Br0kenTeleph0n3

Following the broadband money

BT’s broadband rip-off – the evidence

with 30 comments

Credible evidence that BT is charging more than double what it should for wholesale superfast broadband products has probably prompted national regulator Ofcom to investigate a complaint that BT is conducting an illegal margin squeeze.

The evidence is contained in a confidential report commissioned by TalkTalk, currently the biggest user of BT’s local loop unbundling (LLU) products, which made the complaint.

Ofcom presently does not regulate BT infrastructure provider Openreach’s pricing for SFBB fibre products believing to do so would discourage BT’s claimed £2.5bn investment in fibre to the cabinet (FTTC). Openreach’s prices are generally meant to be very close to its costs, especially where it has ‘significant market power’, in this case, outside the Virgin Media Docsis footprint.

The 59 page report found that Openreach’s costs to build its FTTC network are £4.39 per line per month. BT Openreach charges resellers £7.40 or £9.95 depending on the bandwidth provided. Current prices for BT’s Infinity FTTC services start at £13/month and go up to £26/month. BT Retail offers discounted prices of £6.50 and £20 per month respectively for the first three months.

The report, by German telecommunications analysts Wik Consult, is a sequel to its 2012 report to ECTA, the association of European challenger carriers, that found incumbent operators price LLU access so high as to leave no money for LLU carriers to profit or invest in network upgrades or expansion. It showed that LLU had been a failure in Europe, allowing incumbent operators to retain almost 100% of the market.

“At the prices charged for copper, all the cash flows have gone to the incumbent, and entrants have been persistently cashflow negative,” Wik reported, adding the same might become true for access to fibre-based products unless regulators stopped it.

For its report to TalkTalk, Wik modelled Openreach’s costs based on publicly available information. It found the main factors that affect its costs are penetration (take-up of GEA on the FTTC platform), the weighted average cost of capital (WACC) including any risk premium applied to NGA, the extent to which existing ducts can be reused for the installation of fibre between the street cabinet and local exchange, the depreciation method and asset lifetimes.

It checked the results produced by its base model and sensitivity tests against BT’s own statements and evidence from more developed markets in Europe. The checks suggest Wik’s assumptions and conclusions are conservative.

In particular, it suggests that 65% of non-Virgin Media SFBB subscribers will take up an service provided using Openreach infrastructure. Active electronics had a life span of eight years, cabinets and fibre 20 years each, and ducts 40 years, it said.

Almost two years ago Kevin McNulty, Openreach’s general manager for next generation access commercial partners, told Br0kenTeleph0n3 BT’s NGA financial plan was based on a break-even period of 10 to 12 years and a 20% take-up.

For the record, Ofcom announced on 1 May that it would investigate a complaint from TalkTalk Group that alleged BT has been conducting an illegal “margin squeeze” on wholesale access to Generic Ethernet Access (GEA), BT’s FTTC product.

Ofcom said the complaint alleged abuse of “a dominant position in breach of (regulations) in relation to the supply of superfast broadband (‘SFBB’). Specifically, (TalkTalk) alleges that BT has failed to maintain a sufficient margin between its upstream costs and downstream prices, thereby operating an abusive margin squeeze.”

Ofcom said it could investigate such allegations if it had “reasonable grounds” for suspecting a breach.

TalkTalk said in a statement, “We have long maintained that there needs to be tighter regulation in superfast broadband to ensure a level playing field and therefore deliver real benefits for consumers and businesses. We are pleased that Ofcom is taking this matter seriously and have decided there is reasonable suspicion to investigate BT’s fibre pricing.”

BT said it was “disappointed” by Ofcom’s decision.

Ofcom expects to report its initial findings towards the end of the year. It will decide then whether or not to proceed.

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Written by Br0kenTeleph0n3

2013/05/05 at 08:56

30 Responses

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  1. Working on 65% takeup is a “forward looking statement” to 2019 as the report says at the end of 2012 it is only 16%. I would imagine that makes the cost per line somewhat different at current levels, like 4 times higher for the fixed costs when expressed per connected line ?

    Seems we’re mixing two issues up here – are Openreach costs / charges excessive and the margin squeeze of the Talk Talk complaint. If Openreach prices were lower this would benefit BT retail and other BT Wholesale ISPs as well as Talk Talk, Sky and other LLU operators taking GEA so that isn’t really a margin squeeze issue, is it ?

    The claimed margin squeeze on Talk Talk is also odd in that BT Retail and Plusnet appear to have a very small or negative retail margin whereas Talk Talk have a high margin despite the lowest cost to the customer. TT could charge more if BT & Plusnet were forced to charge more, but if BT Wholesale costs were reduced then BT Retail & Plusnet would get a higher margin. So I am somewhat confused.

    I can see why TT would object to BT Retail / Plusnet making a loss in competing with them, but that’s not really a margin squeeze as they consume different products.

