Annex 1
DELIVERING COMPETITION IN BROADBAND MARKETS—OFTEL'S
REGULATORY STRATEGY FOR BROADBAND
INTRODUCTION
1. The delivery of broadband—enabling
the provision of fast always-on Internet access and advanced interactive
services to consumers and small businesses—has been identified
as a key priority of Governments in the UK and EU over the coming
years.
2. There are a number of different players
involved in creating the UK's broadband market. These are the
industry—to provide both the infrastructure and technology
needed to deliver broadband services, as well as the content of
these services. Oftel—to ensure a coherent regulatory framework
that allows competition in the delivery of broadband services
at all levels of the supply chain. The Government—who have
a number of initiatives to stimulate the take up of broadband
in both the public and small business sector. And most important
of all, the consumer— who will make their own choices over
the services they want to receive and how they want to receive
it. A competitive broadband market gives consumers a greater choice
of how they receive broadband services, what they receive and
the price they pay for them.
3. This paper sets out Oftel's role—our
goal, the areas we are involved in, and the factors we take into
account in reaching decisions over the need for regulatory action.
However all of the above groups have a part to play to create
a flourishing broadband market, and responsibilities for different
aspects rest with different groups. As Michael Powell of the US's
Federal Communications Commission said recently `Market failure
is for regulators, but market challenges should be left to market
players'.
4. The UK's broadband market is growing.
Roll-out of broadband connections is already well under way in
the UK. 60 per cent of households are in areas where DSL is available
and most of these households also have the option of access through
cable modems. The introduction of digital TV offers a one-way
broadband channel to 99 per cent of the population and two-way
satellite access is starting to develop. Over 100 service providers
are offering broadband services to customers over BT's DSL network.
Demand, whilst initially slow, has accelerated significantly with
a five-fold increase in the number of broadband users since December
last year. As of December 2001 there are 110,000 DSL lines and
170,000 cable modems installed and delivering broadband services
to consumers.
5. Competition is also developing in the
provision of high bandwidth `symmetric' services to meet the needs
of large businesses. Businesses in metropolitan areas generally
have the choice of several leased line suppliers. And Oftel's
determination in March 2001 that BT should supply partial private
circuit at wholesale rates is expected to have a significant impact
on the prices of leased lines to businesses.
6. In order to provide a focal point for
its work on regulation in broadband markets going forward, Oftel
has decided to establish a new broadband programme. This programme
is fully in line with Oftel's overall strategy as set out in the
Management Plan. Its aim is to develop and apply Oftel's strategy
in relation to broadband and co-ordinate Oftel's approach to broadband
to ensure that all decisions made are coherent and contribute
to Oftel's overall aim of achieving effective competition in broadband
markets.
7. This paper sets out Oftel's objectives
to create a competitive broadband market, and the existing and
planned initiatives that should contribute to achieving Oftel's
objectives.
OBJECTIVES FOR
BROADBAND
8. Oftel's overarching objectives are set
out in Oftel's Management Plan. Oftel's primary focus is to meet
the needs of consumers through promoting competition at all levels
of the value chain. Oftel's objectives can be translated to the
broadband arena through:
— Effective and sustainable competition
in the provision of broadband access and services (evidenced by
no operators having significant market power in broadband markets);
— swift and firm corrective action
in the event of anti-competitive practices;
— a high level of consumer awareness
of the nature of broadband services and choices available; and
— a regulatory framework which is conducive
to further investment in broadband and roll-out to remote areas
of the country.
ACHIEVING OFTEL'S
BROADBAND OBJECTIVES
Effective and sustainable competition
9. Oftel's long term aim is to achieve a
level of competition in broadband markets that will ensure that
consumer and business needs can be met in the absence of regulation—
ie effective and sustainable competition. There is unlikely to
be a 'single solution', whereby broadband is delivered using one
technology only. Consumer needs vary greatly and the market is
best-placed to decide how, and with which technologies, this can
best be achieved.
10. As with much of Oftel's work, an important
issue is, ensuring that regulation strikes the appropriate balance
between ensuring that an adequate variety of services is delivered
to meet consumer needs, and maintaining incentives for investment
in infrastructure. Oftel's aim is to pursue a strategy that will
ultimately deliver both.
