Ofcom dismisses broadband competition complaints against BT, but commercial rivals must be free to “make a profit”

The UK’s telecoms market regulator published the provisional results of its investigation into TalkTalk's complaint at the same time as setting out proposed new requirements for BT when setting ‘virtual unbundled local access’ (VULA) pricing in future. Once finalised, the new rules would limit the wholesale prices that BT could charge for access to its network so that rivals would still be able to compete profitably.

“Ofcom’s proposals are aimed at ensuring that different operators can compete in the growing superfast broadband market in years to come, so that consumers benefit from competitive prices and high-quality, innovative services,” the regulator said in a statement.

The proposed new rules would require BT to take into account the costs and revenues of its ‘BT Sport’ channels, which it currently provides free of charge to its superfast broadband customers, as part of its wholesale pricing framework. BT paid close to £900 million for the exclusive rights to broadcast 350 matches from the UEFA Champions League and Europa League in the UK for three seasons from 2015/16 at the end of last year.

According to recent Ofcom research, one in four residential fixed broadband connections in the UK is now ‘superfast’, defined as offering a speed of 30 megabits per second (Mbit/s) or more. When Ofcom originally introduced a requirement on BT to offer other providers access to its extensive fibre network, fewer than 100,000 superfast connections were provided to residential customers. That number has now risen to 2.7 million, it said.

Ofcom’s proposals, which it is now consulting on until 28 August, would continue to allow BT to set its own wholesale prices for access to its superfast network. However, it would be required to “maintain a sufficient margin” between the wholesale price it charges to other firms and the retail prices it charges to its own customers to give its rivals the opportunity to “compete and make a profit”.

According to the consultation paper, Ofcom will take into account both BT’s upfront and ongoing costs and revenues when calculating an appropriate margin. This would include the costs of BT Sport, which would likely be calculated by dividing BT’s net costs by its total number of residential broadband subscribers; as well as any special prices it proposes to charge to new customers.

BT would be required to provide the regulator with sufficient confidential accounting information to allow it to monitor compliance with the proposed margin condition, both following its coming into force and then every six months, according to the consultation. Ofcom could also investigate potential non-compliance as the result of a dispute with or complaint from a competitor, or on its own initiative “if we have reason to believe BT may not be compliant”. According to an “indicative assessment” by the regulator, BT would be “close” to the proposed margin boundary. However, Ofcom stressed that BT may have already changed its prices before the proposed condition comes into force.

Ofcom expects to publish its conclusions this autumn, and the proposed margin condition would the cover the 2014-17 market review period, it said.

“We consider [this] is likely to be an important period in the transition from standard to superfast broadband and will thus be important in determining whether the effective retail competition in broadband services currently observed is maintained in superfast broadband services as this transition occurs,” Ofcom said in its consultation paper.

“During this market review period there is a heightened opportunity for retailers (including BT) to compete to attract new subscribers. This competition could be dampened, however, if BT manipulated the VULA price relative to its retail offering in a way that allowed it to distort competition,” it said.