    PhilT

    2013/05/05 at 09:57

    • “If Openreach prices were lower this would benefit BT retail and other BT Wholesale ISPs as well as Talk Talk, Sky and other LLU operators taking GEA so that isn’t really a margin squeeze issue, is it ?” Yes it might be, because it shifts where BT makes its profit from Retail to Openreach. Just because it catched all downstream customers doesn’t make it less of a margin squeeze. And as we have seen over the past couple of years, Openreach’s contribution has been growing…

      Br0kenTeleph0n3

      2013/05/05 at 17:43

  2. In an attempt to get to grips with pricing and margin squeeze I put this together, hope that is of assistance to others :-

    https://docs.google.com/spreadsheet/ccc?key=0Avrz3P5AJBUZdHpJLUdVOTFWTjFSNTEycEJmZUpjd1E&usp=sharing

    PhilT

    2013/05/05 at 09:59

  3. “BT Openreach charges resellers £7.40 or £9.95 depending on the bandwidth provided plus an annual fee of either £88.80 or £119.40 respectively” – one of doesn’t understand the price list then, by my reckoning the rental charges are 88.80 or 119.40 per year for 40/10 and 80/20 which equates to £7.40 and £9.95 per month respectively – it isn’t additional ?

    PhilT

    2013/05/05 at 10:04

  4. 8M LLU in the UK, TalkTalk available to 28M at £3.25/month, Hardly a failure in the UK,.

    Somerset

    2013/05/05 at 19:00

    • If you think a fixed line duopoly constitutes a competitive market, LLU has been a staggering success for the UK.

      Br0kenTeleph0n3

      2013/05/05 at 19:05

      • What does a ‘duopoly’ have to do with the percentage of LLU lines? UK LLU not near zero like other countries.

        124 companies with code powers to install into premises, competitive for last ~30 years!

        Somerset

        2013/05/05 at 20:36

      • How many LLU customers does VM have? Or Geo? Level 3? AT&T? etc ? Or the 124 firms with code powers?

        Br0kenTeleph0n3

        2013/05/05 at 20:42

      • Nothing stopping them offering LLU.

        Somerset

        2013/05/05 at 20:55

      • What local loop could they unbundle?

        Br0kenTeleph0n3

        2013/05/06 at 15:19

      • You say there is a fixed line duopoly and then quote 4 companies that install circuits directly into premises…

        They could allow other companies to provide services over their circuits.

        A telecomms duopoly, if it exists, is better than gas, electricity, water and drains where there is a monopoly with just one supplier.

        Meanwhile, is LLU a success in the UK? It has been said that VM don’t expand because they might then have to offer LLU.

        Somerset

        2013/05/06 at 16:05

      • What’s your definition of success? Preserving your pension fund? LLU preserves the incumbent’s fixed network and discourages investment in alternatives. Who knows how successful Britain might have been if it had chosen to support competition at the infrastructure level rather protect Openreach’s fixed network via LLU and the term and conditions for PIA. Britain might have fibre broadband access speeds and coverage equivalent to Sweden or France or Latvia. (See http://www.ftthcouncil.eu/documents/Presentations/20121016PressConfBBWF.pdfpage 10)

        Br0kenTeleph0n3

        2013/05/06 at 17:07

      • You said LLU was a failure in Europe but cannot show it is in the UK with 8M users. Just pointing out facts.

        So LLU should not have been allowed? When it started there was just voice, no broadband and unlikely any homes would have seen another supplier other than VM who discovered that as well as TV they could supply telephony and, later, broadband.

        Infrastructure competition in the UK started in 1981 and should BT have been allowed to rollout fibre across the UK in the ’80s?

        Soon a large % of the UK will be able to have FoD so that should help the FTTH Council (purely a suppliers organisation) graphs, although they have a problem with FTTC as it sits in the middle of solutions, despite using fiber kit.

        Somerset

        2013/05/06 at 19:55

      • This is a long diversion from the evidence of BT’s rip-off pricing for fibre, which is the main point of this post. Please stay on topic.

        Regarding FoD or fibre on demand, as you have noted before, it has been available for decades. It’s just been unaffordable for anyone who can’t make it tax-deductible. As Benoit Felten points out here, the real cost of FTTP should be closer to what BT charges businesses for a fibre connection. If it’s actually closer to what FoD costs, BT has been ripping off businesses, and because businesses can claim the tax deduction, taxpayers.

        Br0kenTeleph0n3

        2013/05/06 at 20:24

      • You said LLU was a failure, not me!

        Any cost examples for FTTP, Fod etc?

