence of inputs basis. The Equality of Access Board was set up to oversee these new arrangements and ensure that the Undertakings were implemented effectively.
At the core of the Undertakings is the need for all communications providers to have equality of access. This means that Openreach should offer them the same wholesale products as it offers to BT’s own retail businesses, using the same processes. Providers should then be able to compete fairly with BT at the retail level in supplying services to consumers. They should also have more scope to innovate and to differentiate their services from those of their competitors.
Just over a year ago we published our first evaluation of the Telecoms Strategic Review. We concluded that the implementation of the Undertakings was progressing satisfactorily, but that it was too early to assess the impact on the market and consumers. It is now two years since BT began to implement the Undertakings, so we have more evidence to draw on.
This evaluation report looks at the impact on residential and business consumers. It examines industry developments, such as the take-up of wholesale products and the level of investment that is occurring. It then assesses BT’s progress in implementing the Undertakings and highlights the issues that still need to be addressed.
One of these issues is the need for Openreach to have financial incentives to improve the quality of service that it provides to its wholesale customers. At the same time as publishing this report, therefore, we are publishing a consultation on Openreach’s existing service level agreements and the levels of compensation that it must pay in the event that the required levels of service are not satisfied.
Another way of ensuring that the Telecoms Strategic Review has the intended impact is through the Office of the Telecoms Adjudicator. This is independent of Ofcom and works with Openreach and industry to find solutions to the operational problems with the delivery of Openreach’s wholesale products. The Office’s latest report is being published at the same time as this evaluation report. It examines the extent to which the performance of the products supplied by Openreach to industry has improved. It also considers the extent to which Openreach has developed its products so that they have the features that industry requires.
2 Impact of the Telecoms Strategic Review
BT’s implementation of the Undertakings is taking place at the same time as the functional separation model is being considered or adopted in a number of other countries, both in the EU and further a field. The European Commission is intending to include a functional separation remedy in the revised EU framework for electronic communications. There is also considerable debate about how regulation should evolve to ensure that consumers benefit from competition in a world of next generation communications networks. We hope, therefore, that this report will be of interest in both the UK and abroad.
David Currie Ed Richards
Chairman Chief Executive
3 Impact of the Telecoms Strategic Review
Section 2 2 Executive summary
2.1 Ofcom’s Telecoms Strategic Review led to BT Group plc giving Undertakings under the Enterprise Act 2002. It is difficult to isolate the impact of the Telecoms Strategic Review from other factors, but the evidence shows that since the Undertakings were introduced, the experiences of both business and residential consumers have been positive. They are experiencing greater choice, lower prices, and more innovative products and services. The climate for industry has also improved. In particular, there has been rapid growth in the take-up of local loop unbundling.
2.2 From BT’s point of view, implementing the Undertakings has required significant resources and has diverted effort from other operational areas. Communications providers recognise that since our last evaluation report BT’s performance has improved, particularly in relation to account management and respect for confidentiality. However, they still want to see improvements in BT’s quality of service and product development.
2.3 The development of next generation networks creates new challenges. Ensuring that equivalence continues to be delivered as new products are introduced will require effective consultation between Openreach and its customers, and close attention from Ofcom.
2.4 Our Telecoms Strategic Review led to a significant change in the regulatory environment. This report shows that BT’s progress in implementing the Undertakings has delivered benefits for industry and for consumers. More needs to be done, however, to ensure that the full benefits of functional separation are realised. Ofcom will continue to work with BT and industry to this end.
Background
2.5 The goal of Ofcom’s Telecoms Strategic Review was to promote the development of a communications market that would provide consumers, both business and residential, with value for money and a choice of high quality and innovative services.
2.6 We concluded that in order to achieve this goal, communications providers would need equality of access to the parts of BT’s network where competition was not sustainable. At the same time we wanted to ensure that communications providers had incentives to invest in developing their own networks. And to avoid stifling competition and innovation we also stated our commitment to removing regulation that was no longer necessary.
2.7 In addition to Ofcom’s powers under the Communications Act, a key mechanism for promoting increased competition and efficient investment is the set of Enterprise Act Undertakings given by BT Group plc in September 2005. The Undertakings were designed to embed the principle of equivalence in the way that the BT Group operates. This involved the creation of a new organisation, Openreach, which is separate from the rest of the BT Group and provides most of BT’s wholesale products that are delivered on an equivalence of inputs basis. These products are then used by industry to compete with BT’s retail businesses. This means that Openreach must supply communications providers with wholesale products that are equivalent to those supplied to BT’s downstream businesses. Providers are then able to compete fairly with BT at the retail level in supplying services to consumers.
4 Impact of the Telecoms Strategic Review
2.8 This report assesses the outcomes that are being experienced by consumers, both individuals and businesses. It then reviews industry developments, looking at the take-up of the wholesale products that are used to supply consumers, levels of investment and innovation, and the progress that we have made in deregulating. Finally it considers the progress that BT has made in implementing the Undertakings and instilling the principle of equivalence in the way that it operates.
2.9 Our analysis is supplemented by a new survey of BT’s wholesale customers, both customers of Openreach and of BT Wholesale. This focuses mostly on wholesale products that are delivered on an equivalence of inputs basis. The survey was carried out on our behalf by Spectrum Value Partners. It presents a range of different industry perspectives and assesses the extent to which the performance of Openreach and BT Wholesale has improved over the past 18 months.
Consumer benefits
2.10 Ultimately the success of the Undertakings will be judged by the benefits experienced by consumers, both business and residential consumers. It is very hard to assess what would have happened in the absence of the Undertakings and therefore to assess what difference they have made. It is possible to look at how things have changed since the Undertakings were introduced, although it remains difficult to show direct links between the Undertakings and the experiences of consumers, as other factors such as wholesale pricing reductions have had a significant impact too.
2.11 In general, the choice of fixed telecoms services for UK consumers has been increasing, while the cost of these services has fallen. Increased competition in fixed voice and broadband markets has led to continued price falls for residential consumers. In particular, broadband prices have continued to fall at the same time as speeds have increased. This is driven by the cost savings that stem from increases in the scale of networks and more competition, particularly from operators who have deployed their own equipment in BT’s local exchanges in order to supply more differentiated services to consumers (known as local loop unbundling). Between 2005 and 2006, prices for services with headline speeds of up to 8Mbit/s fell from up to £30 per month to as little as £10 per month.
2.12 For business consumers, both small and medium-sized enterprises (SMEs) and large businesses, average annual spend on fixed voice services fell by an average of 8 per cent per annum between 2004 and 2007. In contrast, for broadband services, SME spend fell by an average of 20 per cent per annum between 2004 and 2007, while spend by large businesses fell by 3 per cent per annum on average over the same period.
2.13 In the face of increased competition, communications providers have sought to retain and win new customers by bundling different services together. Over the last two years the percentage of households taking bundled services has increased from 29 per cent to 40 per cent. To a significant degree this trend has been driven by the availability of faster, cheaper broadband services. Between 2005 and 2007, the percentage of bundles that include broadband increased from 42 to 65 per cent.
2.14 Satisfaction with fixed voice services has remained reasonably stable over the last two years, while satisfaction with internet services has declined. This could be explained by discrepancies between the expectations raised by marketing and what the consumer receives in practice. For example, consumers may be surprised that in order to get ‘free broadband’ they have to pay connection charges or buy additional services. Similarly, despite increasing headline connection speeds for broadband,
5 Impact of the Telecoms Strategic Review
consumer satisfaction with internet service speeds fell between 2006 and 2007. This is likely to be a result of dissatisfaction with the speeds consumers receive in practice compared with the advertised speeds. For example, although a service may be advertised to be “up to 8Mbit/s”, this maximum speed may not be achieved in practice, particularly at peak times, such as during the evening.
2.15 Business consumers’ satisfaction with fixed telecoms services has remained stable between 2004 and 2006. On average their satisfaction with customer experience, image and value for money provided by fixed telecoms services lies at a level marginally below “satisfied”. In addition, large businesses are frustrated that they are unable to get broadband services where they need them.
2.16 As competition and the availability of bundled services have increased, so has the level of switching. In 2006, 8 per cent more customers switched fixed line provider compared with 2005, while 5 per cent more customers switched broadband provider in 2007 compared to 2006. Consumer behaviour has also changed, with consumers participating more actively in the marketplace. Between 2006 and 2007 consumers became more aware of their choices, regardless of whether or not they actually switched provider.
2.17 At the same time as consumer engagement and switching has increased, the ease of making quality of service comparisons has not improved universally. Between 2006 and 2007, making such comparisons for fixed line services is perceived to have become more difficult, while comparisons for broadband are perceived to have become easier. The increase in the ease of comparing broadband services appears to be driven by improved consumer understanding.
2.18 The switching level for SMEs has been slightly above those of residential consumers. In 2006, 27 per cent of SMEs had ever switched their broadband supplier, while 26 per cent of residential customers had. Over the next 12 months, the majority of business consumers do not plan to change fixed telecoms provider, with price and hassle being the main reasons given.
2.19 The increased choice and lower prices for consumers brought about by increasing competition have had largely positive effects for consumers. But some consumers have found it difficult to switch broadband providers. This is because the processes involved in switching have not been working effectively. To address the issue, Ofcom has introduced new rules and is actively ensuring that providers comply with them....
Industry outcomes
2.20 The interests of consumers are strongly related to the progress that is made in promoting competition and innovation in the sector. We have therefore examined:
• the take-up by communication providers of the wholesale products that BT must supply on an equivalent basis;
• the customer-supplier relationship between communications providers and BT;
• the investment that communication providers have made in developing their own networks in order to compete with BT;
• the way that the UK fixed telecoms industry has evolved in terms of overall market size and the market shares of different suppliers;
6 Impact of the Telecoms Strategic Review
• the development of next generation networks; and
• the progress we have made in reducing regulation as a result of the Undertakings.
Take-up of wholesale products
2.21 Wholesale line rental and carrier pre-selection services are used to provide fixed line voice services to end users. Carrier pre-selection allows end users to select alternative communications providers for voice calls while continuing to pay line rental to BT. Wholesale line rental enables other communications providers to offer consumers line rental and calls using BT's local network.
2.22 The take-up of carrier pre-selection grew steadily from Q4 2005 to Q3 2006, but the number of carrier pre-selection lines declined from Q4 2006 to Q3 2007. Similarly the take-up of wholesale line rental grew rapidly from Q4 2005 to Q3 2006 but slowed significantly from Q3 2006 to Q3 2007. By the end of Q2 2007 there were 5.6 million carrier pre-selection lines and 4.4 million lines used for wholesale line rental. Taken in the context of 34 million lines in total, about 17 per cent use carrier pre-selection, while about 13 per cent use wholesale line rental.
2.23 The increase in carrier pre-selection lines during 2006 was driven by the launch of bundled voice and broadband services. However, in 2007 new providers established firmer positions in the market and have increasingly moved away from carrier pre- selection services. Instead, providers are migrating their customers to services that are built on local loop unbundling. This is the process by which BT’s local loops (the physical copper wires between consumers’ premises and the local telephone exchange) are disconnected from its network and connected to the networks of competing providers instead.
2.24 Take-up of BT’s bitstream products (i.e. wholesale broadband products that use BT’s infrastructure), which enable communications providers to supply broadband services without needing extensive networks of their own, grew steadily from Q4 2005 to Q1 2007 and then declined from Q1 2007 onwards. By Q3 2007 there were a total of 8.5 million broadband connections based on BT’s bitstream products, about 59 per cent of the total. As with wholesale line rental, the decline in the use of BT’s bitstream products is driven primarily by increasing use of local loop unbundling to supply broadband services to consumers.
2.25 The take-up of local loop unbundling has been increasing rapidly and is expected to continue to grow. Between Q4 2005 and Q3 2007 the total number of unbundled loops grew by over 50 per cent per quarter (compound) and by the end of 2007 we expect there to be over 3.5 million unbundled loops.
2.26 Figure 2.1 highlights the way that take-up of carrier pre-selection, and bitstream has fallen while the take-up of wholesale line rental increased marginally and the take-up of local loop unbundling increased significantly.
7 Impact of the Telecoms Strategic Review
Figure 2.1: Take-up of bitstream, carrier pre-selection, wholesale line rental and local loop unbundling products
Bitstream CPS WLR LLU 10000
9000
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7000
6000
5000
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Lines (thousands) Lines 3000
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0 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007*
*Forecast Source: BT, OTA
Customer-supplier relationships
2.27 The survey of BT Wholesale’s and Openreach’s customers conducted by Spectrum Value Partners showed that customer satisfaction broadly improved over the past 18 months. In particular, respondents felt that the account management and confidentiality measures improved. At the same time, respondents said they would like to see improvements in product support, product innovation and service delivery. It was generally felt that the re-structuring of BT had been well executed and that the mechanics of equivalence were working well. In the future, however, customers of BT Wholesale and Openreach would like them to focus on improving customer responsiveness and enabling innovation. A summary of Spectrum’s report is annexed to this report.
Investment
2.28 The increased take-up of local loop unbundling reflects increased investment by communications providers. Between December 2005 and July 2007 the number of providers using local loop unbundling more than doubled from eight to twenty. Of those providers who entered the market, a number have made significant investments. Over the same period, the number of exchanges in which local loop unbundling operators have installed equipment increased from 695 to 1636. At the same time coverage increased significantly, with 78 per cent of consumers covered by one or more local loop unbundling providers in July 2007 compared with 40 per cent in December 2005.
8 Impact of the Telecoms Strategic Review
Industry evolution
2.29 Changes in the take-up of wholesale products have fed through to changes in the revenue and market shares of the UK’s communications providers.
2.30 Total retail revenues for the UK telecoms industry have grown steadily and in 2006 amounted to £38.5 billion. Revenue from mobile voice and data accounted for the greatest proportion of revenues, with growth in this sector being driven by increasing usage and a growing number of subscriptions. Fixed call and access revenues have continued to decline, driven by a falling number of fixed lines and the increasing substitution of mobile and voice over IP calls for fixed line calls. Internet services, including broadband, have been the fastest growing sector by revenue, driven by increasing take-up and migration from narrowband to broadband.
2.31 The UK fixed telecoms market appears very competitive when compared internationally. BT, as the UK’s national incumbent, has one of the lowest market shares of fixed voice services in terms of call volumes. Compared to other incumbent providers in Europe, BT has the lowest market share of retail broadband connections provided via traditional telecoms networks, with 33 per cent of lines.
Next generation networks
2.32 The term “next generation networks” is used to refer to both an operator’s core network and its access and backhaul networks, which together link the consumer to the core network.
2.33 Plans to develop next generation networks are a response to the fact that consumers are changing the way that they use their broadband connections. The take-up of new services, such as high definition video, will require faster connections and place increasing demands on current networks.
2.34 Communications companies are already responding by upgrading their core networks. In 2004, BT set out specific proposals for a next generation network, called 21CN. This will replace its existing core and backhaul networks and is expected to enable broadband to be supplied at a speed of up to 24Mbit/s. BT expects 21CN to cost in the region of £10billion. Cable and Wireless, Carphone Warehouse and Tiscali are also upgrading their core networks. Other operators, including Thus and Easynet, invested in next generation core networks at the time when they built their networks.
2.35 Virgin Media has recently announced its intention to invest in a next generation access network. This will enable 70 per cent of its potential customers to receive broadband at a speed of up to 50Mbit/s by the end of 2008. There have also been announcements of more limited commercial deployments and small-scale trials.
2.36 Both next generation core networks and next generation access networks are expected to change significantly the market for fixed telecommunications products. There has been a lot of industry debate about how the market will evolve and Ofcom is considering how regulation will need to adapt.
Deregulation
2.37 An important objective of the Telecoms Strategic Review was to target regulation at long-standing economic bottlenecks and remove regulation that was no longer
9 Impact of the Telecoms Strategic Review
necessary. Increased competition has already enabled us to significantly reduce regulation:
• we have lifted BT’s retail price controls;
• we have relaxed the regulation of BT’s business exchange lines, to allow them to be included in bespoke bundles of business services, subject to certain pricing rules;
• we lifted the regulation of BT's wholesale international call services for 235 international destinations;
• we are currently consulting on plans to remove regulation on BT’s wholesale broadband services in some parts of the country; and
• we are undertaking a review of the leased line market in which we will be consulting on the potential to deregulate 155Mbit/s partial private circuits and 34/45Mbit/s partial private circuits in central London and Docklands. Partial private circuits provide connectivity from an end-user (typically a business) to a competing operator’s own network using BT’s underlying infrastructure.
