APPENDIX 13
Memorandum by Tiscali UK Ltd
INTRODUCTION
The Trade and Industry Committee investigation
into and report on The Broadband Market in 2004 identified issues
hindering effective competition, innovation and the wider adoption
of broadband in the UK. Key observations included:
— The need for wholesale competition.
— The importance of market confidence
in the regulatory environment.
— The need to establish a reasonable
and sustainable margin between wholesale DSL products IPStream
and DataStream.
— The need for more competitive pricing
to make LLU viable.
— Recommendations to examine migration
charges.
Since publication of the Committee's report
on 19 May 2004, Ofcom and BT actions have addressed the three
pricing issues. However, the broader aims of wholesale competition
and market confidence are yet to be achieved.
In addition to observations on the Ofcom Strategic
Review, Tiscali intends to address in this submission ongoing
issues still hindering competition and market confidence to answer
the Committee's desire to examine market "extensiveness and
competitiveness".
The objectives of the Strategic Review included:
— Establish the extent to which the
sector benefits from competition.
— Assess the extent to which competition
and/or regulation has delivered lower prices, higher quality and
wider choice for service providers and consumers.
— Compare the UK consumer experience
with that in other countries.
— Look at investment and innovation
trends as drivers for new opportunities.
— Examine the scope for effective and
sustainable competition at all levels and for the foreseeable
future.
Ofcom's current goals after Phase 2 include
the need for the promotion of a more competitive environment for
LLU and the creation of true equality of access to BT network
assets for all competing operators.
Tiscali supports the case for change and a new
regulatory approach. In particular, Tiscali believes that the
reliance on BT for access to the network it controls is currently
not producing the level of competition needed by the UK economy.
Poor wholesale products and processes and a complexity of regulation
and dispute have hindered market development. One clear example
of this has been the struggle to develop wholesale broadband competition.
Although the margin between DataStream and IPStream has been determined
and the migration charge reduced, there are still no effective
bulk or single migration processes that allow ISPs an alternative
choice of wholesale supplier and consumers the opportunity to
move freely and easily between DSL broadband providers.
If the Phase 3 statement due in Spring 2005
produces actions and results that change the UK industry, the
review process will have worked. This depends on the BT reaction
to Ofcom proposals and the will and ability of Ofcom to see them
through.
SUMMARY OF
TISCALI'S
RESPONSE TO
OFCOM (PHASE
2)
The Tiscali response to the Phase 2 consultation
submitted to Ofcom is attached at Annex A.[10]
A summary of the main features of the response
is as follows:
— Tiscali supports Option 3: input
equivalence and transparency to achieve equality of access.
— The Enterprise Act referral solution
must be pursued if Option 3 becomes unviable.
— No deregulation should occur without
complete satisfaction of requirements for demonstrable equivalence.
— The 21st Century Network (21CN) should
have built-in equivalence, which means early collaboration and
consultation, but the work to create equality of access should
not be postponed until 21CN begins.
— A major organisational change will
be necessary in BT to achieve goals, involving significant separations,
behavioural changes and new models of corporate governance.
— Changes made to deliver equality
of access must be measurable and monitored; Ofcom must be able
to enforce compliance and penalise failure.
TISCALI'S
VIEWS ON
THE BT RESPONSE
TO OFCOM
(PHASE 2)
It was critical that BT responded with real
commitment to change for there to be any hope of success. The
BT response has been published on the BT website and Tiscali has
considered the implications it holds for the future of the Ofcom
review. The outlook is not promising; BT suggests many things
without meeting any demands completely. A summary of problems
Tiscali has with the BT response is as follows:
— Organisational change proposed is
limited to the creation of an "Access Services Division"
(ASD), without sufficiently meaningful separation and without
the clarity or detail on equivalent products and transactions
needed to achieve equality of access.
— No detail is provided on separations
required between parts of the wholesale business and between wholesale
and retail businesses.
— The proposed ASD would report to
BT operationally, just like any existing division, and be overseen
by an "Equality of Access Board" (EAB). The BT CEO would
chair the EAB.
— No detail is given on SMP products
not sold by ASD (such as DataStream) and how issues around lack
of equivalence in systems and processes would be addressed. The
assets and products to be moved into ASD do not include all eligible
qualifying bottlenecks.
— BT proposes to delay any significant
development of equality of access until the advent of 21CN, after
2006.
— The only mention of behavioural and
incentives change relates to ASD, but that would be inadequately
separated from BT anyway. The importance of the need for total
cultural shift is not acknowledged by BT.
— BT's document is negative and defensive
in tone; considerable space is given to denying poor performance
and behaviour and itemising alleged unfounded accusations in Ofcom
publications.
The BT response is disappointing. Proposals
made by BT are tailored to only partly meet demands and the overwhelming
impression gained is that BT challenge Ofcom to attempt to extract
more or go the way of Enterprise Act referral. There is clearly
a large difference between the detailed and practical approach
to achieving equality of access demanded by the UK industry and
what BT has volunteered. BT makes much of its doubts concerning
Ofcom's ability to enforce any of the changes it seeks and BT's
generosity in going as far as it has.