        Somerset

        2013/05/06 at 20:30

      • FoD prices (note this is what Openreach will charge ISPs): “As indicated previously, Openreach is slashing the monthly rental cost of its FTTP service upon which FoD is based – from 60 per month to 38 per month, to make it more attractive to industry and their customers. In addition to a fixed installation fee of 500, a distance based construction charge will also apply, reflecting the costs of building a fibre network direct to a customers premise. In line with what weve said previously, we estimate that more than half of premises will incur a distance based charge of between 200 and 1000. Premises that are further away from the relevant part of the fibre network will incur a higher charge due the extra engineering work involved.” FTTP (these are bit old, but will serve): “…cattle farmer and community Wi-Fi network volunteer Christine Conder, who put in her own fibre link to two properties for 2,500. Or Daniel Heery, CEO of Cybermoor, who managed to lay 9km of fibre for 20/m, compared to BT’s standard “excess construction cost” of more than 120/m. “Their stories were some of the highlights of local MP Rory Stewart’s conference to discuss how to get high-speed or next-generation broadband into Cumbria, one of Britain’s most sparsely populated and poorest counties.” (http://community.plus.net/forum/index.php?topic=89790.0;wap2)

        Br0kenTeleph0n3

        2013/05/06 at 20:48

      • Infrastructure competition in the UK started in 1981 and should BT have been allowed to rollout fibre across the UK in the ’80s?

        Maybe the telcos wanting to use LLU should have been told to build their own alternative infrastructure. In fact some did combine to do that.

        Somerset

        2013/05/07 at 19:47

      • Perhaps Openreach should never have been part of BT.

        Br0kenTeleph0n3

        2013/05/07 at 20:29

      • If Openreach was separate you would still say there was a ‘fixed line duopoly’.Difficult to come up with a sound business case to install new fixed lines into many of the UK residential areas.

        Somerset

        2013/05/08 at 11:21

  5. Still awaiting some feedback from TalkTalk but BT has given us their response to this report.

    http://www.ispreview.co.uk/index.php/2013/05/bt-completely-refutes-talktalk-commission-study-of-its-uk-fttc-isp-prices.html

    MarkJ
    ISPReview.co.uk

    Mark (ISPreview)

    2013/05/08 at 06:18

    • Well, they would say that, wouldn’t they? Funny how just about every time Ofcom has looked at complaints that BT is overcharging, it has found in favour of the complainants. Ask BT how much it has paid in refunds in the past five years. What do you think of the Wik evidence?

      Br0kenTeleph0n3

      2013/05/08 at 09:33

  6. IMO I think it’s certainly something that would encourage Ofcom to take a closer look (as they have done) and they’ll have access to the full information, as oppose to assumptions. But alone there’s some detail missing and quite a bit of potential variance in a few of the reports predictions.

    Margin squeeze is a tricky beast to pin down, although TalkTalk’s concerns do have some possible merit and Ofcom are right not to ignore them. But I wouldn’t want to call this one. I hope Ofcom makes the feedback for its consultation public (without excessive redaction) as that could shed a lot more light on the matter.

    I asked a whole bunch of ISPs about this privately and most didn’t want to comment, either secretly or in public. But many did hint that they would be happy if BT Retail was forced to raise its prices (i.e. struggle to compete and make a profit).

    MarkJ
    ISPreview.co.uk

    Mark (ISPreview)

    2013/05/08 at 12:07

  7. It’s quite simple: BT is selling retail below wholesale. It’s not the first telco to do so in an effort to drive competitors into bankruptcy and it’ll probably suceeed before any legal punishments catch up. (Regain monpoly, pay fine, PROFIT! – noone ressurrects the failed competitors.)

    Stoat

    2013/05/29 at 18:29

  8. Try not to worry. Pour yourself a glass of milk, start a bath and unwind.

    Ali

    2013/06/06 at 23:58

  9. As an LLU user, I’d certainly consider LLU a fail. Failure to provide me with what I need or want. Reluctant take-up cannot be taken as a vote of confidence. In my case, LLU was a way to save around 5% on monthly costs. Measure LLU’s success using my yardstick and you’d need some vaseline to provide future relief :/
    I have a specific defined requirement for reliable IPv6 (and have done for some years now) as both a home and business user, yet there are few providers that take it seriously, which also limits my choice.
    Having mass-consumer IPTV and bundled fone deals rammed down my throat sold to me as “internet access” makes me rather sick. All I want is reasonable reliability at core level, reasonable choice at local level, access to the full internet not only parts of it and a fair marketplace for all. What I don’t want is lame excuses about 256MB cards not being available or compatible with the “national infrastructure” that we are all forced to rely on.

    Gord

    2013/06/11 at 17:35

    • What bits of the internet can you not access and what’s the 256MB cards issue?

      Somerset

      2013/06/12 at 08:31

  10. […] Someone should be checking these costs, because Ofcom has allowed BT to set its own prices for wholesale fibre access. In consequence Ofcom is now having to investigate a TalkTalk complaint that BT has run a margin squeeze on the product. […]


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