Delivery of the Undertakings
2.38 The industry outcomes that we have described, including the increased take-up of local loop unbundling, are linked to the implementation by BT of its Undertakings.
2.39 Feedback from communications providers shows that BT is committed to the principle of equality of access and that improvements have been made to account management. BT has shown significant commitment and devoted significant resources to implementing the Undertakings. Establishing Openreach and the initial associated reorganisation within BT involved substantial changes. However, Ofcom believes there are a number of areas where action is still needed.
2.40 Our evaluation of BT’s delivery of the Undertakings is divided into four areas:
• organisational separation;
• implementation of equivalent products;
• development of BT’s next generation core network; and
• product development.
Organisational separation
2.41 BT established Openreach as a separate organisation over 18 months ago. Feedback from communications providers shows that it has developed good working relationships with large providers that supply residential consumers, but that there is still room to improve relations with smaller providers and those that serve business consumers.
2.42 The Equality of Access Board, supported by the Equality of Access Office, is felt by providers to have been effective in monitoring the implementation of the Undertakings, investigating complaints about implementation and identifying breaches.
10 Impact of the Telecoms Strategic Review
2.43 The creation of Openreach, and the splitting of functions between Openreach and other parts of BT, has led, however, to a number of boundary issues. Of particular concern to providers is the way that space and power in BT’s exchanges is controlled. BT is currently reviewing whether more space and power can be made available and plans to make the process of applying for space more transparent. We are concerned, however, that Openreach does not have sufficient control of space to ensure that providers using local loop unbundling are not unfairly disadvantaged by BT’s ability to preferentially reserve space. Therefore, we have discussed with BT a revised process for allocation of space and power that would provide Openreach with more control over the allocation process and hence provide communications providers with more confidence that space is not being blocked without genuine justification. Openreach will consult on this new process in early 2008.
2.44 BT is also required to separate its operational support and management information systems. It has made progress towards this end but some issues still need to be resolved. We have discussed these issues with BT and before the end of 2007 it will present a detailed plan to address them. Ofcom will need to be assured that this plan will deliver solutions that meet the systems separation requirements specified in the Undertakings.
Implementation of equivalent products
2.45 Openreach has continued to deploy the equivalent wholesale products required by the Undertakings and is close to having introduced all the products that must be supplied on an equivalent basis.
2.46 Of crucial importance is the Equivalence Management Platform, which provides the interface through which communications providers transact with Openreach to, for example, place orders and report faults. Openreach has been working to improve the performance of the platform and levels of service have improved recently. However, further improvement is still needed to ensure the availability of this key platform. We are also concerned that the development of the Equivalence Management Platform to support the launch of new products may impact the timescales of future product deployments. We are concerned about the Equivalence Management Platform, from both a service performance and product development perspective. Our view is that one way to address these concerns is through appropriate service level agreements and service level guarantees. In addition, Openreach will need to include in the product development process review that it proposes to carry out shortly an examination of how the process of adding new features to the platform can be managed better.
2.47 The delivery of equivalent local loop unbundling products has contributed to increased competition in broadband markets. Since delivering these products on an equivalent basis, Openreach has been focused on improving its performance and progress has been made, but still needs to do more to meet the requirements of its customers.
2.48 Openreach launched its equivalent wholesale line rental product in June 2007 as required in the Undertakings. However, we are concerned that consumer complaints have increased and communications providers still do not feel that the product is fit- for-purpose. We will therefore continue to monitor BT’s development of the wholesale line rental product.
2.49 Openreach has delivered the full set of Ethernet products it was required by the Undertakings to provide. However, competition in the Ethernet backhaul market has
11 Impact of the Telecoms Strategic Review
not developed to the extent that we envisaged. We believe there are several reasons for this. In particular, the Spectrum survey showed that communications providers believe Openreach needs to improve the design of the products to make them more commercially viable. Openreach’s planned 21CN Ethernet backhaul product is expected to address a number of our concerns. BT will publish a timetable for the delivery of this product.
2.50 In relation to bitstream, we are concerned that the full benefit of equivalence has not been delivered. This is because BT uses a different bitstream product variant to most other communications providers. BT has proposed to resolve this by introducing a new product, IPStream Connect, during 2008.
2.51 In relation to partial private circuits, we want to see more transparency about the comparable products used by BT. This will be addressed in our review of the leased lines market.
2.52 There is a need for improved quality of service in relation to all of Openreach’s products. While service performance has been improving recently, particularly on the Metallic Path Facility (MPF) product, further improvements are required. Consequently, Ofcom is currently consulting on proposals to improve service level agreements and guarantees for local loop unbundling, wholesale line rental and Ethernet products, and the related Equivalence Management Platform. In addition, Ofcom is in discussion with BT over its own intended use of MPF as it rolls out its next generation network. This is a response to concerns that Openreach may not have adequate incentives to sustain the quality of the MPF product until BT consumes the product itself.
2.53 Stakeholders believe that BT has made progress in deploying equivalent products, but needs to focus on addressing the implementation issues that we have highlighted.
BT’s next generation network
2.54 The Undertakings establish a set of principles that BT must follow in deploying its next generation core network, known as 21CN. These principles include:
• not foreclosing network access;
• providing network access on an equivalence of inputs basis;
• setting the charges for SMP products based on efficient design;
• making arrangements for compensation; and
• ensuring that no communications provider suffers a material competitive disadvantage due to the software-controlled migration between products that will be made possible.
2.55 BT has engaged with industry on the development of its NGN through the Consult21 working group. Next Generation Networks UK (NGNuk) has also been established as an industry group to provide a forum for consultation. As the deployment of 21CN is still at an early stage, it is too early to judge the extent to which BT is following the above principles.
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2.56 Ofcom has reviewed the Consult21 approach and we believe that it is an effective way for BT to engage with industry, subject to some improvements. We are encouraged that BT is going to review its programme of engagement and consultation to address the concerns that have been raised by communications providers. As we believe that this is an area of paramount importance, we will seek a commitment from BT in relation to the content and timescales for future 21CN consultations.
Product development
2.57 Openreach’s product development process has caused concern. To date its focus has been on meeting the requirements of the Undertakings and feedback from communications providers suggests that this has limited the development of a pro- active and innovative approach to product development. It appears to have concentrated on milestones required to be met in the Undertakings at a cost to the product features required by customers. Specific examples include:
• the lack of a product roadmap for Ethernet services; and
• the absence of several important features in the initial release of the equivalent wholesale line rental product.
2.58 Ofcom has discussed the product development process with Openreach. While progress is being made in developing specific products beyond the strict requirements within the Undertakings, Ofcom is concerned that the product development process is not fit-for-purpose.
2.59 Openreach recognises that there is significant room for improvement in its product development process. It has developed a number of initiatives to try to improve customer interaction. For example, it has run intensive workshops about local loop unbundling to involve customers more directly in the product development process.
2.60 Openreach is now in the process of implementing a review of its end-to-end product development process. It expects this review to be carried out during the first three months of 2008 and communications providers will be invited to provide input. Ofcom intends to review the terms of reference, and outputs of this work and monitor Openreach’s progress in implementing process improvements.
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Section 3 3 The Telecoms Strategic Review
3.1 In April 2004 Ofcom started its Telecoms Strategic Review. The review was designed to set out a strategic direction for our activities in relation to telecoms, and to create a new settlement between the regulator, the companies we regulate, and citizens and consumers. In our initial consultation document we posed five fundamental questions:
• In relation to the interests of citizens and consumers, what are the key attributes of a well-functioning telecoms market?
• Where can effective and sustainable competition be achieved in the UK telecoms market?
• Is there scope for a significant reduction in regulation, or is the market power of incumbents too entrenched?
• How can Ofcom incentivise timely and efficient investment in next generation networks?
• At varying times since 1984, the case has been made for the structural or operational separation of BT, or the delivery of full functional equivalence. Are these still relevant questions?
3.2 At the end of the Telecoms Strategic Review we provided answers to these questions, and set out our strategic approach to the regulation of the sector.
3.3 Attributes of a well-functioning telecoms market. Our market research and consultation suggested that businesses and consumers wanted much more than basic reliable telecoms services at low prices: they also wanted choice, and rapid innovation and introduction of new services. Our assessment was that the most effective way of delivering this was through competition at the deepest level of infrastructure where competition would be effective and sustainable. We also showed that the competition that had delivered benefits to consumers to date might not be sustainable, so maintaining the regulatory status quo was not an option.
3.4 Though competition might be a means of delivering the kinds of outcomes that consumers wanted, it could not be effective unless customers were able to make well-informed choices, and to switch easily between suppliers. Our research showed that some groups of consumers had difficulties in making these choices. Although the same could be said of most markets, it appeared that there might be features of some telecoms markets that exacerbate these problems. As a result we decided to make changes in a number of areas and looked at the issue further in our wider review of consumer policy.
3.5 Where effective and sustainable competition can be achieved. Whereas competition between rival end-to-end infrastructures had proved to be effective and sustainable in the mobile market, this had not been the case in fixed telecoms. In fixed telecoms, we concluded that there were enduring economic bottlenecks – parts of the network where effective and sustainable competition was unlikely in the short to medium term. Therefore we adopted the principle that regulation should promote competition between competing infrastructures as deep in the network as such
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competition was likely to be effective and sustainable. However, we noted that companies who wished to compete on this basis had to rely on BT for access to parts of the network where competition was not sustainable. We concluded that in order for competition in fixed telecoms to be effective, BT needed to make such access available on the same terms as it made it available to itself: an approach we called equality of access.
3.6 Scope for a reduction in regulation. If equality of access were introduced for bottleneck parts of the network, we expected to be able to deregulate elsewhere in, for example, some retail markets. We said that such deregulation could take two forms: either a lessening of Significant Market Power (SMP) conditions where equality access was applied in upstream markets or a finding that there was no longer SMP in downstream markets.
3.7 Incentivising timely and efficient investment. As technology progresses and existing copper switched telecoms networks become due for replacement, we felt that it was particularly important for regulation not to disincentivise efficient investment. We described our approach to regulation of risky investments in our August 2005 statement on assessing the cost of capital. However, we anticipated that there would be a particular difficulty in incentivising efficient investment in access networks. So we began a review of next generation access to look specifically at this issue.
3.8 Achieving equality of access in fixed telecoms. The final fundamental question for the review was whether questions about the structural or operational separation of BT remained relevant. Our preferred approach of equality of access meant both equivalence at the product level, and organisational changes by BT. In June 2005, BT offered Ofcom a set of undertakings in lieu of Ofcom making a reference to the Competition Commission under the Enterprise Act 2002. In September 2005 we accepted these undertakings, with the expectation that they would deliver equality of access.
3.9 We also set out our approach to evaluating the impact of the Telecoms Strategic Review. We said that we considered it important to measure not only whether the undertakings were being complied with, but also more broadly whether our overall regulatory approach was delivering the intended outcomes for consumers, both residential consumers and businesses. The next section of this evaluation report sets out the outcomes that are being experienced by consumers. The report then considers the outcomes being delivered for industry. Finally it examines BT’s progress in implementing the Enterprise Act Undertakings.
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Section 4 4 Outcomes for consumers
4.1 The Telecoms Strategic Review set out to create the conditions for a competitive and innovative fixed telecoms market. This section assesses the extent to which consumers and business customers have benefited.
4.2 It is difficult to show a direct link between the different regulatory approach introduced by the Telecoms Strategic Review and the outcomes experienced by consumers and business customers. There are a wide range of other relevant factors, such as the economic climate and the affordability and usability of services and the availability of information about services that can influence end user experience.
4.3 The data presented in this section has been taken from The UK Communications Market 2007, published by Ofcom in August 2007, The Consumer Experience, published in November 2007, the International Communications Market 2007 to be published by Ofcom in December 2007, as well as external sources. More extensive discussion of trends and changes can be found in the original Ofcom reports.
Consumer experiences
4.4 Increasing competition in the fixed, mobile and broadband markets has led to continued price falls for UK residential customers. The cost of a basket of residential telecoms services fell by just under £35 per month between 2002 and 2006 (figure 4.1). Average fixed access charges have been increasing as line rental packages increasingly include call bundles. However, fixed call spend has been falling as a result of usage being included in call access charges but also as mobile calls continue to replace fixed calls. While monthly costs for mobile voice and text fell by about £15 between 2002 and 2006, the monthly cost for broadband has nearly halved over the same period.
Figure 4.1: Real cost of a basket of residential telecoms services CAGR 02-06 Total (9.6%) 120 £104.82 Broadband (16.2%) £97.05 100 £86.98 29.83 25.27 £76.36 80 20.00 £69.85 Mobile voice (9.3%) 16.11 60 14.73 and text 45.04 43.20 40.04 40 34.97 30.45 Fixed voice (8.6%) calls 20 18.31 17.19 15.36 13.59 12.80
Monthly cost (£s2006 prices 11.65 11.39 11.59 11.69 11.88 Fixed access 0.5% 0 2002 2003 2004 2005 2006
Source: Ofcom Note: (1) figures include VAT; (2) since this chart was included in the 2006 Communications Market Report we have updated it to reflect more accurate data
4.5 In terms of business customers, while SMEs experienced similar trends to consumers with significant decreases in spend on fixed telecoms services, spend by large business customers did not fall to the same extent.
16 Impact of the Telecoms Strategic Review
4.6 SME spend on broadband services fell by approximately 20% on average annually between 2004 and 2007, with the greatest fall in spend between 2004 and 2005. SME spend on voice over the same period fell an average of 8% per annum. In 2007 SMEs taking both broadband and voice services spent on average £1000 less per annum than they did in 2004 (figure 4.2).
4.7 For large business the average annual spend on voice services fell by approximately 8% per annum between 2004 and 2007, while the spend on broadband over the same period fell by approximately 3% per annum (figure 4.3). Increasing substitution of fixed calls with mobile calls, caused spend on fixed voice to fall. Broadband spend stayed comparatively stable due to the complexity and variety of solutions offered to customers, making a reduction in spend more difficult.
Figure 4.2: SME average spend on fixed telecoms services Broadband Voice 1600 1,452 1400
1,166 1200 1,088 1,007 1000 1,038 906 825 800 744
600
400
Average spend per annum per site (£) 200
0 2004 2005 2006 2007
Source: Analysys
17 Impact of the Telecoms Strategic Review
Figure 4.3: Large business average spend on fixed telecoms services Broadband Voice 120 105 98 100 90 81 80
60
40 39 38 40 36
20
Average spend per annum per site (£ thousands) (£ site per annum per spend Average 0 2004 2005 2006 2007
Source: Analysys
4.8 Broadband connections are continuing to replace narrowband connections in the residential market. Broadband (with minimum speeds of 512kbit/s) is available to 99.6% of households while about 52% of households have chosen to take up broadband services to date. Between 2002 and Q1 2007, the proportion of broadband grew from 12% of total residential internet connections to over 83%.
Figure 4.4: UK residential internet connections 20 15.8 16.0
) 14.9 14.4 Broadband 15 12.8 10.8 10 Total 12.4 13.3 residential 5 9.4 internet
Connections (millions 5.8 connections 2.9 0 1.3 2002 2003 2004 2005 2006 2007 Q1
Source: Ofcom/communications providers Note: since this chart was included in the 2006 Communications Market Report we have updated it to reflect more accurate data
4.9 Penetration of broadband services amongst business users has increased significantly between 2004 and 2007, driven largely by rapid and significant increases in the number of SMEs taking broadband services. While 27% of business sites used broadband in 2004, by 2007 this had increased to 60%.
18 Impact of the Telecoms Strategic Review
Figure 4.5: Business broadband penetration
70%
60%
50%
40%
30% 60% 51%
20% 40%
27% 10%
0% 2004 2005 2006 2007
Source: Analysys
4.10 Compared to the countries considered in Ofcom’s International Communications Market 2007 report, broadband penetration in the UK is higher than in other European countries and the USA but lower than in Canada and Japan.
