Ofcom’s Surprise

When Ofcom announced its strategic review of digital communications (SRDC) in March, it came as a surprise even to seasoned observers. Only a few weeks previously Ofcom held a meeting for hundreds of its stakeholders on its draft annual plan, where there was no mention nor hint of its biggest review for a decade. So what brought about this change and how does it differ from the telecoms strategic review (TSR) of 2004-5?

UK Broadband – Up where it belongs? Both the British government and the UK communications regulator, Ofcom, are keen to demonstrate the success of the availability of superfast broadband, defined as broadband with download speeds of at least 30 Mbps. The Department of Culture, Media and Sport (DCMS) likes to boast that this is now available to 95% of UK households and will increase to 98% within a couple of years, while Ofcom is keen to show that superfast broadband has risen quickly as a result of competition among network providers and the regulator’s application of the EU regulatory framework and national competition law. Moreover, Ofcom’s studies find that the UK is ahead of the other four big EU member states when it comes to broadband availability.

“It is argued that reliance on some form of virtual unbundling, which is becoming the norm, will not replicate the physical unbundling of the old PSTN.”

All this is true enough, but these figures tell only part of the story. For a start, most of the broadband and, superfast broadband for that matter, is delivered by some form of copper-based, digital subscriber line (ie. ADSL and VDSL technology via BT Openreach, the wholesaler, to both BT Retail and its competitors). To a lesser extent, around 19% household broadband connections are provided by the cable operator Virgin Media. But only a tiny proportion of fixed broadband connections to households is ultrafast, end-to-end fibre, ie. 100 Mbps. In fact the UK doesn’t appear in the FTTH Council’s ranking, which requires countries with populations of more than 200,000 to have more than 1% fibre to the premises or to the building.

Does this matter? The UK government seems to think so. In its Digital Infrastructure Strategy published in March 2015, it sets out the ambition that ultrafast broadband of at least 100 Mbps should be available to nearly all UK premises. As many IIC members know well, there are frequent debates about whether such speeds are needed by households. But we know that 4K highdefinition TV requires at least 15–20 Mbps spare bandwidth. Add to that all the services now delivered plus more to come, particularly ‘clouds of clouds’ to support the internet of things, and the need for ultrafast broadband is compelling.

The situation is not all that different to a decade ago when the then new regulator, Ofcom, launched its strategic review. During the early 2000s, BT chairman Iain Vallance questioned the need for broadband at all, arguing that ISDN was sufficient for most residential needs. The UK was at the bottom or near the bottom of international broadband league tables and other EU member states were achieving far greater levels of local loop unbundling (LLU) take-up by alternative network operators than the UK, notably France. It was one of the chief reasons why the then telecoms regulator, Oftel, was replaced by Ofcom – not only to meet the foreseen technology and market convergence but also to act strategically where Oftel and BT had failed to deliver.

Ofcom took the novel approach of using national competition powers to accept undertakings from BT to create an operationally (and later described as ‘functionally’) separate unit with the sole purpose of delivering better wholesale services to other communications providers and making BT consume the same products with the same processes as its rivals. What was often missed was that Ofcom also got BT to agree to slash its wholesale prices for unbundled local loops by 70%, and it created an Office of the Telecoms Adjudicator (OTA) staffed by experienced engineers to sort out the products and processes between BT and the alternative network operators.

The result was a massive increase in take-up of local loop unbundling by alternative network operators from 100,000 prior to the creation of Openreach in 2005 to over 4 million in three years and almost 10 million today. The increased number of active broadband providers spurred advertising and interest from the public who could now readily consume new applications and new content at ever great speed with a choice of supplier at least in most urban areas.

Within this context it’s of little surprise how subdued the net neutrality debate has been in the UK compared to the US where, instead, alternative network competition and non-discriminatory local network access was abandoned and reliance placed on inter-platform competition. In fact many Americans wouldn’t recognise that there is much in the way of genuine competition in the UK unless it is end-to-end infrastructure competition between telecoms, cable and mobile rather than dependency on regulatory-imposed, nondiscriminatory access.

Breaking up is so hard to do

Talk to any of BT’s major competitors today and they will say the situation is far removed from a decade go. While they say that it compares favourably to other EU countries with respect to non-discriminatory access, they also say that the current regime is not fit for purpose to achieve ultrafast broadband and quadruple play offerings of calls, fixed broadband, mobile services and TV. This is despite the implementation of equivalence of input (EoI) requirements, which can be understood to be rules for non-discrimination ‘on steroids’ and despite several regulatory interventions along the way. It’s partly this strength of feeling expressed during Ofcom’s business connectivity market review (BCMR) that contributed to calling the SRDC.

The operator, TalkTalk, has advocated the full structural separation of BT to achieve competitive outcomes, but even other operators such as Vodafone and Sky argue that if effective competition is to remain then at the very least access to BT’s passive infrastructure is needed. It is argued that reliance on some form of virtual unbundling, which is becoming the norm in an age of next-generation access products and services, will not replicate the gains achieved by the physical unbundling of the old PSTN.

Again, this is not so different from when the likes of Energis and Cable & Wireless (remember them?) argued that nothing less than structural separation of BT was required to address BT’s perceived tactics to deny, delay and degrade wholesales products and services to them. Ofcom didn’t go for that option then because it had no power to mandate such a solution: it would have had to make a market reference to the competition authority. Moreover it feared that such a drastic remedy would negate any substantial broadband investment if BT has no incentive to invest in broadband infrastructure if it had no skin in the retail game.

Brussels Calling

One of the other interesting aspects of Ofcom’s current strategic review and perhaps not coincidentally is that it comes when the Juncker Commission has launched its digital single market strategy. The European Commission proposes to make telecoms regulation ‘fit for purpose’ across Europe and argues that there is a need for simpler and more proportionate regulation in those areas where infrastructure competition has emerged at regional or national level and that the deployment of ultrafast broadband networks needs to be encouraged while maintaining effective competition and adequate returns relative to risks. Many alternative network providers fear a dilution of current regulatory access requirements as a consequence.

A decade ago when the conclusion of the then review was reached and the BT undertakings were accepted, the European Commission was concerned that Ofcom had struck a deal with BT which allowed for the creation of BT Openreach and fast LLU rollout in return for a regulatory holiday with respect to the rollout of nextgeneration networks. As it was, Ofcom gave assurances that the EU framework would continue to be enforced in parallel to the BT undertakings. In practice, BT received precious little deregulation except for the removal of retail price controls. This time, the Commission is looking to reform its own regulatory framework to incentivise investment and it may be primarily concerned only that the outcome of Ofcom’s SRDC will be broadly consistent with its own direction of travel.

It’s the final countdown

Then, as now, Ofcom’s strategic review will examine competition, innovation and the availability of products in the broadband, mobile and fixed-line markets. Previously, Ofcom narrowed its attention to addressing BT’s enduring bottleneck control of fixed local access and middle-mile backhaul services to third parties. Today that communications landscape is complicated by great consolidation in the mobile sector and, increasingly, consideration of fixed markets distinct from mobile is becoming untenable. At the same time, it is not only about competition: Ofcom wants to ensure that the incentives for private-sector investment are right, too. Whichever option Ofcom determines, entire business models and indeed businesses in the sector will either thrive or dive as a direct consequence of the SRDC, with long-term consequences for British citizens and consumers. The stakes couldn’t be higher.