Competition at all levels of the value chain
11. Oftel believes that competition between
delivery routes for broadband plays an important role in achieving
sustainable competition. In particular it should contribute to
ensuring that different product specifications are available to
meet consumers' varying needs and encourage technological innovation
and improvements in efficiency. Competition at the infrastructure
level should in turn feed through to competition in the provision
of services, providing consumers with a choice of packages, pricing
structures and customer service options.
12. The UK has a good basis for the development
of infrastructure competition to deliver broadband services to
consumers and small businesses. In addition to the DSL and cable
networks which currently cover some 60 per cent of homes, two-way
satellite services are also beginning to be rolled out which have
the potential to cover 100 per cent of the population, although
prices are currently generally higher than those for DSL or cable.
Broadband fixed wireless access will also have a role to play
in the delivery of broadband as will third generation mobile networks,
although it is not yet clear the extent to which these will provide
substitutes to the other technological solutions available.
13. There are also promising signs in the
development of competition in the provision of leased lines serving
business customers with two-way `symmetric' access at speeds above
2Mbit/s. Businesses are able to access leased line services throughout
the country from BT, and generally have the choice of several
operators in metropolitan centres, although competition remains
limited in more remote regions and in final connections to the
customer.
14. The longer term prospects in the UK
for the development of competition driven through competing broadband
delivery routes are good. However, at present the level of competition
is not sufficient to deliver consumer and business needs as regards
range, quality and price of services. Market power persists particularly
in the local access network with BT having the only ubiquitous
broadband-capable network.
15. Regulation to require the provision
of wholesale products is therefore necessary at the moment to
prevent operators with market power from restricting market entry
or levering their power into downstream markets. This should facilitate
the provision of services to meet consumers' needs while competition
is not yet sufficiently developed to achieve this.
16. However, it is important that regulation
is applied only where appropriate and that the terms of regulation
are proportionate to the problem identified and consistent with
the ultimate objective of achieving effective and sustainable
competition. Too heavy-handed regulation now could undermine the
longer-term prospects for infrastructure competition. Thus it
is a particular challenge that regulatory action is structured
in such a way as to effectively address the particular problem
or bottleneck identified whilst not deterring investment or stifling
innovation.
Ensuring regulation is appropriate
17. Oftel's overall strategy applies similar
principles to all regulatory decisions thus ensuring a coherent
response to competition concerns.
18. In the context of broadband, this means
that a coherent approach should be taken to establish which are
the relevant markets for broadband products and services. The
same generic rules should be used to assess whether any specific
request for regulatory action is justified and the particular
conditions attached to the provision of access.
19. The approach that Oftel has taken to
assessing broadband and other markets is based on 4 fundamental
principles:
— Appropriate market definition. The
basis for any assessment of whether regulation is appropriate
should start with a definition of the relevant market in accordance
with the principles of competition law and taking into account
all potential substitute products and technologies. Market definitions
should be consistent across all relevant cases dealing with broadband.
— Market power test. Regulation should
be justified on the basis of an economic assessment of market
power. The level of market power should be regularly reviewed
and in markets where competition is effective regulation should
be removed. It may be appropriate for different levels of regulation
to be applied depending on the strength of market power and whether
it is being eroded.
— Regulation justified on basis of
objectives. Obligations should only be applied to the extent necessary
to meet the objective of promoting effective competition in the
provision of broadband access and services and ensuring that consumer
needs are met in the absence of effective competition.
— Setting appropriate terms and conditions.
Regulation should be a proportionate and reasonable response to
the problem identified. It should aim to address the problem at
hand while not undermining the development of effective competition
in the longer term. This means in particular that the conditions
applying to obligations, and particularly the pricing conditions,
should not undermine incentives for operators to invest in competing
infrastructures or innovate in the provision of technologies or
services.
20. As a general rule, Oftel will continue
to apply this principle in the following way. Where market power
is entrenched, markets are relatively mature, and there is little
prospect of effective competition in the short-medium term, prices
should be set on cost-based terms. This should ensure that competitors
are able to provide an effective alternative investing in their
own infrastructure to the extent possible, but using inputs where
necessary from the wholesale supplier. On the other hand, where
competition, while not yet effective, is developing, prices should
be set in a way that allows for market entry by competitors that
are at least as efficient than the wholesale supplier, while maintaining
incentives for operators to invest in competing infrastructures
and services. Such an approach is also likely to be appropriate
where the services being provided are new and/or risky and the
relevant markets new and/or immature. Cost-based price control
in these circumstances could harm investment in the new services
and competing services
21. In addition, Oftel would ensure that
any particular product mandated could reasonably be supplied ie
that it did not represent an undue burden on the operator supplying
it, requiring it for example to provide services in the absence
of any apparent demand or invest without prospect of making a
reasonable return.