Figure 4.6: Broadband connections per 100 households - international comparison
70%
60%
50%
40%
30% 58% 54% 52% 51% 48%
20% 38% 40%
10%
0% UK France Germany Italy USA Canada Japan
Source: IDATE / industry data / CRTC / Ofcom
4.11 Broadband prices have continued to fall as speeds increased since the beginning of 2006 (figure 4.7) – a trend that was emerging in 2005. This trend is driven by a combination of increased growth and scale of networks and more competition,
19 Impact of the Telecoms Strategic Review
particularly from LLU operators. Services with speeds of up to 8Mbit/s fell from up to £30 per month to as low as £10 per month between 2005 and 2006.
Figure 4.7: Indicative standalone broadband prices 50
40
30
20
10 Price per month (£) Price
0 2001 2002 2003 2004 2005 2006
512 Kb/s 1Mbit/s 2Mbit/s 8Mbit/s 24Mbit/s
Source: Ofcom
Bundling
4.12 Strong competition among communications providers over the past couple of years has been an important contributor to falling prices for consumers. Since 2005 providers have continued to introduce and expand their offerings to consumers by bundling different services together. This means that consumers have a choice of a greater range of services from a greater range of providers. Service bundling has increased the range of consumer propositions significantly, as different operators offer numerous bundles containing different services. Combinations of different headline broadband speeds, different ranges of TV channels and varying numbers of inclusive voice minutes, texts and data access have become available to consumers at a variety of (continually falling) price points.
4.13 Driven by this greater range of bundled combinations and by the deals on offer, the proportion of households taking bundled communications services reached 40% in Q1 2007 (figure 4.8).
Figure 4.8: Households taking bundled services from an operator 50%
40% 40% 35% 31% 29% 29% 30%
20%
10%
0% Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007
Source: Ofcom research, Q1 2007
4.14 Fixed line voice is the service that most commonly features in bundles purchased by consumers, followed by broadband. In Q1 2006, 58% of purchased bundles included
20 Impact of the Telecoms Strategic Review
fixed voice and broadband - by Q1 2007 this increased to 65%. The penetration of broadband among specific bundles has increased by 23% over the last two years (figure 4.9). The increase in the take-up of bundled broadband is related to the growth of broadband per se, and the other services that broadband facilitates such as IPTV.
Figure 4.9: Bundled services purchased by consumers by type 100% Other 14% 13% 9% 12% 13% 4% 5% 4% 4% 2% 80% 13% 10% 8% Fixed voice, dial-up and 16% 15% 12% multichannel TV 16% 13% 60% 19% Fixed voice and multi- 23% 18% 18% 17% channel TV 40% 13% 12% Fixed voice and dial-up 47% 20% 40% 44% Fixed voice, broadband 30% 36% and multichannel TV 0% Fixed voice and broadband Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007
Source: Ofcom research, Q1 2007
Satisfaction
4.15 While the overall levels of customer satisfaction with fixed and mobile telecoms services remain high, the satisfaction of consumers with fixed services has declined marginally between 2005 and 2006.
Figure 4.10: Residential consumer satisfaction with fixed voice services
100% 93% 92% 94% 91% e 79% 78% 80% 41% 51% 48% 55%
60% 29% 34% Very satisfied
40% Satisfied 51% 20% 49% 45% 43% 42% 39%
% of consumers withservic 0% 2005 2006 2005 2006 2005 2006
Overall Value for money Reliability Source: Ofcom research, Q3 2005 and Q4 2006 Note: includes only those who expressed an opinion
4.16 In contrast to fixed and mobile services, there has been a marked decline in consumer satisfaction levels with internet services over time (figure 4.11). This fall can be attributed largely to quality of service issues surrounding broadband offerings.
4.17 Despite the falling prices of internet services, satisfaction with the cost of internet services has been falling. This may be explained by the discrepancy between some of the marketing messages surrounding broadband and what the consumer receives in practice. For example, consumers signing up for free broadband may be surprised
21 Impact of the Telecoms Strategic Review
to have to pay connection or upgrade fees, or commit to other services that they were not aware of when deciding to buy the service.
4.18 Similarly, despite increasing headline connection speeds for broadband, consumer satisfaction with internet service speeds fell between 2006 and 2007. This is likely to be a result of customer dissatisfaction with the actual speeds consumers receive in practice compared to the advertised speeds.
4.19 The fall in consumer satisfaction with internet service reliability may be attributed to connections slowing down or failing in busy periods as a result of a growing user base, while the increasing use of wireless home networks may also be having an effect as these are more prone to failure than wired access.
4.20 Ofcom is currently considering broadband quality of service issues and looking at ways to improve the access to quality of service information and the value this information has to consumers.
Figure 4.11: Residential consumer satisfaction with aspects of internet service 100% 91% 85% 88% 84% 83% 81% 83% 77% 80% 70% 71% 40% 31% 39% 30% 35% 34%
60% 34% 30% 24% 24% Very satisfied 40% Satisfied 54% 53% 51% 49% 49% 49%
20% 47% 47% 47% 46%
Percentage of adult users 15+ 0% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 Overall Cost Value for Speed Reliability money Source: Ofcom research
4.21 Between 2004 and 2006 the average rating by business customers across different aspects of service provision was just below satisfied (a rating of 3). Average satisfaction with customer experience dropped between 2004 and 2005, and remained at the same level in 2006. Satisfaction with both the image of service providers and the value for money offered by them fell between 2004 and 2005 but increased again in 2006. The only aspect for which the satisfaction of consumers has improved between 2005 and 2006 was value for money.
4.22 It is important to note that this data is the average rating across service providers in the fixed telecoms industry. Individual service providers may have seen significant improvements or reductions in their customer satisfaction over the period.
22 Impact of the Telecoms Strategic Review
Figure 4.12: Business customer satisfaction with aspects of fixed telecoms service provision 2004 2005 2006 4
3.5
3
2.5 Satisfaction 2
1.5
1 Customer Experience Image Value for money
Satisfaction on scale of 1-4, where 1=extremely dissatisfied and 4=extremely satisfied Source: CMA
4.23 Surveys done by the Communications Management Association highlighted that access to broadband, particularly by large businesses, is a major area of frustration for customers. In 2006, 41% of businesses said that their organisation could not get broadband where they needed it. In addition the survey found that 73% of respondents wanted symmetric broadband (SDSL), where the upstream bandwidth is the same as the downstream bandwidth, but couldn’t get it where they need it.
Figure 4.13: Business customers unable to get broadband services where needed
100%
90%
80%
70%
60%
50%
40%
30% 54% 20% 42% 41%
10%
0% 2004 2005 2006
Source: CMA
23 Impact of the Telecoms Strategic Review
4.24 The majority of business customers consider the fixed telecoms market competitive, with over 80% of respondents considering the price, quality and range of service offered in the market to be either extremely or fairly competitive.
Figure 4.14: Business customer perception of competitiveness of fixed telecoms market
100%
90%
80%
24% 28% 70% 28%
60% Extremely competitive 50% Fairly competitive 40%
30% 61% 55% 57% 20%
10%
0% Price Quality Range of services
Source: Ofcom/Holden Permain
Switching and participation
4.25 The percentage of residential communications customers who have switched fixed and broadband providers increased significantly as competition in the market spread and bundled services became more prevalent. In 2006, 8% customers had switched fixed line provider compared to 2005, while 5% more customers had switched broadband provider in 2007 compared to 2006.
Figure 4.15: Residential customers who have ever switched provider 40%
30%
2005 20% 37% 36% 34% 28% 26% 2006 10% 21% % of adultusers 15+
0% Fixed line* Mobile* Internet+
* Data Q4 2005 and Q4 2006 + Data Q1 2006 and Q1 2007 Source: Ofcom research
4.26 We have examined consumer engagement with the telecoms market. This measure goes beyond actual switching behaviour and looks at the extent to which consumers are aware of the choices that they have and are actively participating in the market.
24 Impact of the Telecoms Strategic Review
The participation index is calculated on the basis of past and current behaviour in relation to fixed, mobile and broadband services. There are four different participation segments that emerge:
• Inactive consumers – consumers may have had some past involvement, but have low interest in the market. This group does not keep up to date with the market.
• Passive consumers – more likely than inactive consumers to have participated in the past and indicated some current interest in the market.
• Interested consumers – while broadly similar to passive consumers in terms of their past behaviour, they are more likely to keep an eye on the market, looking out for better deals. Their increased interest in the market means that most of this group are more likely than passive consumers to act on their future intentions.
• Engaged consumers – the most active group in terms of past behaviour and interest.
4.27 Between 2006 and 2007 consumers have become more active in all of the markets considered. This is likely to be the result of a more competitive market in which consumers have increasingly greater choice and therefore have more options to consider in making decisions about their telecoms services.
4.28 Participation in the fixed line and mobile markets is relatively similar, while active participation is highest in broadband markets. The greatest increase in participation between 2006 and 2007 was seen in the broadband market.
Figure 4.16: Level of participation in each market 100% 21% 19% 20% 21% 21% 30% Engaged 80%
31% 22% 60% 36% 36% 32% 28% Interested
40% 22% 11% 29% 15% 20% 17% Passive 20% 33% 28% 28% 26% 25% 27%
0% 2007 2006 2007 2006 2007 2006 Inactive Fixed line Mobile phone Broadband
Source: Ofcom
4.29 At the same time as consumer engagement and switching has increased, the ease of making quality of service comparisons has not improved universally. Making comparisons of fixed line services is perceived to have become more difficult between 2006 and 2007, while comparisons for broadband are perceived to have become easier. The increase in ease of comparison for broadband services appears to be driven by a greater level of comprehension by consumers as there has been a significant decrease in the proportion who state they don’t know. Overall, consumers are more likely to say it is easy to make quality of service comparisons in the internet market than in any of the other markets.
25 Impact of the Telecoms Strategic Review
Figure 4.17: Consumer opinion on ease of making quality of service comparisons
Very easy Fairly easy Fairly diff icult Very difficult Don't know
Q2 2006 13% 28% 21% 13% 25%
Q2 2007 8% 30% 24% 15% 23% Fixed line
Q2 2006 17% 34% 21% 11% 17%
Mobile Q2 2007 11% 34% 21% 12% 22%
Q2 2006 15% 33% 24% 10% 18%
Internet Q2 2007 16% 41% 24% 13% 6%
Q2 2006 15% 35% 19% 8% 23% TV Q2 2007 12% 37% 20% 8% 23% Multichannel Source: Ofcom Communications Tracking Survey Q2 2007 Base: all Adults with fixed line (2006, 2234) (2007, 1350) mobile (2006, 1883) (2007, 1273) internet (2006, 1479) (2007, 917), multichannel TV (2006, 1784) (2007, 1226)
4.30 Switching levels among SMEs were slightly above those of residential consumers. 27% of SMEs have switched their broadband supplier, with 11% having done so during 2006. Switching is slightly higher among larger SMEs, at 31%, with 12% reporting having changed provider during 2006.
Figure 4.18: SME switching of broadband suppliers, 2006 % of SMEs with a broadband connection 40%
31% 30% 27% 27% All
20% 1-50 14% employees 11%11%12% 11% 11% 10% 51-250 4% 4% 4% employees 0% Ever switched Past 12 months 1-3 years ago 4-8 years ago
Source: Ofcom
4.31 Over the next 12 months, the majority of business customers are unlikely to switch their fixed data or voice providers. The main reasons given for not switching are price and hassle.
26 Impact of the Telecoms Strategic Review
Figure 4.19: Business customer likelihood of switching fixed data or voice provider over the next 12 months
Data 33% 19% 13% 21% 15%
Very unlikely Quite unlikely Neither likely nor unlikely Quite likely Very likely
Voice 34% 23% 12% 17% 14%
0% 20% 40% 60% 80% 100%
Source: Ofcom/Holden Permain
Figure 4.20: Business customer reasons not to switch supplier
Price 49%
Hassle 44%
Easier to manage existing supplier relationship 38%
Locked in with existing supplier until contract 38% expires
High internal costs associated with switching 33%
High installation costs associated with switching 33%
Good contacts at existing company 31%
Current supplier understand our business 29%
Historic links to existing company 26%
Source: Ofcom/Holden Permain
Problems and risks for consumers
4.32 Although the increased choice and lower prices for consumers brought about by increasing competition have had largely positive effects for consumers, some significant problems affecting consumers, mainly around switching broadband suppliers, have also emerged.
27 Impact of the Telecoms Strategic Review
4.33 Some service providers have been impeding and in some cases blocking consumers from switching to other providers. The two main problems encountered by consumers in relation to switching broadband suppliers are:
• difficulties for consumers in obtaining a Migrations Authorisation Code (MAC), which the customer must give to a broadband service provider in order to be transferred from an existing service provider seamlessly and with little or no disruption of service; and
• the presence of a ‘tag’ on the line which is preventing the supply of broadband services to a consumer
4.34 In February 2007, Ofcom introduced General Condition 22 which requires all providers to supply MACs on request, where applicable, and to meet other obligations including a requirement to make sure that tags and other operational issues do not hinder customers' ability to switch. Alongside this, Ofcom launched an active enforcement programme to monitor compliance by providers with the new rules on broadband migrations.
4.35 Although significant improvements have been made in this area with the number of complaints to Ofcom about broadband migrations falling from a peak of 4,000 in early 2006 to approximately 1,000 today, the problem is yet to be eliminated.
4.36 In addition to the problems already occurring, there are further areas of risk that may become significant problems for consumers in the future, namely:
• LLU operators have provided consumers with lower prices and greater choice in areas where their services are available. However, this means that in areas where there is little or no LLU investment, consumers may be faced with less choice and potentially higher prices. Overall there is a risk of an increasing consumer divide between those consumers with access to LLU services and those without.
• With bundled products consumers are increasingly tying themselves into longer contracts that reduce the flexibility and ease with which they can switch suppliers.
• The wide range of different service combinations and different pricing levels are making the market increasingly complex and may be making it more challenging for consumers to understand and make choices about providers and services.
28 Impact of the Telecoms Strategic Review
Section 5 5 Outcomes for industry
5.1 The Telecoms Strategic Review set out to create a new regulatory approach to the fixed telecommunications market that would support and help to create the necessary conditions for competition and innovation. The Undertakings agreed between Ofcom and BT are an essential mechanism for achieving this objective by securing equality of access to bottleneck products and services.
5.2 In this section we assess the outcomes that are being achieved for industry. We consider the following factors:
• the take-up of wholesale BT and Openreach fixed telephony, broadband and network products by communication providers;
• the investment alternative communication providers have made into creating their own networks to compete with BT;
• the way the UK fixed telecoms industry has evolved in terms of overall market size and share by different competitors; and
• the progress made by Ofcom in reducing the regulation of fixed telecommunications services.
Product take-up
5.3 The Telecoms Strategic Review set requirements for equivalence of inputs and transparency for a set of wholesale products available from BT or Openreach. This section provides an outline of the trends and current levels of take-up for these wholesale products, namely:
• Wholesale Line Rental (WLR) and Carrier Pre-selection Service (CPS);
• Bitstream products – DataStream and IPStream combined;
• Local Loop Unbundling (LLU) – Metallic Path Facility (MPF) and Shared Metallic Path Facility (SMPF) combined;
• Ethernet products – Wholesale Extension Services (WES), Wholesale End-to- End Ethernet Service (WEES) and Backhaul Extension Services (BES) products; and
• Partial Private Circuits (PPC) as well as Traditional Interface Leased Line Access Products (TILLAP) and Traditional Interface Leased Line Backhaul Products (TILLBP).
5.4 With its aim of providing the conditions to encourage competition and innovation within the fixed telecommunications market, the Telecoms Strategic Review and Ofcom’s related approach to regulation was expected to impact the outcomes for the industry. At the same time the actual take-up of the wholesale products offered and willingness of communications providers to introduce services to directly compete with BT, will have been equally important in affecting the outcomes for industry.
29 Impact of the Telecoms Strategic Review
Wholesale Line Rental and Carrier Pre-selection Service
5.5 Wholesale Line Rental (WLR) and Carrier Pre-selection Service (CPS) are used to provide fixed line voice services to end users. CPS allows end users to select alternative communications providers for voice calls while continuing to pay line rental to BT. WLR enables other communications providers to offer both line rental and calls to end users over BT's local network. This usually means that the end user no longer has a contractual relationship with BT and is billed solely by the WLR provider. CPS and WLR allow new entrants to gain scale before deploying infrastructure of their own. It is important to note that while WLR will generally be used in conjunction with a CPS, CPS does not have to be used with WLR, which means that lines using WLR are a subset of CPS lines.
