Select Committee on Culture, Media and Sport Minutes of Evidence

Annex 1



  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.


  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.


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.


  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.


  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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