Existing Activities
22. Examples of the way in which Oftel is
applying regulation according to these principles are as follows:
— Requiring the provision of unbundled
loops and shared access on cost-based terms to encourage competing
operators to build out infrastructure further into the network
whilst having regulated access to the customer over the last mile
connection where BT's market power persists. This should enable
competitors to innovate in the provision of broadband services
and deliver tailored packages to end-users or service providers.
— Requiring the provision of partial
private circuits (PPCs) on cost-oriented terms encouraging operators
to compete in the provision of leased circuits as far as possible
while having regulated access to the customer over the non-competitively
supplied element of BT's network.
— Encouraging (and requiring where
necessary) the provision of appropriate DSL wholesale products
on a non-discriminatory basis. This enables operators and service
providers to compete with the wholesale supplier on the efficiency
of their service provision and the range of packages offered to
meet customers' needs. The pricing of this wholesale product should
nonetheless maintain incentives for operators to build further
into the network and compete in providing broadband infrastructures.
— Not imposing regulatory obligations
on cable networks, broadband fixed wireless or 3G networks in
the absence of market power.
Planned Activities
23. Oftel intends to further elaborate the
principles under which it applies pro-competitive regulation to
broadband and other markets once the new EU Framework for telecoms
is introduced through developing and consulting on Guidelines
on how it would envisage applying the proposed Access and Interconnection
Directive. The basis of these Guidelines is to encourage competition
at all levels.
24. Oftel will consider how best the reviews
of markets required under the new Directives can be grouped to
ensure consistency of approach. It will also need to examine the
interaction between regular market reviews required by the Directives
and specific cases brought to it for resolution.
Preventing Anti-competitive Practice
25. As an authority with dual responsibility
for sectoral ex ante regulation and application of competition
law in the telecommunications sector, Oftel needs to take a judgement
as to whether it is more appropriate to consider any particular
case under its sectoral powers or as a competition authority.
A key factor in reaching these decisions is which route would
be more effective in addressing the problem identified and encouraging
compliant behaviour in the future.
26. In general, and in line with the approach
of the Directives, where there is entrenched market power, it
will usually be more appropriate to apply sectoral regulation
to provide an ex ante framework in which competition can emerge
rather than relying solely on retrospective action. However, as
competition develops, or in the case of disputes where there is
a clear case of an abuse of market power, competition law remedies
can provide an effective solution and deterrent to further anti-competitive
practices.
27. Whether applying regulation ex ante
or under the Competition Act, Oftel aims to follow the same principles
set out above. This will ensure that action taken is consistent,
whether based on a forward-looking ex ante assessment of the prospects
for competition in a particular market, or on a conclusion that
a company has engaged in anti-competitive behaviour.
A High Level of Consumer Awareness
Competition functions most effectively if consumers
and stakeholders understand the characteristics and benefits of
a service and are fully aware of the choices available to them.
Work to facilitate customer awareness can therefore be an important
adjunct to achieving an effectively competitive market.
Existing Activities
The Government is already planning to undertake
customer awareness initiatives in a number of areas as reported
in its response to the Broadband Stakeholder Group's Recommendations
in December 2001. Oftel will play its part in assisting Government
in pursuing these initiatives. Meanwhile, Oftel will continue
its work to develop consumers' and small businesses' awareness
and understanding of broadband services through:
— Publishing a bi-monthly briefing
providing statistics on take-up and updates on Oftel's work to
create a competitive broadband market;
— Consulting on the introduction of
an accreditation scheme for sites providing comparative information
on pricing of telecoms services (including broadband services);
and
— Providing information on broadband
to small businesses through the Small Business Task Force website
Planned activities
28. Oftel is looking at ways of further
improving awareness of broadband through:
— Examining possible further consumer
awareness initiatives such as a specific broadband consumer guide;
— Evaluating consumers' and businesses'
needs as regards Quality of Service information for broadband
services and encouraging industry to respond to those needs; and
— Informing industry of any new regulatory
initiatives and of progress towards meeting Oftel's broadband
objectives through regular presentations to Oftel's industry fora.