5.6 Figure 5.1 shows that the take-up of CPS grew steadily from Q4 2005 to Q3 2006, but the number of CPS lines declined from Q4 2006 to Q3 2007. Similarly the take-up of WLR grew rapidly from Q4 2005 to Q3 2006 but growth slowed significantly from Q3 2006 to Q3 2007. By the end of Q3 2007 there were 5.6 million CPS lines and 4.4 WLR lines. Taken in the context of approximately 34 million end-user lines, about 17% of lines use CPS, while approximately 13% of lines use WLR.
5.7 The increase in CPS line take-up during 2006 was driven by the launch of bundled voice and broadband services. However, in 2007, as new providers have established firmer positions in the market, they have increasingly moved residential customers away from WLR and CPS. Instead these providers are rolling out full LLU and migrating their customers to these LLU based services.
Figure 5.1: Take-up of CPS & WLR
CPS WLR 7000
6000
5000
4000
3000
Lines (thousands) Lines 2000
1000
0 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007*
*Forecast Source: BT, OTA
Bitstream products
5.8 BT’s bitstream products enable alternative communications providers to provide broadband services to end users without needing extensive networks of their own.
30 Impact of the Telecoms Strategic Review
With DataStream, BT manages the DSL multiplexing equipment at the various local exchanges, and hands off the aggregated traffic to another communications provider at one or a few points of presence. With IPStream, BT also provides the IP transport services for the communications provider.
5.9 Take-up of the DataStream and IPStream product grew steadily from Q4 2005 to Q1 2007 but started to decline from Q1 2007 onwards. By Q3 2007 there were a total of 8.5 million lines with DataStream or IPStream products. Taken in the context of 14.4 million lines with broadband connection, lines with DataStream or IPStream represents 59% of total broadband connections.
5.10 As with WLR and CPS, the decline in DataStream and IPStream is primarily driven by increased roll-out of and migration of customers to LLU.
Figure 5.2: Take-up of Bitstream products
10000
9000
8000
7000
6000
5000
4000 Lines (thousands) 3000
2000
1000
0 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007*
*Forecast Note: Figures include take-up of bitstream products by BT Group of companies (e.g. BT Retail, BT Ignite, BT Global Services) Source: BT
Local loop unbundling
5.11 Local loop unbundling (LLU) is the process by which an incumbent provider's local loops (the physical connection between the customer and the local exchange) are physically disconnected from its network and connected to competing providers' networks. This enables communications providers other than the incumbent to use the local loop to provide services directly to customers. BT Openreach offers two types of LLU products, namely Metallic Path Facility (MPF) and Shared Metallic Path Facility (SMPF). For MPF (or full unbundling), the local loop is used by a single communications provider to provide broadband, voice and/or TV services over its network. In comparison SMPF offers a ‘shared’ local loop where the broadband service is carried over the communications provider’s network and voice services are carried via an alternative network based on WLR. Each provider has a contract to provide its service to the end user. Currently the majority of LLU lines are shared rather than fully unbundled.
31 Impact of the Telecoms Strategic Review
5.12 Figures 5.3 shows that take-up of LLU has been growing rapidly between Q4 2005 and Q3 2007 and is expected to continue to do so over the next quarter. The total number of unbundled lines has been growing by over 50% per quarter (compounded). By the end of October 2007 there were 3.36 million LLU lines. While it took 6 years to achieve take-up of the first million LLU lines, take-up of the second million lines took only 6 months.
Figure 5.3: Take-up of LLU
4500
4000
3500
3000
2500
2000
Lines (thousands) 1500
1000
500
0 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007*
*Forecast Note: Both MPF and SMPF have been included in the number of lines Source: BT , OTA
5.13 Looking at the take-up data for wholesale broadband products together, a clear trend emerges showing that LLU accounts for an increasingly large proportion of the total number of lines using wholesale broadband products – by Q3 2007 it was over one quarter and in Q4 this is expected to increase to over 30% (figure 5.4).
32 Impact of the Telecoms Strategic Review
Figure 5.4: Wholesale broadband products – LLU vs. Bitstream LLU Bitstream 100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007*
*Forecast Source: BT
Ethernet products
5.14 Wholesale Extension Services (WES) provide a high speed secure point-to-point connection linking an end user site directly to a communications provider network point of presence or access node.
5.15 Wholesale End-to-End Ethernet Service (WEES) provide a secure point-to-point direct connection between two different end user sites up to a maximum straight-line distance of 25km between each premise unless technical feasibility dictates otherwise.
5.16 Wholesale Extension Service Access Products (WESAP) provide a network access service that enables a point-to-point direct connection between an end user site and a BT local access node.
5.17 Backhaul Extension Services (BES) provide a permanently connected secure high speed point-to-point data connection between a communications provider network (at LLU sites) and the BT exchange
5.18 The take-up of Ethernet products grew slowly between Q4 2005 and Q4 2006. After this point step changes in the take-up of available products occurred. The take-up of WES jumped between Q4 2006 and Q2 2007 and of WEES and BES between Q1 2007 and Q2 2007 (figure 5.5). These increases were due to the completion of the installed base migration of BT Global Services Short Haul Data Services to Openreach WES, WEES and BES services based on equivalence of inputs.
5.19 By Q3 2007, WES and WEES accounted for approximately 16,000 lines each. BES take-up amounted to 7200 lines. WESAP, which only launched in December 2006, reached a take-up level of 25 by Q3 2007.
33 Impact of the Telecoms Strategic Review
Figure 5.5: Take-up of BES, WES, WEES, WESAP BES WES WESAP WEES 18
16
14
12
10
8
6 Lines (thousands)
4
2
0 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007
Source: BT
Partial Private Circuits
5.20 Partial Private Circuits (PPCs) provide a connection with dedicated transmission capacity between an end user site and another communications provider’s point of handover. Both the communications provider and BT supply a portion of the connection.
5.21 Take-up of PPCs has remained relatively flat between Q4 2005 and Q3 2007, with growth totalling 7.3% over the period (figure 5.6). Take-up is not expected to change significantly over the next quarter.
34 Impact of the Telecoms Strategic Review
Figure 5.6: Take-up of PPC
80
70
60
50
40
30 Lines (thousands)
20
10
0 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007*
*Forecast Source: BT
5.22 Traditional Interface Leased Line Access Products (TILLAP) provide dedicated transmission capacity between an end user's premise and a BT Local Access Node which uses a defined interface. Traditional Interface Leased Line Backhaul Products (TILLBP), provide dedicated transmission capacity or a network access service running from a communications provider’s radio base station to a BT Local Access Node, a BT Core Node or that communications provider’s point of handover, in the case of the latter. The Undertakings required BT to provide TILLAP and TILLBP to communications providers within a reasonable time of request. To date these products have not been developed and therefore there has been no take-up (see section 6.78).
Customer supplier relationships
5.23 The survey of BT Group’s wholesale customers conducted by Spectrum Value Partners showed that the satisfaction of both BT Wholesale and Openreach customers improved over the past 12 months.
5.24 The area of greatest improvement was around confidentiality, with communications providers recognising the active efforts made across the BT Group to ensure appropriate measures are in place. There was also recognition of the improvement in the quality of account management, particularly in Openreach, compared to 12 months ago when these teams were still only being put into place.
5.25 Key areas for which respondents were looking for improvements in operational performance were in product set support, product innovation and service delivery.
5.26 Overall respondents felt that the re-structuring of BT has been well executed and the mechanisms for equivalence were well implemented and are working well. In the future, the focus should lie on encouraging further innovation and customer responsiveness of both BT Wholesale and Openreach.
35 Impact of the Telecoms Strategic Review
5.27 Please refer to Annex 1 for further details of the findings of the Spectrum survey.
Investment
LLU investment
5.28 The trend in LLU take-up already outlined is reflected in the indicators relating to the investment made by operators in LLU. Between December 2005 and July 2007 the number of operators investing in LLU more than doubled from 8 to 20. The number of exchanges in which these operators have installed equipment increased to a similar degree from 695 to 1636. At the same time coverage also increased significantly, with 78% of end users covered by one or more LLU operators in July 2007 compared to 40% in December 2005.
Figure 5.7: LLU investment in exchanges
December 2005 August 2006 July 2007 Number of operators 8 12 20 investing in LLU Proportion of end users 40% 55% 78% covered by an exchange with one or more LLU operators Proportion of end users 8% 26% 59% covered by an exchange with three or more LLU operators Number of exchanges with 695 1024 1636 LLU operator equipment (no duplicates) Average number of LLU 1.8 2.5 3.4 operators per unbundled exchange Total number of 5587 5587 5587 exchanges Source: BT
5.29 Over the past year Carphone Warehouse, Tiscali, Orange and Sky invested heavily into LLU. This is expected to continue, with these operators aiming to extend the coverage of their networks:
• Tiscali plans to migrate from IPStream and DataStream and continue to roll out both SMPF and MPF to 1000 exchanges in order to achieve 65% coverage.
• Carphone Warehouse plans to continue to invest in expanding and deepening its network in order to grow its customer base towards a target of 3.5m broadband customers by March 2010.
• Sky’s LLU plans were 6 months ahead of schedule, with 70% coverage achieved in July 2007, but further expansion is planned, with industry commentators suggesting a possible upgrade from shared LLU to full LLU.
• Orange is continuing to transfer customers to LLU lines in order to avoid paying wholesale fees to BT and increase the number of possible services that can be supplied to customers.
36 Impact of the Telecoms Strategic Review
Evolution of the UK fixed telecoms industry
5.30 The take-up of the products specified under the Telecoms Strategic Review has led to changes in the UK fixed telecoms industry particularly in terms of revenue and market shares.
5.31 Some of the data presented in this section has been published in the reports: The UK Communications Market 2007 published by Ofcom in August 2007 and The International Communications Market 2007 to be published by Ofcom in December 2007. While the data presented here gives an overview, more extensive discussion of trends and changes in the industry can be found in the original report.
5.32 Total UK telecoms retail revenues have been growing steadily and in 2006 accounted for £38.5 billion (see figure 5.8). Revenue from mobile and voice data account for the greatest proportion of revenues. Growth in this sector has been driven by increasing usage and a growing number of subscriptions despite penetration of over 100%. Fixed call and access revenues have continued to decline as a result of a falling number of fixed lines along with increasing substitution of mobile and VoIP calls for fixed line calls. Internet and broadband has been the fastest growing sector by revenue, driven by increasing take-up and migration from narrowband to broadband.
Figure 5.8: UK telecoms industry retail revenue CAGR 02-06 Total 4.3% 38.0 38.5 40 36.3 34.4 Other retail 6.8% 32.3 9.5 8.6 9.9 30 8.0 Corporate 7.3 2.7 5.2% 2.3 2.5 2.6 2.2 2.5 2.5 2.8 data services 1.9 2.2 20 Internet & 10.2% 9.0 10.5 12.0 13.1 13.9 broadband Mobile voice Retail revenue (£bn) revenue Retail 10 11.5% & data 11.9 11.4 10.7 10.0 9.6 Fixed calls & 0 (5.2%) access 2002 2003 2004 2005 2006
Source: Ofcom/communications providers Note: since this chart was included in the 2006 Communications Market Report we have updated it to reflect more accurate data
Voice
5.33 Although BT still holds the largest share in the provision of fixed lines for voice services, the share of lines taking non-BT voice services has been steadily growing (figure 5.9). By 2006, 36% of lines were using non-BT voice services, compared to just 19% in 2002.
5.34 Similar developments can be seen in the market shares for fixed voice call volumes. BT’s market share of fixed calls has been declining steadily, while the total share of other communications providers has been growing. The greatest increase in market share between 2002 and 2006 was achieved by operators utilising CPS and WLR. By 2006, BT lost the majority market share it held in previous years and only accounted for 48% of total voice call minutes while other communications providers account for 52% of total minutes. These trends are shown in figure 5.10. Calls
37 Impact of the Telecoms Strategic Review
supplied by a provider, other than BT, using its own network are categorised as direct calls. Calls supplied by a provider using BT’s network, via CPS or WLR, are categorised as indirect calls.
Figure 5.9: Share of lines taking non-BT voice services CAGR 02-06 Total 19.7% CPS lines 75.6 % 40% 36% 34% 31% 30% Full LLU n/a 25% 17% 19% 13% 19% 7% 20% Other direct 0% 2% 1% 4% 5% 4% 4% 4% (exc. WLR and LLU) 10% 13% Cable 0%
Proportion of total lines 13% 13% 14% 13%
0% WLR lines n/a 2002 2003 2004 2005 2006
Source: Ofcom/communications providers Notes: (1) in cases where we do not receive data from communications providers we have included estimates; (2) since this chart was included in the 2006 Communications Market Report we have updated it to reflect more accurate data.
Figure 5.10: Market share of fixed voice call volumes 100% CAGR 02-06 14.5% 16.7% 20.9% 24.8% 28.2% 80% 10.0% 10.1% Indirect 18.1% 9.4% 8.7% 13.4% 13.5% 9.0% 60% 14.3% 14.6% 14.9% Direct (2.5%)
40% Cable 2.7% 62.1% 59.7% 55.4% 51.9% 20% 48.0% BT (6.2%) Share of voice callminutes 0% 2002 2003 2004 2005 2006
Source: Ofcom/communications providers Note: NTS voice calls are not included
5.35 Compared to other countries featured in Ofcom’s review of the international communications market, BT, as the UK’s national incumbent, has one of the lowest market shares of fixed voice call volumes. In 2005, for which comparative data is available, only the German incumbent, Deutsche Telekom, has a smaller share of call volumes than BT. Deutsche Telekom’s falling share has been driven by strong growth in the use of carrier pre-selection services in Germany.
38 Impact of the Telecoms Strategic Review
Figure 5.11: Incumbent market share of fixed voice volumes – international comparison 100 87 80 80 7170 70 67 67 70 65 66 66 65 65 65 61 ) 55 56 60 52 2004 48 48 44
Share (% Share 40 2005
20 2006
0 UK FRA* GER* ITA JPN** POL* ESP* NED* SWE IRL
Source: IDATE/national regulators/OECD/Ofcom Note: * 2005 data ** Revenue data unavailable
Broadband
5.36 Penetration and take-up of broadband services has been increasing rapidly. While there were only 1.4 million broadband connections in 2002, by 2006 there were 13 million. Connection figures from the first half of 2007 show that this rapid growth is continuing.
5.37 Between 2005 and 2007, increasing availability of LLU services and aggressive pricing by LLU based providers has led to LLU services quickly acquiring a significant share of the market. Connection figures from between 2006 and H1 2007 show that this growth is coming at the expense of other non-LLU DSL broadband connections (figure 5.12).
Figure 5.12: UK residential and small business broadband connections CAGR 02-06 Total 79.1% Other n/a 15 14.4 13.0 3.2 Cable 41.4% 9.9 3.1 10 2.4 modem 1.3 2.7 LLU DSL n/a 6.1 0.2 5.5 5.0 5 2.0 4.7 3.1 Other non- 102% Connections (millions) Connections 1.4 2.7 1.4 3.7 LLU DSL 0.8 0.3 0.9 2.3 3.1 0.8 1.4 0 0.3 BT retail DSL 87.4% 2002 2003 2004 2005 2006 2007 H1
Source: Ofcom/communications providers Note: since this chart was included in the 2006 Communications Market Report we have updated it to reflect more accurate data
5.38 Although BT has maintained a stable market share between 2002 and H1 2007, providers using LLU and DataStream or IPStream have rapidly expanded their share
39 Impact of the Telecoms Strategic Review
throughout this period. The greatest loss in share over the period was experienced by the cable provider ntl:Telewest (now Virgin Media) (figure 5.13).
Figure 5.13: UK broadband service provision share of retail connections 100% 13% 16% 16% 18% 16% 16% Other 80% Tiscali 60% Orange Home 57% 44% 40% TalkTalk/AOL 34% 29% 25% 24% ntl:Telewest 20% 24% 26% 24% 23% 24% 26% BT 0% 2002 2003 2004 2005 2006 2007 H1
Source: Ofcom / operators Note: TalkTalk/AOL, Orange Home and Tiscali shares are commercially sensitive and are purposefully omitted from the chart. Ofcom is unable to release these data.
5.39 Compared with other European countries, BT, the incumbent operator in the UK, has the smallest share of retail broadband connections at 25% in 2006 (figure 5.14).