NEXT STEPS
FOR THE
REVIEW
An optimist may say that BT has stated a starting
point for negotiation, with more to come in the process of completing
the review. Ofcom will now have to decide if that is true, or
if it will now be unable to bring about the desired outcome of
Option 3. Where industry members such as Tiscali were hoping to
begin detailed work on helping Ofcom and BT to progress the equality
of access project, they are now limited to expressing severe disappointment
to Ofcom and waiting for the next instalment.
Ofcom must promptly reply with a Phase 3 statement
that contains its opinion of what BT has offered and what it will
do to complete the review. If it is not possible to fully achieve
the objectives of equality of access, the Enterprise Act referral
option should be taken immediately.
KEY ISSUES
FOR BROADBAND
Wholesale Competition
BT's retail market share is currently 36% of
DSL broadband, but BT still has a monopoly over the wholesale
DSL market with a 95% share. DataStream has not been able to compete
effectively as a wholesale product (the 5% difference is accounted
for almost completely by Tiscali's DataStream consumer base) and
LLU accounts for only 31,000 lines.
The changes in LLU pricing have not made an
impact yet, because significant investment and time are needed
and there are many processes to iron out. New investment in LLU
will be visible by mid-2005, but it will take years rather than
months to reach a percentage of the market significant enough
to be considered competitive with IPStream. The Tiscali DataStream
network currently reaches 75% of the addressable market base.
ONGOING AND
UNRESOLVED BROADBAND
ISSUES
Broadband activation/connection charge
Tiscali still believes that the £50 BT
charge is not reasonable and is an obstruction to the growth of
the UK broadband market. This activity should be priced at a level
closer to the £11 charge determined by Ofcom for broadband
migrations. The £50 looks even more arbitrary considering
the LLU connection charge is currently £34.86. A reasonable,
cost-related figure would be in the region of £20-25. This
activation fee affects all ISPs offering DSL broadband access.
Tiscali leads the consumer market with product and price offerings,
but could do much more without the hindrance of this excessive
charge.
IPStream/DataStream to LLU migration charge and
capability
The current £34.86 charge (refer above)
is actually for LLU connection. Telecoms Adjudicator (TA) work
should feed into an Ofcom consultation soon, however there is
little knowledge available on progress against this plan. The
charge should fall to £11 (see above), because the current
level of charge is a huge barrier to LLU investment and roll-out.
The TA target for LLU is one million lines by
mid-2006 (achieved level is 31,000 in February 2005). The target
seems extremely ambitious now, but even that would not be enough
to cope with reasonable demands for migration by large ISPs as
they roll out LLU. More significantly, there is no reason to suppose
that BT can handle connections and migrations at the required
rate and questions remain regarding industry demand, as the model
for unbundling will focus on the most economic exchanges with
a requirement to complete migration to LLU quickly and efficiently.
BROADBAND MARKET
DESTABILISING FACTORS
Geographic price deaveraging
On 3 February 2005, BT announced geographically
deaveraged prices for wholesale IPStream products (in the form
of rebates to purchasing operators), focused on high concentration
exchanges. Proportionate rebates that comply with the margin determination
must apply to DataStream, however these will not be announced
for some weeks. Therefore, DataStream operators are disadvantaged
in comparison to IPStream operators (notably BT Retail). These
wholesale broadband price reductions target exchanges most eligible
for LLU (the high concentration exchanges), undermine the case
for LLU and are likely to disrupt and delay investment by alternative
operators.
21st Century Network and Equivalence
The conclusions of Ofcom's consultation on access
and interconnection for 21CN are awaited. As LLU will not develop
in every part of the country, DataStream-like access will be required
and this will need to be achieved by sufficiently deep-level operator
access in BT exchanges. BT has been slow to agree to operator
demand for this. Also, BT broadband operations should receive
supply of BT wholesale broadband products in an equivalent manner
to retail and wholesale competitors. This does not happen and
the BT response to the Phase 2 consultation does not indicate
forthcoming reductions in lack of equality.
WHAT OFCOM
NEEDS TO
DO
1. Publish the Phase 3 Strategic Review
statement as soon as possible and clearly commit to an Enterprise
Act referral if complete satisfaction of the requirements of Phase
2 is not feasible.
2. Complete the revision of the broadband
margin model to reflect deaveraged pricing and incorporate the
margin between LLU and DataStream in whatever way is appropriate,
and then ensure that BT pricing is compliant with its obligations.
3. Consult on and determine LLU migration
charges and processes by April 2005.
4. Answer the regulatory questions raised
by 21CN regarding interconnection and access in the forthcoming
statement, clarifying BT obligations and protecting the future
of competition in the UK broadband market.
5. Respond constructively to future demands
from industry for the review of BT wholesale broadband activation
charges, seeking to ensure consistency with determinations on
migration and connection charges.
The problems Ofcom identifies and aims to fix
with the Strategic Review seriously afflict the UK wholesale broadband
market. An opportunity now exists for the instigation of major
change in UK telecommunications. Belief, commitment and hard work
will be required of all stakeholders to ensure this opportunity
is not wasted.
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