Encouraging widespread access to broadband services
29. Oftel believes competition should best
serve the interests of consumers providing access at competitive
prices to meet demand throughout the country, and it is likely
that this will be achieved through a variety of technologies.
Two-way satellite technology, for instance, offers the potential
to serve more remote regions, although it is currently priced
above DSL and cable offerings. However, the market is not yet
sufficiently developed to gauge definitively whether competition
alone will serve consumer needs. Availability of broadband services
has improved significantly over the past year, but it is not yet
clear how much further development there will be in DSL deployment
or what the longer term impact of other technologies such as satellite
and 3G mobile will be. While demand has been accelerating, take-up
is still relatively low as a proportion of the available market
in the UK as well as elsewhere, making it difficult to accurately
predict the shape of the market in years to come.
30. If a broadband delivery `gap' were identified,
Oftel would aim to assist the Government as necessary in identifying
and applying any measures to meet the reasonable needs of consumers
outside areas addressable through commercial means. In so doing,
Oftel would aim to ensure that any measures are technologically
neutral and, as far as possible, have no detrimental effect on
the development of competition in general.
Existing activities
31. Examples of the way in which Oftel has
been working with the Government to promote widespread access
to broadband services consistent with its objectives, are:
— Work advising the devolved administrations
on plans to roll-out broadband technologies to remote and rural
areas
— Work encouraging the provision of
special packages for schools, libraries and other public institutions
Planned Activities
32. Oftel will contribute to delivering
some of the recommendations set out in the recently published
Broadband Stakeholder Group report aimed at encouraging more widespread
availability of broadband. In particular Oftel will advise relevant
Government Departments on how they can be implemented in a way
which is consistent with the objective of promoting sustainable
competition.
SUPPORTING OFTEL'S
BROADBAND PROGRAMME
33. In order to ensure that Oftel's decisions
are based on an accurate assessment of the level of competition
in the market and demand from competitors, consumers and businesses
for various services, provision of accurate, comprehensive and
up-to-date information is vital. Oftel has already expanded its
data gathering and market analysis work to provide:
— six monthly benchmarking of cable
and ADSL services (latest published Dec 01);
— survey of consumer attitudes towards
broadband and narrowband Internet services; and
— Up-to-date information on availability
and take-up of ADSL services and unbundled local loops, published
on Oftel's website as the ADSL and LLU factsheets.
34. Oftel is currently undertaking a review
of the research it needs to improve its understanding of the developing
broadband market. Oftel is looking at the possibility of:
— Expanding existing benchmarking programme
to include comparisons on LLU and wholesale ADSL as well as DSL
availability and take-up at the retail level;
— Collating and publishing where appropriate
more information on availability, take-up and pricing of major
broadband technologies in the UK including satellite, broadband
fixed wireless access and 3G; and
— Conducting interviews with industry
to understand the commercial intent and technical capability of
both infrastructure and services suppliers.
REVIEWING PROGRESS—BROADBAND
INDICATORS
35. Oftel carries out regular market reviews
to ensure that its work is appropriate to the level of competition
in the market. This process of market evaluation and review of
obligations will be formalised with the introduction of the new
EU Directives, which require regular market reviews.
36. To assist in its review exercises, Oftel's
practice has been to identify more tangible indicators that can
be used to measure progress towards effective competition. The
following outcomes in particular are ones that Oftel would associate
with effectively competitive markets in the provision of broadband
access and services.
— roll-out of competing broadband delivery
routes to the extent economically viable;
— Availability of broadband services
at home, work and other public sites such as schools and libraries
to meet reasonable demand;
— consumers and businesses' reasonable
expectations in terms of price, quality and range of products
available met;
— Prices of services consistent with
those that would be offered in a competitive market (ie normally
cost-oriented). As an indicator of this—prices comparable
to or lower than prices offered in comparable markets elsewhere
(in the EU and amongst the G7); and
— Clear and readily accessible information
on the nature of services and choices available to consumers and
businesses
37. Oftel's work on market research and
consumer attitude studies will assist it in assessing the extent
to which these measures—as indicators of effective competition—
are being achieved. This assessment will be in addition to an
examination of the characteristics relating to the supply of broadband
services and the behaviour of specific market players. Together
these considerations should assist Oftel in reaching accurate
assessments as to whether operators have significant market power,
in identifying general trends in the level of competition in a
market. And thus identifying the appropriate level of regulation.
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