Figure 5.14: Incumbent share of retail broadband connections – international comparison
100%
90%
80%
70%
60% 2004 50% 2006 40%
30%
20%
10%
0%
a e UK nd ny c nd ds ium la Italy way ugal and lg rance ree lan rt Spain e in Irela or o erl Austri F F erma G er N Sweden B Denmark G P Neth Switz
Source: Analysys
5.40 In terms of wholesale broadband connections, BT accounted for approximately 67% of lines at the end of 2006 compared to 64% in 2004. By Q2 2007, this fell to just over 60%, as a result of providers previously using BT’s bitstream wholesale products switching to local loop unbundling. BT’s share lies below the average level of incumbent share in Europe of 66%.
40 Impact of the Telecoms Strategic Review
Next Generation Networks
5.41 Next generation network services can be divided into two separate components. The first component, next generation core networks refer to the backbone networks. The second component, next generation access networks refers to the section of the operator’s network which links the end customer into the operator’s core network.
5.42 Consumer use of their broadband connections is changing. The desire for operators to offer even faster speeds and for consumers to purchase them shows no signs of slowing. New high speed services, such as high definition video will place increasing demands on current networks. In the future, as more and more consumers take up these and other new high bandwidth services, increasing strain will be placed on the underlying communications infrastructure on which broadband is built. There is likely to be a point beyond which today’s networks will no longer be able to address increasing speed and coverage requirements, and will need to be replaced by next generation core and access networks.
5.43 Communications companies are already responding to this trend with a range of investments in upgrading the current core network infrastructure. In 2004, BT set out specific proposals for a next generation network, called 21CN, to replace all of its existing networks with a new single multi-service network. The aims of 21CN are to improve end-user experience and empowerment, improve speed to market for new services and change cost structures to bring about significant savings. 21CN is aimed at enabling broadband speeds of up to 24Mbit/s. The first phase of end user migration started in November 2006. BT expects 21CN to cost approximately £10billion. Cable and Wireless, Carphone Warehouse and Tiscali are also upgrading their existing core networks. Other operators including Thus and Easynet invested in core next generation networks when they started building their networks.
5.44 Virgin Media has recently announced its intention to invest in a next generation access network. This will enable 70 per cent of its potential customers to receive broadband at a speed of up to 50Mbit/s by the end of 2008. There have also been announcements of more limited commercial deployments and small-scale trials, such as BT’s trial in Ebbsfleet.
5.45 Both next generation core networks and next generation access networks are expected to significantly change the market and competitive landscape for fixed telecommunications products. There has been significant industry debate in both cases about how the market will evolve and Ofcom is considering how regulation needs to be adapted to these changing circumstances. Important questions about the applicability of the Telecoms Strategic Review and the Undertakings are already emerging. Ofcom is continuing to monitor the developments and likely changes in the market and is considering how to adapt its regulatory approach and mechanisms in order to deal with these.
Deregulation
5.46 In implementing the Telecoms Strategic Review, we have sought to target regulation at economic bottlenecks and remove regulation that, in the light of increased competition, is no longer necessary. Figure 5.15 outlines the progress that we have made in reducing regulation.
41 Impact of the Telecoms Strategic Review
Figure 5.15: Progress in reducing regulation
Market Statements made in the Telecoms Strategic Review Latest status Residential Ofcom committed to: • Residential charge controls were voice • Relax the retail price cap (from RPI – RPI to RPI – 0) once removed in August 2006. services it was satisfied that a fit-for-purpose WLR product was • Ofcom intends to initiate a review available to communications providers. of the retail narrowband market in • Consider further deregulation via a consultation in the early 2008 part of 2006 on whether remedies, including price controls, continue to be needed in fixed narrowband retail service markets. Business In the TSR statement, Ofcom committed to: • Ofcom has conducted a retail services • Complete its review of the replicability of BT’s business replicability analysis and a calls, exchange lines and leased lines products to allow BT statement was published in April to offer bundles of these products should replicability of 2007. these services be proven. • There has been no relaxation of • Complete its analysis of whether BT should also be allowed regulation on low bandwidth to offer bespoke discounted prices on bundles of these PPCs as these were not found to products. be replicable • Business exchange lines were identified as being replicable • Relaxation on bespoke pricing has been implemented Leased lines In the TSR statement, Ofcom committed to: • A discussion document was (geographic • Complete a review of the extent to which competitive issued during 2006 analysis) conditions vary in different parts of the UK in retail and • The leased line market review is wholesale markets for leased lines: currently underway and Ofcom − Should there be a strong case for defining separate plans to publish a consultation geographic markets, Ofcom would launch a full market documents in December 2007 review of the relevant markets. • The leased line market review will − Should there be a strong case for varying remedies by be considering the potential for geography within a single market, Ofcom would launch a deregulating 155Mbit/s partial further consultation document in the first half of 2006. private circuits and 34/45Mbit/s PPCs in central London and Docklands Wholesale In the TSR statement, Ofcom committed to: • Ofcom has delivered on its international • Complete a new review of wholesale international markets commitment: services to assess whether the SMP status of BT and Cable & − Ofcom completed a market Wireless continued to exist. review of wholesale international voice services in 2006 and concluded in July 2006 with a finding of no SMP on 235 routes. − In its final statement Ofcom lifted the existing regulatory obligations on BT. Wholesale In the TSR Statement, Ofcom stated that it would: • Ofcom has published a broadband • Complete a new review of WBA which should consider the consultation proposing the access potential constraining effect of LLU on WBA markets. identification of separate • Consult on whether there is a case for varying regulatory geographic markets and the solutions by geography. deregulation of Wholesale Broadband Access services in some parts of the country. Wholesale In the TSR, Ofcom stated that: • Ofcom intends to launch a review fixed • The market for inter-tandem conveyance and transit, was of the wholesale narrowband narrowband already deregulated in 2005; this was accompanied by a market in 2008 access relaxation of obligations on BT in the market for local tandem conveyance and transit; regulation was kept in three markets where BT was found to have SMP: − Call origination in the UK − Single transit in the UK − Call termination in the UK • While believing that BT’s dominance in these markets will continue for several years, Ofcom committed to monitor developments such as the impact of BT’s 21CN and, in due course, conduct a full review of these markets to explore the potential for further deregulation.
42 Impact of the Telecoms Strategic Review
Section 6 6 Delivery of the Undertakings
6.1 It is over two years since BT began to implement the Undertakings. Since we published our last evaluation report in October 2006, a number of the milestones set out in the Undertakings have passed and BT, Ofcom and industry have gained additional experience of the practical issues involved in their implementation.
6.2 We decided that it was appropriate, therefore, to carry out a review of the progress made in implementing the Undertakings. The review involved discussions with communications providers and BT, and was carried out between July and September 2007. To supplement our analysis, we then commissioned Spectrum Value Partners to carry out a more extensive survey of BT’s wholesale customers. The findings of this survey are summarised in Annex 1.
6.3 Our review highlighted industry’s view that BT is committed to delivering the commitments set out in the Undertakings. This was confirmed by the survey carried out by Spectrum on our behalf. BT pointed out that it has devoted significant resources to delivering the products and systems needed to meet the commitments made in the Undertakings. We observe that the establishment of Openreach, and the associated re-organisation within BT, caused major upheaval and the changes have taken time to bed down. But, as the Spectrum survey demonstrates, Openreach has now progressed from ‘start-up’ mode to relative maturity.
6.4 Our review also brought to light a number of issues that have arisen in relation to the implementation of the Undertakings. These are discussed below, along with the progress that has been made in resolving them. Again, our analysis is supported by the Spectrum survey.
6.5 Ofcom’s view is that the Undertakings remain an effective mechanism to achieve the objectives identified in the Telecoms Strategic Review. There has been progress made in delivering the Undertakings, but significant issues still remain to be resolved. It was inevitable that the implementation process would raise issues that were not foreseen when the Undertakings were agreed, and we remain committed to the principle of equality of access as the right way to ensure sustainable infrastructure competition. We also recognise that as BT develops its next generation network we will need to be closely involved to ensure that BT continues to deliver equality of access.
6.6 This section of the report covers organisational separation, the implementation of equality of access and delivery of products, and the issues raised by the development of BT’s next generation network. Also included is a review of a number of related areas which are not covered directly by the Undertakings but are relevant to achieving the objectives of the Telecoms Strategic Review.
Organisational separation
6.7 The following issues related to operational separation are discussed in this section:
• the operation of Openreach, the impact of BT’s recent re-organisation and the organisational boundaries between Openreach and the rest of BT;
• the operation of the Equality of Access Board and Equality of Access Office; and
43 Impact of the Telecoms Strategic Review
• the separation of operational support systems and management information systems.
The operation of Openreach
6.8 Openreach has now been established for over eighteen months. In that time a discrete organisation has been created, as required by the Undertakings. For example, its headquarters team are located in separate accommodation and changes such as the re-branding of fleet vehicles have progressed. Openreach has also published separate financial reports within the overall BT Group financial reports to meet the requirements of accounting separation.
6.9 Communications providers reported that their interactions with Openreach were initially positive but that, given issues with product delivery, these relationships have been tested. The Spectrum survey indicated that communications providers are generally of the view that Openreach has improved as an organisation in the last year. As indicated in the responses to the survey carried out by Spectrum, Openreach was viewed most positively by larger communications providers that provide services to residential consumers. Smaller consumer-focused providers did not feel that Openreach regarded them as important customers. And those focused on providing services to business consumers felt that Openreach was not equipped to understand their needs.
6.10 We also note from the Spectrum survey that views of BT Wholesale relative to Openreach tended to vary by type of provider. Communications providers that supply business consumers rated BT Wholesale more positively than those who supply residential consumers.
6.11 Overall, it is Ofcom’s belief that Openreach’s performance in establishing itself as a functionally separate entity to the rest of BT is a good achievement, but that Openreach needs to continue to develop its customer relationship management.
Operation of the Equality of Access Board and the Equality of Access Office
6.12 The Equality of Access Board was established on 1 November 2005, ahead of the date required in the Undertakings. It is supported in monitoring BT’s compliance with the Undertakings by the Equality of Access Office.
6.13 The Equality of Access Board published its second annual report in May 2007.1 In this report it highlighted that BT had delivered 24 of the key milestones in the Undertakings on time, that 3 of the key milestones had not been delivered on time and that 3 were under review. It reported a total of 9 breaches of the Undertakings. In last year’s evaluation of the impact of the Telecoms Strategic Review, Ofcom stated that the Equality of Access Board was a valuable organisation capable of monitoring the implementation of the Undertakings effectively. 2 We also noted that it had not, at that time, been fully tested. The declaration of breaches since last year demonstrates its effectiveness and its neutrality. Since this report the EAB has reported further breaches, the majority of which it has categorised as trivial breaches.
1 http://www.btplc.com/Thegroup/Theboard/Boardcommittees/EqualityofAccessBoard/Publications/EAB AnnualReport2007.pdf 2 http://www.ofcom.org.uk/telecoms/btundertakings/impact1006/
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6.14 The Equality of Access Board has been keen to engage with industry and several communications providers have been invited to attend its monthly meetings. The Equality of Access Office has been developing its relationships with communications providers. This is important in making it an effective vehicle for handling complaints about BT.
6.15 The Equality of Access Board has continued its monitoring programme. It monitors the delivery of BT’s Undertakings (both the achievement of milestones and the ongoing obligations), examines key performance indicators and has instigated a programme to assess whether the behaviour of BT employees is consistent with the requirements of the Undertakings. The outcomes of this monitoring programme are published after each meeting.3
6.16 In addition, the Equality of Access Board is engaging with BT to establish its programme for monitoring compliance with the principles within the Undertakings that relate to BT’s next generation core network. This is a key challenge as it signifies a shift from specific product delivery milestones to principles-based compliance monitoring.
6.17 It has also initiated a programme to monitor more closely the operation of BT in Northern Ireland. The Undertakings provide for different requirements in Northern Ireland but it is nonetheless important to ensure that communications providers can compete effectively and consumers are not disadvantaged. Ofcom is very keen for these requirements to be met. As of last year, the Equality of Access Board remains satisfied that BT is delivering its Undertakings in Northern Ireland.
6.18 On balance, industry’s view is that both the Equality of Access Board and the Equality of Access Office have played an effective role in monitoring compliance with the Undertakings.
BT’s re-organisation
6.19 In April 2007, BT announced a re-organisation to create two new divisions, BT Design and BT Operate. These new divisions will design and operate networks and platforms, excluding Openreach’s networks and platforms. They will bring together the previously separated IT function that resided within the OneIT organisation and the network functions carried out within BT Wholesale. Some engineers will also transfer from BT Global Services into the new divisions.
6.20 The re-organisation does not change the resources or functions of Openreach, which remains separate from all the other BT divisions. However, the Undertakings do specify rules about how Openreach interacts with other BT divisions. Ofcom needs to satisfy itself that BT’s recent reorganisation does not result in a relaxation of the commitments in the Undertakings. In particular, Ofcom wishes to ensure that the sharing of confidential customer information between various BT divisions is restricted to the minimum necessary to enable BT’s other divisions to continue to provide the support required for Openreach to be able to provide products and services to its customers.
6.21 Following the announcement of the re-organisation, Ofcom has been in discussions with BT. We have agreed an approach that we believe maintains the principles that were included in the Undertakings prior to the re-organisation. These principles will
3 This report is available at: http://www.btplc.com/Thegroup/Theboard/Boardcommittees/EqualityofAccessBoard/News/news.htm
45 Impact of the Telecoms Strategic Review
be enshrined in a variation to the Undertakings which we will publish as soon as legal formalities with BT are completed.
Issues related to the boundary between Openreach and the rest of BT
6.22 The creation of Openreach gave rise to a number of boundary issues, where functions previously carried out by a single group within BT were split between Openreach and the rest of BT. These included wideband planning, inter-exchange capacity planning and the control of space and power in BT’s exchanges.
6.23 Wideband planning is the function that dimensions demand for BT products such as Ethernet and Partial Private Circuits. These circuits require fibre, which is owned by Openreach, and electronics, which are owned by BT Wholesale. Ethernet products are provided by Openreach and Partial Private Circuits are provided by BT Wholesale. This implies that the wideband planning function spans the boundary between Openreach and BT Wholesale (or BT Operate following the recent reorganisation).
6.24 The inter-exchange capacity planning function dimensions capacity between BT’s exchange buildings. This involves planning at the civil works level (e.g. duct), fibre and the equipment housed in the exchange linking different exchanges. The planning function reviews when upgrades are needed, including the trade-off between upgrading the equipment to improve connection speeds versus the provision of more fibre connections or more duct. Given that the backhaul and core networks may share capacity in a duct or on a fibre, this function cannot easily be split between backhaul and core network planning and hence splitting functions between Openreach and BT Operate is challenging.
6.25 Initially BT placed wideband planning in BT Wholesale. However, BT has now moved the functions related to wideband planning for the access network to Openreach. Ofcom believes that this approach is consistent with the intention of the Undertakings. With respect to the inter-exchange capacity planning function, BT has stated that it intends to leave this function in BT Operate. Following clarification provided by BT at our request, Ofcom is of the view that carrying out the inter- exchange capacity planning function in BT’s Operate division rather than Openreach does not lead to concerns in relation to the delivery of equivalence.
6.26 Space and power management is carried out in BT Operate as of 1st October 2007. Prior to this it was carried out in BT Wholesale. Communications providers that provide broadband services based on local loop unbundling place orders for space in BT exchanges with Openreach. Openreach then obtains space and power from BT Operate. There have been a number of cases where space and power has not been available for providers using local loop unbundling. Communications providers are also concerned that BT is reserving large areas of space for its next generation network, and that this is blocking communications providers’ ability to unbundle certain local exchanges. More generally, Ofcom is concerned that Openreach does not exert sufficient control over the process of space allocation to manage its own products effectively.
6.27 Additionally, the Co-mingling product provided by Openreach can only be used to provide space for equipment used to unbundle the local loop, but not for other services such as Ethernet. The Co-mingling product provides space and power to allow other communications providers to locate their own equipment in BT’s local exchange buildings to provide services to consumers connected to those exchanges. However, as the use of the Co-mingling product is currently contractually restricted,
46 Impact of the Telecoms Strategic Review
communications providers looking to house other types of equipment cannot use this space. Instead they must obtain additional space. Currently, this additional space must be obtained from BT Wholesale. This leads to inefficiencies in space allocation and increased costs for communications providers. It can also impact the rollout of services where the right type of space cannot be provided. For example, a communications provider that has space for Co-mingling in a local exchange cannot use that space to house equipment needed to connect a backhaul circuit to its equipment deployed in another exchange.
6.28 BT has set up a review of space allocation at the exchanges where requests for space have been rejected. This has shown that in many cases space can be made available without affecting space allocated for BT’s next generation network. BT has informed us that in many cases the perceived lack of space is down to poor quality records which BT’s review process will address. In other cases, site audits have shown that space can be created with minimal incremental investment. BT plans to complete this review of previously rejected orders before the end of 2007.
6.29 In addition, Ofcom and BT have discussed a revised process for the allocation of space that would provide Openreach with more control over the space and power allocation process and hence communications providers with more confidence that BT’s downstream divisions are not reserving space without genuine justification. Openreach will consult on this new process in early 2008. The key features of this process are likely to include:
• More transparency as to BT’s next generation core network space requirements and rollout plans;
• Space that is tentatively reserved for BT’s next generation network to only become committed 18 months prior to BT’s next generation deployment of equipment at a given exchange. If there are orders from local loop unbundling players prior to the committed deadline for BT’s next generation networks deployment, Openreach’s customers’ orders will be met first;
• Openreach to have responsibility for ensuring that the processes outlined above are consulted on and adhered to so that it can exert sufficient control over space and power to fulfil its customers’ needs; and
• BT to consider introducing a more flexible use of commingling space. First, BT will continue the trial process for allowing the migration of space from local loop unbundling to Ethernet. Secondly, it will consult with industry on the potential to expand the use of co-mingling space to accommodate equipment other than local loop unbundling equipment.
6.30 All the above will be subject to consultation between Openreach and its customers. Ofcom intends to monitor the consultation process closely. Ofcom believes that a positive outcome on the forthcoming consultation from BT on space and power allocation should go a significant way towards addressing the issues relating to space and power that Ofcom identified in its review of the implementation of the Undertakings.
47 Impact of the Telecoms Strategic Review
Separation of Operational Support Systems and Management Information Systems
6.31 Operational support systems are the support systems that help to run network and business processes, including ordering, fault management and network configuration.
6.32 Management information systems are the systems that BT uses to plan and direct business and organisational operations, make decisions and develop strategies. They may hold commercial information and/or confidential customer information.
6.33 The Undertakings originally required BT to logically separate its operational support systems for various products by a given date, known as the relevant ready for Service (RFS) date in the Undertakings. Logical separation relates to separating the information held within the systems and the applications that run on the system (e.g. by the use of user access controls). BT also had to physically separate systems by 30 June 2010 and ensure that all operational support systems designed for Openreach were separate from the rest of BT’s systems. Physical separation requires that Openreach and the rest of BT have completely separate systems, including separate physical platforms.
6.34 Ofcom and BT discussed the requirement for logical separation and decided that different interpretations could be applied. Therefore Ofcom and BT agreed a Variation to the Undertakings to clarify the position, effective from 19 June 20074. This set in place requirements for user access controls on Wholesale Line Rental and Local Loop Unbundling products and included binding milestones for how much of the installed base had to be migrated to physically separated systems by specific dates. These milestones are subject to external and internal audits.
6.35 BT was also required to separate its management information systems between Openreach and the rest of BT to ensure that BT would not gain a commercial or competitive advantage over other communications providers. The original requirement was to logically separate its management information systems, which was the requirement that related to operational support systems. In October 2006, Ofcom agreed to vary this requirement. At this time, 58 of 71 systems were no longer shared at any level between Openreach and the rest of BT and hence did not need to be separated. For the remaining 13, the variation required BT to put in place user access controls to restrict access (by 22 October 2006), and also to provide a roadmap (by 30 June 2007) to demonstrate how level 2 systems separation would be implemented. Level 2 systems separation was defined as both separation of systems data and separate instances of the application software such that users can only have access to the data and the applications to which they are entitled.
6.36 BT has made progress towards the separation of its management information systems and operational support systems. It has put in place the required user access controls and it has commenced the development work required to deliver separate systems.
6.37 It has also delivered its management information systems separation roadmap. This provides a document against which progress towards systems separation can be tracked. Within this management information systems roadmap, a risk still exists around five systems, for which the evolution is dependent on a wider systems development programme within BT.
4 http://www.ofcom.org.uk/consult/condocs/bt_oss/statement/
48 Impact of the Telecoms Strategic Review
6.38 Despite the progress made by BT, and even though the variation on operational support systems separation has only been agreed recently, some issues exist where, for example, systems separation may lead to adverse impacts on customers. Ofcom and BT have been in discussions on these issues and BT will present a detailed plan to address each of them before the end of 2007. Ofcom will need to be reassured that this plan will deliver solutions that meet the systems separation requirements as specified in the Undertakings.
Equivalence of inputs and other product aspects
6.39 Openreach has continued to deploy products on an equivalence of inputs basis as required by the Undertakings. In the last year it has deployed:
• Wholesale End-to-End Ethernet Service (WEES);
• Wholesale Extension Service for Local Access (WES-LA) which meets the definition of a WES access circuit within the Undertakings; and
• Wholesale Line Rental for analogue and ISDN2 lines.
6.40 Openreach is close, therefore, to having in service on an equivalence of inputs basis all the products specified within Section 3 of the Undertakings. While the Equality of Access Board has reported several breaches in the deployment of these products, industry feedback suggests that BT has focused on the delivery of equivalence where this has been specified in the Undertakings. Nonetheless, there have been, and continue to be, significant issues with the products and platforms that are preventing the delivery of services at a service level required by industry.
6.41 The remainder of this section reviews each main product set and any issues identified by Ofcom’s review.
Equivalence Management Platform
6.42 Openreach has developed the Equivalence Management Platform to provide the business processes for products which it supplies on an equivalence of inputs basis. It is a key component in the overall effective delivery of equality of access.
6.43 The Equivalence Management Platform provides the interface through which communications providers place orders, fault requests and other enquiries to Openreach for products such as those required for local loop unbundling. Therefore, it is of paramount importance that the platform has high performance and availability. Openreach has been focused on providing the required level of performance on the platform, and service levels have been increasing recently. However, there have been incidents that have had disruptive effects on the platform and, as a knock-on, the ability of communications providers to place orders. For example, a software release to provide functionality required to meet BT’s obligation to provide Wholesale Line Rental on an equivalence of inputs basis caused the platform to be unavailable for part of a weekend, resulting in communications providers not being able to place orders for other products supported on the platform. Given that the Equivalence Management Platform is vital to the provision of services on an equivalence of inputs basis, and because there is a high degree of functionality planned to be added to the platform through major releases in the next few years, the performance of the platform continues to pose a key risk to the effective delivery of products.
49 Impact of the Telecoms Strategic Review
6.44 In addition, communications providers have indicated that the growing number of products being supported on the Equivalence Management Platform may be leading to problems with the deployment of new features. The Office of the Telecommunications Adjudicator has stated that it believes that the platform is becoming a bottleneck in the delivery of new products and functionality.
6.45 Ofcom is concerned about the Equivalence Management Platform both in relation to service performance and product development. Our view is that the way to address this is through the appropriate use of service level agreements and service level guarantees. In addition, the product development process review that Openreach proposes to carry out shortly must include an examination of how deployment of features onto the platform can be better managed. Service level agreements and guarantees and the Openreach product development process are discussed further below.
Local Loop Unbundling
6.46 Since the Undertakings came into effect, the number of unbundled local loops has risen to over 3.5 million. Ofcom believes that the provision of unbundled local loop products on an equivalent basis, and the transparency provided by the functional separation of Openreach, is a key contributor to this uptake.
6.47 Openreach provides two products that support local loop unbundling. Metallic Path Facility (MPF) provides access to the whole line for the provision of both voice and broadband services. Shared Metallic Path Facility (SMPF) provides access to the line for the provision of broadband services only.
6.48 Ofcom observes that there have been significant issues with the service provided by Openreach. The quality of provisioning and repair has not met industry targets, as reported by the Office of the Telecommunications Adjudicator. Consistently, since the launch of Openreach, the service performance on Metallic Path Facility has trailed that of Shared Metallic Path Facility. Recent improvements have occurred on both products, particularly Metallic Path Facility. Communications providers have indicated to Ofcom that the service performance on the Shared Metallic Path Facility product is reasonable. Nonetheless, communications providers that use Metallic Path Facility remain concerned at the service performance provided by Openreach. Ofcom shares these concerns, particularly given that BT does not use the Metallic Path Facility product to a significant degree, and hence may be perceived not to have the incentive to improve the quality of this product.
6.49 Openreach has informed Ofcom that the poorer relative performance of Metallic Path Facility is unrelated to the fact that BT’s downstream divisions do not use it. It argues that the lower level of performance of Metallic Path Facility stems from it being a more complex product to provide and fault-manage. While Ofcom understands these arguments, we feel that the poorer service performance on Metallic Path Facility compared to Shared Metallic Path Facility impacts other communications providers and not BT.
6.50 Therefore, we believe that strong service level guarantees are required for these two products. We explain the progress on delivering these in the section on service performance below.
6.51 In addition, Ofcom is in discussion with BT over its intended future use of MPF as it implements its next generation core networks programme. We recognise that any perception that Openreach does not have incentive to improve and sustain the
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quality of the MPF product will be removed once BT consumes the product in significant volume.
Wholesale Line Rental
6.52 In the Undertakings, BT committed to two dates for making Wholesale Line Rental ready for service for analogue lines on an equivalence of inputs basis. The first date was 31 December 2006. This was a target date for making the service available. If BT missed this date it was committed to making good faith payments for the period that it remained unavailable, up to the second date, 30 June 2007, which was the formal ‘ready for service’ date.
6.53 For some time, BT has supplied a legacy (i.e. not equivalence of input based) wholesale line rental product to communications providers. This product is known as WLR2. In order to meet the obligation in the Undertakings, Openreach decided to develop a new product, which is known as WLR3.
6.54 BT did not achieve ‘ready for service’ on 31 December 2006 for its equivalence of input based Wholesale Line Rental product so consequently made good faith payments as per its Undertakings commitments.
6.55 BT asserted that it met the Ready For Service date for Wholesale Line Rental of 30 June 2007. However, it continued to make the good-faith payments through July while it confirmed the sustainability of the systems it had developed to support the product. These included upgrades to the Equivalence Management Platform and a separate system within BT’s retail divisions (BT Retail and BT Global Services) to allow these BT divisions to place orders.
6.56 Some communications providers do not agree with BT’s assertion that it has met its obligation to provide Wholesale Line Rental on an equivalence of input basis. This is because the product delivered does not have certain functionality that was available on the legacy Wholesale Line Rental product. Consequently, communications providers who were considering moving to the new product would be losing some of the functionality that they currently have. In addition, industry is not yet convinced that the product is sufficiently robust.
6.57 While Ofcom has not formally investigated the delivery of WLR, the Equality of Access Board (EAB) has concluded that BT achieved the Ready for Service date for WLR. However the EAB has expressed concern about the quality of the service and it has also reported that a non-trivial breach of equivalence of inputs occurred later in July. This involved BT Retail falling back to processing some orders through its legacy systems rather than the new equivalence of input based system. From the start of August, the EAB confirmed that BT Retail has been using only the new systems for the supply of new end users5.
6.58 Ofcom is, however, concerned that regardless of “technical” compliance with the Undertakings on this front, the wholesale line rental product that BT has delivered may not yet meet the needs and expectations of industry and consumers. Firstly, communications providers do not feel the product is fit-for-purpose and currently few of them have plans to migrate onto this product, preferring to stay on the legacy variant; and secondly, consumer complaints have increased since the deployment of WLR3 by BT.
5 More information can be found at the Equality of Access Board’s website: www.bt.com/eab
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6.59 To address these concerns, Ofcom will monitor closely the progress on Wholesale Line Rental both in terms of improved system stability and in providing the additional features that industry requires. Wholesale Line Rental is also included in our review of Service Level Agreements and Guarantees.
6.60 We will also monitor Openreach’s delivery of functionality closely to ensure this is done in an acceptable timeframe and in a way that allows its customers to plan for the deployment of these features.
6.61 Finally, BT has delivered a Wholesale Line Rental ISDN2 product. The Equality of Access Board is currently validating that this meets the Wholesale Line Rental ISDN2 Ready For Service requirements.
Ethernet
6.62 At the time that the Undertakings were agreed, Ethernet services within the access and backhaul networks were evolving. The Undertakings required Openreach to provide a set of Ethernet products. These included:
• end-to-end connectivity products. End-to-end products include Wholesale End-to- End Ethernet Service (WEES), which provide connectivity between two end-user sites, and Wholesale Extension Service (WES) which provides connectivity between an end-user and a communication provider’s network; and
• disaggregated access and backhaul products which are intended to allow communication providers that have infrastructure at a deeper level of the network to buy an access service but provide backhaul themselves.
6.63 Openreach has delivered all the Ethernet products it was required to provide within the Undertakings. As well as transferring the Wholesale Extension Service (WES) and Backhaul Extension Service (BES) products that were already in service into Openreach, it has launched the following:
• the Backhaul Extension Service Daisy-Chain product. This product allows a communication provider to connect its equipment located in two different BT local exchanges. The equipment can be linked together to provide a backhaul connection from a distant local exchange back to a communications provider’s network, via other BT local exchanges;
• the Wholesale End-to-End Ethernet Service (WEES) product, which provides connectivity between two different end-user sites; and
• the Wholesale Extension Service-Local Access (WES-LA) product, which is a wholesale extension service that meets the requirements of the Undertakings. This delivers a connection from an end-user’s site to the local exchange that serves that end-user. It does not include any backhaul connection.
6.64 Ofcom observes that competition in the Ethernet backhaul market has not developed to the degree that we would have expected. Demand for end-to-end connectivity has far exceeded demand for disaggregated access and backhaul. Ofcom believes there are a number of reasons for this:
• The design of the products is such that the disaggregated approach is less attractive to communications providers. In order for the disaggregated approach to be commercially attractive, a communications provider must connect a high
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number of local access connections onto a single backhaul circuit to achieve efficient use of this circuit. In other words, the product only scales in very large increments. Such scaling is required to offset the additional cost of the accommodation and the investment in new equipment. However, communications providers are reluctant to commit to such large increments in capacity as this requires them to take the risk of paying more up-front (including paying for assets they will not own, such as leased backhaul circuits and space), with the return on this investment being highly uncertain. This means that the majority of circuits purchased are the aggregated products that do not make efficient use of backhaul capacity and provide a disincentive for communications providers to extend their own Ethernet networks to local exchanges.
• In order to connect access circuits onto backhaul circuits, a communications provider needs to house its own equipment at the serving exchange where the access and backhaul circuits terminate. The current space products offered by Openreach and BT make this inefficient. Further development of the Openreach and BT products could make this more attractive to communications providers.
• The distance limits applied to Ethernet products affect the deployment of these products. The Undertakings apply distance limits to Ethernet circuits to restrict the use of these to backhaul and prevent them being used to provide trunk connectivity so that Openreach’s scope to compete against its customers is reduced. However, each exchange that needs to be linked to provide such end- to-end connectivity requires space in BT exchanges which the communications provider has to rent. As discussed earlier, this can be difficult to obtain and results in additional expenditure for communications providers. The Leased Lines Market Review will consider the requirements for access and backhaul products. This may lead to a need to review the definitions of products specified within the Undertakings.
6.65 Ofcom is concerned that the issues set out above may affect competition in Ethernet products and backhaul networks. We believe that, while the products required by the Undertakings have been delivered by BT, their design (particularly in the use of backhaul networks and the restrictions in the use of the different space and power products offered by Openreach and BT Wholesale) may not support infrastructure- based competition as effectively as intended.
6.66 The Spectrum survey has also demonstrated significant dissatisfaction with the Ethernet product set, particularly among those communications providers providing services to business users.
6.67 Ofcom has therefore engaged with Openreach to find ways that it could improve its Ethernet product design to meet the needs of all its customers and to provide a set of products to allow for the more effective development of competition in the backhaul market. Openreach has expressed its desire to work with its customers to address the issues around the Ethernet product portfolio. It believes that the first of the points referred to above will be addressed by the rollout of a re-structured backhaul network (known as Project Orchid) as part of BT’s 21CN programme. This will make more efficient use of the backhaul network. BT will continue to develop its rollout plans for Orchid. It will provide a plan that commits to start dates, end dates (for a complete national rollout) and interim milestones dates.
6.68 As outlined above, Openreach and BT will consult on the use of the Co-mingling product for Ethernet in addition to local loop unbundling.
53 Impact of the Telecoms Strategic Review
6.69 If implemented effectively, the proposed changes we have set out above have the potential to improve the products offered by Openreach and create the right incentives for competition in the backhaul market to develop. Nevertheless, Ofcom will continue to monitor this area closely until the plans for Project Orchid are published and the products that use the revised definitions of backhaul (to be defined in the Leased Lines Market Review) are released.
Bitstream products
6.70 The delivery of IPStream on an equivalence of inputs basis was one of the earliest deliverables in the Undertakings. This milestone was met. There were additional milestones within the Undertakings that concerned IPStream:
• All new IPStream orders had to be met using the Shared Metallic Path Facility product. The Equality of Access Board reported a trivial breach of this because a small number of orders did not meet this requirement.
• The installed base of IPStream customers had to be migrated to using the Shared Metallic Path Facility product by December 2006. The Equality of Access Board reported a non-trivial breach of this obligation. BT rectified this breach in March 2007.
6.71 Ofcom has an additional concern relating to the way that the IPStream product is designed to include two variants of the product. One of these, IPStream Central+, provides a connection from the end-user to the internet through the BT network. The other, IPStream Central, provides a connection from the end-user through the BT network to the communications provider’s network. BT uses the IPStream Central+ product to support its own customers. While this product is provided on an equivalence of inputs basis, most communications providers use the other variant of the product. This means that the full intention of equivalence is not achieved in practice.
6.72 In order to address Ofcom’s concern, BT is developing a new IPStream product – IPStream Connect. This will deliver a single equivalent product. It is expected that this new product, and the timescales for using it to supply current and new end- users, will be enshrined in a variation to the Undertakings, and that the rollout will commence during 2008.
6.73 Ofcom is disappointed that the effect of BT’s choice of service is that it consumes the product variant used by few other communications providers. We are also disappointed with the length of time it has taken BT to move to supplying IPStream on a single equivalent product variant.
Partial Private Circuits
6.74 Partial private circuits provide a connection from an end-user (usually a business customer) to a communications provider’s network. They may be used to provide portions of a leased line, or may be used to provide access to other services, such as a virtual private network.
6.75 BT is not required by the Undertakings to provide partial private circuits via Openreach on an equivalence of inputs basis. However, it is required to provide sufficient transparency to other communications providers to enable them to understand the differences between partial private circuits and the comparable products that it supplies to its own downstream businesses. The Equality of Access
54 Impact of the Telecoms Strategic Review
Board stated that BT met the requirement to publish such information within the specified three months.
6.76 Ofcom has examined the information provided by BT and believe it can be improved. As part of our forthcoming Leased Line Market Review, we have asked BT to provide the information that will be needed to demonstrate a greater level of transparency.
6.77 The Undertakings also committed Openreach to provide, if requested, Traditional Interface Leased Lines Access Products (TILLAPs) and Traditional Interface Leased Lines Backhaul Products (TILLBPs). The objective of these is to provide disaggregated access and backhaul products to ensure competition in the backhaul network. The intention was that they would be based on traditional (rather than Ethernet) technology and would provide communications providers with an alternative to partial private circuits. There has been discussion between Openreach and its customers about these products and a consultation was carried out in January 2007. To date, however, product development has not commenced. Openreach has informed Ofcom that this is because the requirements placed on these products in the Undertakings mean it is not possible to deliver these services more efficiently than the current partial private circuit model, and therefore the attractiveness of these products is reduced.
6.78 As communications providers continue to show some interest in these products, Ofcom is keen that Openreach re-consults with its customers based on a more efficient product design. Openreach has expressed its commitment to re-consulting on these products. We also believe that Openreach should commit to a delivery date for these products should this result in reasonable demand.
Next generation networks
6.79 The Undertakings established a set of principles that BT must follow in deploying its next generation network, which is known as 21CN. These principles include:
• not foreclosing network access;
• providing network access on an equivalence of inputs basis;
• setting the charges for SMP products based on efficient design;
• arrangements for compensation; and
• requirements to ensure that no communications provider suffers a material competitive disadvantage due to BT’s software controlled migration between products made possible by its next generation network.
6.80 As the deployment of 21CN is still at its early stages, there is little evidence to enable us to assess whether BT is following these principles.
6.81 BT has engaged with industry on the development of its Next Generation Network through the Consult21 working programme. Next Generation Networks UK (NGNuk)6 has also been established as an industry group to provide a forum for consultation.
6.82 To date, BT has engaged reasonably well with industry through Consult21 and NGNuk. However, there have been various changes to the design of 21CN and the
6 http://www.ngnuk.org.uk/
55 Impact of the Telecoms Strategic Review
plans for its deployment. This, coupled with the complex nature of the discussions, means that it has been very time-consuming, both for BT and communications providers, to attend all the working group meetings.
6.83 There have been a number of consultations published by BT to gain industry views on technology and product issues related to 21CN. Communications providers have raised concerns about some of these consultations. In particular they have been concerned about:
• the lack of detail;
• the lack of clarity about what decisions may be made based on the responses, and any wider implications;
• the timescales for responding; and
• the way that BT’s re-planning means that decisions are changed after they have been consulted on. The lead time of changes announced by BT gives communications providers little time to react. For example, in response to a consultation on broadband trials, many communications providers requested a change to the migration process. BT did not initially agree to implement the migration process proposed by communications providers. However, some months later, and close to the commencement of trials, BT did make this change. There was no written consultation on this change of approach, although communications providers were engaged via bilateral discussions and a web call over a period of one month. However, this change of approach was made too close to the point of deployment for communications providers to be able to react.
6.84 These concerns have resulted in some disengagement with the consultation process.
6.85 It is our opinion that this is an area of paramount importance to ensure that BT’s next generation network deployment does not unfairly restrict access. Therefore we have agreed with BT that consultations related to 21CN should follow an approach laid out in a Code of Practice or similar publicly available document. These principles will include the objectives of each consultation, the decisions that will be made based on the consultation, the timescale and process for feedback, transparency on how feedback will be taken into account and will include the requirement to publish a statement explaining the decisions made, with clear linkages to the questions raised in the consultation.
6.86 In addition, we have agreed with BT that it will publish its Plan of Record every 3 months to avoid situations where communications providers may not be aware of whether they have up to date information on which to plan their own networks. This will include information on points of interconnect and migration plans on a per exchange basis from the current network to the next generation network. It will also include roadmaps over a 2 year horizon for mandatory products (those with SMP) linked to 21CN. These will be indicative and non-binding, but will provide a forward view to communications providers of these future products. In addition, BT will announce, on a best endeavours basis, release dates three months before launch of mandatory products, unless other regulatory obligations impose a different lead-time.
56 Impact of the Telecoms Strategic Review
Exemptions
6.87 The Undertakings allow for BT and Ofcom to vary or amend the Undertakings by mutual consent. In addition, BT may request, and Ofcom may agree, exemptions to the Undertakings.
6.88 At the time the Undertakings were formulated it was considered inappropriate to define all products that should be supplied using equivalent inputs. It was expected that as BT went through the process of mapping its products and services against the Undertakings it would identify cases for exemption, i.e. products and services which the Undertakings were never intended to cover.
6.89 At various times, BT has requested exemptions. Following a review of each request by Ofcom and discussion with BT, Ofcom has indicated to BT on a number of occasions that it would not agree to some of these requests as submitted. In these cases BT has either re-submitted the requests to meet Ofcom’s concerns or provided the products using equivalent inputs.
6.90 To date, Ofcom has agreed to a number of exemptions. The first set of 14 exemptions was agreed in June 2006. A second set of 13 exemptions was consulted on in October 2006. From this set, nine further exemptions were granted. For the four remaining exemptions included in this second set, Ofcom agreed to extend the time for which these products did not need to be provided on an equivalence of inputs basis.
6.91 Ofcom deferred a decision on these products because of the high number of responses to the consultation. This was because these products utilised fibre directly (rather than, for example, Ethernet as the underlying transport technology) and there were different views as to whether these should be provided on an equivalence of inputs basis as an end-to-end product or if the underlying fibre should be provided as an equivalent input by Openreach. Based on these responses, we re-engaged with BT, which issued updated requests. Ofcom agreed to three of these four requests. The outstanding request was for the Wavestream product, which provides an end-to- end Wavelength Division Multiplexing product. This provides very high bandwidth and a high degree of flexibility to customers on an end-to-end basis. Ofcom again extended the time during which this product did not need to be provided on an equivalence of inputs basis. This was because Ofcom believed it had some similarities to the analysis being carried out in the Leased Lines Market Review. We intend to return to this request shortly.
6.92 In July 2007, Ofcom consulted on four more exemption requests, and agreed to each of these in September 2007.
6.93 We have also granted several temporary exemptions. For example, an exemption was granted during the severe weather in July 2007 to allow BT to deal with the damage caused to BT’s network more effectively. Ofcom has since agreed to vary the Undertakings to allow BT to put in place a formal process to handle such circumstances in the future. Ofcom has also agreed to a temporary exemption to allow a limited number of Openreach engineers to work on behalf of BT Operate, or for a limited number of BT Operate engineers to work on behalf of Openreach. The Undertakings included a mechanism for Openreach and BT Wholesale to operate in this way in certain geographic areas. This temporary exemption allowed this practice to continue following the move of engineers from BT Wholesale into BT Operate as part of BT’s re-organisation. Again, Ofcom expects to vary the Undertakings to allow for this.
57 Impact of the Telecoms Strategic Review
6.94 Ofcom reviews each request on its own merits, but is also mindful that there may be a more general cumulative effect. However, we currently believe the exemptions granted to date have not changed the overall effect of the Undertakings.
Related Areas
6.95 There are a number of other areas that we see as related to the effective delivery of the Undertakings although they are not specifically included. These are Openreach service performance and Openreach’s product development.
Service Performance
6.96 There have been concerns around the service performance of Openreach. This has been in relation to products used for local loop unbundling (both Metallic Path Facility and Shared Metallic Path Facility), Ethernet products and the stability and availability of the Equivalence Management Platform.
6.97 Performance on provision and repair for Metallic Path Facility and Shared Metallic Path Facility has been consistently below the expectation of the industry and the Office of the Telecommunications Adjudicator. While both have shown improvements during 2007, the required service levels are still not being met. Shared Metallic Path Facility has out-performed Metallic Path Facility from the outset. This gap has closed in recent weeks as can be seen in Figure 6.1. The sustainability in these improvements needs to be demonstrated over the coming months, and further improvements for both products are required to meet the target level.
6.98 The chart below shows the performance for provisioning MPF and SMPF. This chart is provided by the Office of the Telecommunications Adjudicator and is agreed to and supported by Openreach and communications providers. It is based on data provided by Openreach.
Figure 6.1: Office of the Telecommunications Adjudicator – Local Loop Unbundling provision performance 120% Total SMPF Target Total MPF FTLT - RFT Target 98% 100%
80%
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20%
0% 01-Jul 15-Jul 29-Jul 07-Oct 21-Oct 03-Jun 14-Jan 28-Jan 17-Jun 22-Apr 08-Apr 04-Nov 11-Mar 25-Mar 31-Dec 12-Aug 26-Aug 23-Sep 17-Dec 09-Sep 25-Feb 11-Feb 06-May 20-May Source: Office of the Telecommunications Adjudicator
58 Impact of the Telecoms Strategic Review
6.99 As explained above, BT deployed the WLR3 product in mid-2007 to meet its equivalence of inputs commitment. Given that the service is relatively new and the majority of communications providers have not migrated onto the WLR3 product, we have not included any data on provisioning or repair for Wholesale Line Rental.
6.100 Figure 6.2 below indicates the provisioning performance on Wholesale Extension Services and Wholesale End to End Ethernet Services. We have shown these services separately from the Backhaul Extension Services because they include a connection to the end-user’s premises and delivery may be affected, therefore, by the need to carry out civil works. In general, a Backhaul Extension Service should not be affected in this way. The chart shows that, in general, BT has received a level of service comparable to that experienced by other communications providers. However, the data should be treated with caution as BT currently has low volumes of circuits. Communications providers have indicated that while Openreach is performing well, the fact that the products are supplied to business users means that levels of service provision and repair need to be far higher.
Figure 6.2: Ethernet provision performance for Wholesale Extension Services and Wholesale End to End Ethernet Services External CPs WES circuits BT's WES circuits External CPs WEES circuits BT's WEES circuits
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10 % orders completedby final customerdelivery date 0 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07
Source: BT7. Last updated: 22/11/2007
6.101 Figure 6.3 below indicates the repair performance on Wholesale Extension Services and Wholesale End to End Ethernet Services. Given the very low volume of faults reported by both BT and external communications providers, we do not draw any conclusions about the performance on the repair of these services.
7 http://www.btplc.com/Thegroup/Regulatoryinformation/Ourundertakings/KeyPerformanceIndicators/Ke yProductPerformanceIndicators/BackhaulandWholesaleExtensionServices.htm
59 Impact of the Telecoms Strategic Review
Figure 6.3: Ethernet repair performance for Wholesale Extension Services and Wholesale End to End Ethernet Services External CPs WES circuits BT's WES circuits External CPs WEES circuits BT's WEES circuits
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0 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07
Source: BT8. Last updated: 22/11/2007
6.102 Figure 6.4 shows that BT has maintained the improvement in the performance of Backhaul Extension Services that was in our last evaluation of the Telecoms Strategic Review. This service is used by communications providers to provide backhaul, particularly from BT exchanges where they have installed local loop unbundling equipment. As with Wholesale Extension Services and Wholesale End- to-End Ethernet Services, the volume of orders for these circuits is very low and so caution should be exercised when comparing the service performance experienced by communications providers with the performance experienced by BT.
8 http://www.btplc.com/Thegroup/Regulatoryinformation/Ourundertakings/KeyPerformanceIndicators/Ke yProductPerformanceIndicators/BackhaulandWholesaleExtensionServices.htm
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Figure 6.4: Ethernet provisioning performance for Backhaul Extension Services External CPs BES circuits BT's BES circuits
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10 % orders completedby final customerdelivery date 0 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07
Source: BT9. Last updated: 22/11/2007
6.103 Figure 6.5 below shows the repair performance for Backhaul Extension Services. Again, the low volume of fault reports means that caution should be exercised when comparing the service performance experienced by communications providers with the performance experienced by BT.
Figure 6.5: Ethernet repair performance for Backhaul Extension Services External CPs BES circuits BT's BES circuits
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0 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07
9 http://www.btplc.com/Thegroup/Regulatoryinformation/Ourundertakings/KeyPerformanceIndicators/Ke yProductPerformanceIndicators/BackhaulandWholesaleExtensionServices.htm
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Source: BT10. Last updated: 22/11/2007
Service Level Agreements and Guarantees
6.104 Openreach has invested time and resources in attempting to address the service performance issues outlined above. However, it is our view that this has not resulted in a level of service performance that meets industry’s requirements across the product set. We believe the best way to continue to drive service improvements is through effective Service Level Agreements (SLAs) and Guarantees (SLGs).
6.105 Consequently, in June 2007, Ofcom asked Openreach to agree service level agreements and guarantees with industry, coordinated via the Office of the Telecommunications Adjudicator. We stated that these were required for products including local loop unbundling (both Metallic Path Facility and Shared Metallic Path Facility), Ethernet services, Wholesale Line Rental and for the operation of the Equivalence Management Platform. Openreach made significant progress with industry but, by the end of August, agreement had not been reached. As a result, the Office of the Telecommunications Adjudicator referred the issue back to us and since then we have been carrying out a project to establish effective service level agreements and guarantees. The publication of a consultation on our proposals has been timed to coincide with the launch of this report.
Product development
6.106 Openreach has, to date, been concerned with delivering the products required of it by the Undertakings. This has entailed developing versions of existing products with equivalent inputs, such as Wholesale Line Rental and the products required for local loop unbundling, and rolling out new products that have equivalent inputs. While there have been several breaches of the Undertakings, we believe that Openreach has been committed to delivering these products as required and that it has resolved breaches when they have occurred.
6.107 Ofcom shares industry’s concerns, however, that some of these deployments have led to products not meeting the requirements of customers.
6.108 Ofcom believes that Openreach has not yet developed the sort of pro-active and innovative approach to product development that is required and, to date, customer interaction has been somewhat mixed. Communications providers have pointed to the following examples:
• the lack of availability of a product roadmap for Ethernet services, which means that communications providers are not able to plan their own product roadmaps;
• the absence of several important features in the initial release of the equivalent Wholesale Line Rental product, WLR3; and
• the development of Traditional Interface Leased Line products in the access and backhaul network (TILLAPs/TILLBPs), where Openreach has engaged with customers following initial interest in this product set, but has not developed
10 http://www.btplc.com/Thegroup/Regulatoryinformation/Ourundertakings/KeyPerformanceIndicators/Ke yProductPerformanceIndicators/BackhaulandWholesaleExtensionServices.htm
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commercially attractive products taking into account the requirements in the Undertakings.
6.109 Ofcom is also concerned that the consultation on the Ebbsfleet Next Generation Access trial led to considerable dissatisfaction across the industry. This trial will deploy Next Generation Access technology within a new development of housing and business premises at Ebbsfleet in Kent. Whilst Openreach has expended significant effort in engaging with its customers, the quality of this consultation led to industry concerns about the deployment of the trial.
6.110 Ofcom has discussed the product development process with Openreach. While progress is being made in developing products in specific areas beyond the strict requirements of the Undertakings, Ofcom remains concerned that Openreach’s product development process is not sufficiently transparent and fit-for-purpose. Given the issues highlighted above with current products and the new requirements that may arise from 21CN, Ofcom believes Openreach needs to improve its product development approach substantially.
6.111 Openreach recognises that there is quite significant room for improvement in its product development process. It has developed a number of initiatives to improve customer interaction. For example, it has run intensive workshops to involve customers more directly in the development of Local Loop Unbundling products.
6.112 In addition, Openreach is now in the process of implementing a review of its end-to- end product development process. It expects this review to be carried out during the first three months of 2008. Communications providers will be invited to input to this review. Ofcom intends to review the terms of reference and outputs of this work and monitor Openreach’s progress in implementing process improvements.
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Annex 1 Survey of BT Wholesale and Openreach customers
SURVEY OF BT’S WHOLESALE CUSTOMERS
London, 12 November 2007
BT’s progress on the implementation of the Undertakings – how industry relationships are changing
Background
In October and November 2007, Spectrum Value Partners conducted an independent survey on behalf of Ofcom, investigating how customers of BT Wholesale and Openreach felt that their relationship with their wholesale supplier had evolved since Ofcom accepted the Undertakings from BT in September 2005. This included speaking to key individuals within a cross section of Communication Providers, including BT Retail and Global Services as well as Openreach and BT Wholesale. This exercise is a follow up to a similar survey conducted by Spectrum Value Partners in April 2006, and hence we have been able to compare responses to those captured 18 months ago.
Introduction to this survey
Over the course of eight weeks, Spectrum conducted 29 interviews with 24 organisations, including LLU players, altnets, service providers, ISPs, mobile operators and business units within BT. The majority of interview participants were senior management representatives within their organisations, including CEOs, Operations Directors, CTOs, Programme Directors and Regulatory Affairs Directors. The interviews primarily looked at BT’s compliance with the Undertakings, its delivery of Equivalence11 and the resulting evolution of industry relationships. The key areas we focused on included:
11 During our survey and in this document we have used ‘Equivalence’ in a broad sense, covering product, process and price equivalence as defined in Ofcom’s TSR (see Ofcom, Strategic Review of Telecommunications, Phase 2 consultation document, 18 November 2004, p. 67) and in addition, behavioural aspects such as treating customers in a fair and transparent manner.
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• Transparency and availability of adequate information • Effectiveness of complaints handling • Adherence to confidentiality within the BT organisation • Availability of appropriate information on 21CN • Innovation in areas such as switching processes and traditional access products • Interaction with, and confidence in, account management and senior management Respondents were asked to provide a rating of each of these areas in order to allow the comparison of results over time, and then to explain the reasons for their assessment in face-to-face or telephone interviews. We also asked for a view on improvements achieved since the introduction of the Undertakings and on how BT and Ofcom could contribute to making further progress towards Equivalence. We also spoke to Openreach and BT Wholesale representatives from a supplier perspective and asked how the rest of the industry could contribute to a successful implementation of the Undertakings.
Main messages
Overview
In the quantitative questionnaire BT Wholesale’s and Openreach’s customers broadly indicated improved satisfaction levels from 18 months ago: particularly in account handling and appropriate confidentiality measures. However, a range of concerns around operational performance remain, with key areas of concern being the delivery of WLR3 and the EMP platform, challenges with the Ethernet product set (particularly for B2B providers) and the uncertainty around Next Generation Network (core and access) plans. Communications providers broadly recognise the challenges posed by The Undertakings, including the time, effort and investment BT has made to achieve them. There was also a great deal of respect in particular for Openreach Senior Management. But with the majority of the major deadlines met, the industry is now looking to BT to focus on innovation and a more customer focused approach to product development. Key feedback
• Whilst interviewees made criticisms across a number of areas, there was generally a recognition of improvement – across all questions asked in the quantitative survey, on average CPs felt that BT had made improvements relative to 18 months ago • There is a recognition that BT – and in particular Openreach – is committed to the project and is working hard to deliver equivalence and establish best practices around behavioural change • There is recognition of the tremendous resources and investment BT has made towards delivering the undertakings • Although the mechanics of equivalence are recognised to be working, there is still a current of mistrust – some CPs suggested in an unsubstantiated manner that given the circumstances there must be some kind of non-equivalent behaviour going on – others had specific concerns, but few had raised them with the EAO
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• Openreach has been totally focused on delivery of The Undertakings. The enforced adherence to strict timelines and required focus on particular products and market sectors is considered to have been to the detriment of innovation and service quality – for example many CPs felt that WLR3 was delivered on time, but not fit for purpose – there is recognition within BT the compulsory product set and deadlines have been restrictive, but not necessarily that they have hindered innovation – in the case of BT Wholesale, there have been products specified in the Undertakings which have little industry demand and require disproportionate investment (e.g. IPStream Connect) • The messages around interaction with both Account Management and Senior Management were mixed, with CPs experiences varying greatly – overall this was improved feedback; during the last survey the lack of an adequate account handling structure in Openreach was a major cause of complaint – however, some CPs had experienced a degradation in treatment, in part as a consequence of their business being split between two wholesale divisions and therefore becoming less important to each respective provider (BT Wholesale and Openreach) • 21CN and Next Generation Access are a key subject for communications providers, with clarity of information being the principal concern. – in terms of core network developments, communications providers felt that there was too much information and that it lacked focus or relevance with little commercial information to allow for planning. However a number praised Consult 21 as an effective and valuable process – for NGA many communications providers commented that Openreach’s consultation on NGA was presented as a fait accompli • B2B providers were consistently the most dissatisfied customer group: The Undertakings were not set up to address business needs, leaving the sector somewhat marginalised. Furthermore the expectation is that this situation will persist, as high volume services are favoured over high value services.
Respondents’ ratings to BT’s services
Satisfaction with BT has improved over the last twelve months for all industry groups (with the exception of mobile operators, although the data below is based from responses from only two of the five operators and therefore we do not consider this representative of this segment of the market). It should be noted that this perceived improvement was relatively small – an average mark of 3.8 indicated a response somewhere between ‘remained about the same’ and ‘improved a little’ (see exhibit 1).
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Exhibit 1: Respondents’ satisfaction with BT relative to 12 months ago
5.0
Improved 4.3 3.8 4.0 3.8
2.0
Deteriorated
Large CPs Small CPs Mobile LLU BT Overall average
Scores 1 Deteriorated significantly 2 Deteriorated a little 3 Remained about the same 4 Improved a little 5 Improved noticeably but could do better 6 Is as good as my best supplier – no improvements
Both Openreach and BT Wholesale were seen to have improved in all areas tested over the last twelve months. The area of greatest improvement was around confidentiality, with CPs recognising the efforts being made across BT Group to change behaviours. There was also recognition of the improvement in the quality of Account Management, particularly in Openreach which, at the time of the last survey, was still attempting to get Account teams in place.
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Exhibit 2: Satisfaction by area investigated
6 Openreach 2006 Openreach 2007 5 4 3 2 1 0 Information Complaints Confidentiality Account mngt Senior mngt 21CN
6 Wholesale 2006 Wholesale 2007 5 4 3 2 1 0 Information Confidentiality Senior mngt 21CN
Scores 1 Unacceptable 2 Amongst the worst of my suppliers 3 Below average but not the worst 4 Average – poorer than my best supplier but about average amongst all my suppliers 5 Very good – almost as good as my best supplier 6 Excellent – as good as my best supplier
Average 2007 scores across Openreach and BT Wholesale did not differ greatly, although both received a wide range of responses. Both Openreach and BT Wholesale were seen to have improved in their own right over the last twelve months, although mean scores remain around 4.0: “average”.
Improvements and areas to work on
Aspects of BT Wholesale’s or Openreach’s service provision that have most improved
• Recognition of the need for even-handedness – sense that everyone at BT is committed to maintaining good practices in terms of openness and trust and is taking the issue of confidentiality very seriously. • New account teams – although some respondents (notably smaller business providers) remain dissatisfied with levels of responsiveness, there has been a clear forward step from the last survey.
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Key areas that BT Wholesale and Openreach should improve on
Satisfaction levels around relationship issues such as confidentiality and Account Management have improved; CPs were primarily looking for improvements in operational performance areas such as product set support (new and legacy) , product innovation and service delivery. • Improvements in service delivery – meeting deadlines for provision and fault repair • Improvements in product set to ensure they are fit for purpose (e.g. Ethernet, WLR3) • Renewed focus on innovation and product development speed – the process is too slow and general product management (product to market process) is poor. • Provide appropriate level of support to customers using older products. There were a few areas where communications providers believed there had been a degree of degradation of these services as BT focuses on new platforms: e.g. on WLR2 where new products are only available on WLR3 and difficulties that some mobile operators faced in trying to get development work done on the TDM network. • Greater attention to business providers. Players in this space recognise they are not a commercial or strategic priority, but highlighted a need for BT to redress the balance. Generally there were a number of comments on a need to improve high value services with small customer bases (e.g. repair capability on SDSL) • Improve communication and clarity of information (particularly commercial information) around 21CN and Access products.
Effectiveness of BT’s organisational structure
The asymmetric split between BT Wholesale and Openreach is acknowledged by almost all to be an awkward one. Some of the product boundaries are unnatural (e.g. should WLR be in Openreach or BT Wholesale?). Consequently the relationship between Openreach and BT Wholesale can be hard work, and there is a perception amongst some CPs that Wholesale has lost its identity and sense of purpose. A number of further practical concerns were raised, including: • The required physical division of IT systems has placed a huge strain on BT, in terms of investment and resources. More generally some CPs noted that, while necessary, the separation of systems had placed in extra layers of communication. BT also did not agree with the need for physical rather than logical separation of systems. It may be appropriate for Ofcom to review whether this separation is actually required or whether halting this activity would have any merits (or if activities are already too far in train) • Communication across the group can be stilted – there is certainly nervousness, and no one wants to be ‘fired’ because they breached an Undertaking • While the EAO / EAB were seen as a good comfort factor, not many CPs had dealt with them directly and some were slightly vague about their remit. There were suggestions that they might take a higher profile. • It appears that both BT and the industry are frustrated with BT’s belief that it needs to consults on products and development issues. It might be helpful for Ofcom to clarify what it regards as an acceptable level of product development customization and when BT does / does not need to consult with the market
Delivery of Equivalence
In the main, communications providers were broadly positive about delivery of equivalence. Their primary interest lay in quality of service and, consequently, the main concern around
69 Impact of the Telecoms Strategic Review equivalence was that an overly cautious ‘one-size-fits-all’ approach was resulting in an ‘equivalently average/poor’ services rather than ‘equivalently excellent’ services. • Strong assertion from within BT Group that suspicions around Equivalent delivery were unfounded. They stressed the great rigour that they apply to their relationship and new way of working. • Individual CPs raised some specific instances of favourable treatment for BT Retail but these appear to be isolated rather than systematic • EMP – teething problems have delayed industry joining the platform, and there were suggestions that until all CPs are on the EMP the industry will not have achieved true equivalence
Satisfaction with implementation of the Undertakings
There was recognition from both BT and CPs that it has been a difficult process. From BT’s point of view it has absorbed a huge amount of time, money, resource and effort. Customers have also suffered because BT’s required focus on delivering against The Undertakings has diverted effort from other operational areas, most notably product innovation.
Suggestions for Ofcom’s contribution
There was acknowledgment across the Industry that Ofcom has a crucial role to play in developing the new market that The Undertakings have helped create. There were several comments that Ofcom needed to set out soon and clearly how it would regulate the BT relationships going forward: • CPs, and BT, asked the question ‘what’s next?’ in terms of regulation, now that the bulk of the proscriptive product and delivery deadlines in The Undertakings have been met. CPs stressed their preference for an open and consultative approach to this • There was broad consensus that Ofcom should move to a more principles based regulation, but with EOI as its starting principal and foundation. • A number of CPs aired concern over Ofcom’s apparent flexibility in allowing BT to ‘twist the rules to hit targets’ and the granting of exemptions. There were calls for Ofcom to challenge BT more closely on specifics and details of The Undertakings, and also clarify protocol of what occurs in the event of a breach.
BT feedback on relationship with Industry and areas for improvement
In the first instance there was acknowledgement from BT that it has been challenging. Both BT Wholesale and Openreach feel that, broadly speaking, there had been an improvement in the quality of interaction with CPs, and recognition from their customers that BT had been on a difficult journey. As with the survey 18 months ago however, the quality of relationships with both Wholesale and Openreach varied greatly from CP to CP. • Openreach and BT Wholesale stressed that a supplier is only as good as its customers (a sentiment echoed by a number of communications providers). Open, two-way communication is required, particularly around commercial reality: there often seems to be a disconnect between Regulatory and operational teams. • There was a feeling that, while there had been some justified frustrations from customers over the course of a difficult period, there remains an element of axe-grinding. In particular there is a suggestion that communications providers are too quick to go to Ofcom, on the basis that ‘they might as well’.
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• Relationships with the downstream, BT Group companies have improved – there has been great effort on both sides to develop more natural commercial relationships. The relationship between Openreach and BT Wholesale in particular has been difficult and sometimes untidy: but is improving. BT Retail was very enthusiastic about the improvement in service from Openreach over the last year.
Conclusions
BT’s delivery to its customers has improved over the last 12 months under difficult circumstances. The industry values and recognises the effort that BT has gone to meet the Undertakings. However, communications providers still raised a number of ongoing concerns: • The Undertakings have been overly prescriptive (and in some areas unnecessary e.g. separation of systems or IPStream Connect), taking up a huge amount of BT’s bandwidth and creating a slow and awkward innovation cycle • The large enterprise focused sector in particular has suffered, seeing little benefit from the Undertakings, which cover few services relevant to them • It appears that both BT and the industry are frustrated with BT’s belief that it needs to consults on products and development issues. It might be helpful for Ofcom to clarify what it regards as an acceptable level of product development customization and when BT does / does not need to consult with the market • There are service problems with major product sets, in particular WLR3 and the Ethernet products, with communications providers frustrated by products that are either out of date or not fir for purpose • NGN is an area of concern, but there is recognition of the complexity of the challenge. Many communications providers simply called for greater transparency and clarity on anticipated commercial and operational arrangements • NGA is also a key area of concern: How do the Undertakings apply? What is the commercial reality? Does the Openreach / BT Wholesale split work in an NGN world? In the main, however, the general view has been that the re-structuring of BT has been well executed and that the mechanics of equivalence have well implemented and are working well. The focus of the industry now is on encouraging further innovation and customer responsiveness of Openreach & Wholesale
Contact information
Spectrum Strategy Consultants [email protected] Greencoat House [email protected] Francis Street [email protected] London SW1P 1DH United Kingdom Telephone: +44 (0)20 7630 1400 Facsimile: +44 (0)20 7630 7011 www.spectrumstrategy.com
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