Following the broadband money

Ofcom ignores deeper problems with 11% price cut for >1Gbps links

with 3 comments

Last week Ofcom proposed to make BT cut its prices by 11% a year for each of the next three years for very high speed wholesale services outside of London and Hull. It believes this will encourage leased line customers, mainly large enterprises and bandwidth resellers, switch to Ethernet as it will allow prices for services based on older technologies to rise modestly to allow BT recover its costs from a declining customer base.

Supporting this proposal was a report from CSMG on qualitative issues around the >1Gbps market. Its main findings about market conditions were unsurprising: BT has significant market power outside London and Hull; most cities on the UK’s ‘figure of 8’ fibre ring are relatively well provided for; the rest of country depends on Openreach, etc etc.

The respondents, 25 end users and five wholesale buyers of >1Gbps services,  also volunteered comment off the ‘approved list’ of topics. Full marks to CSMG for including them in its report, and to Ofcom for publishing them even though they must have made uncomfortable reading.

The ‘unspoken’ issues include lead times to provision services, lack of physical route diversity, supply of dark fibre, business rates on lit fibre, and duct access. By and large, the comments suggest that Ofcom has failed to make best use of two of its primary policy tools, namely to encourage investment in network infrastructure and to ensure a competitive market at all levels.

“Numerous” end users told CSMG, “We have major problems with lead times – it can take three months to get a site survey, and a further three months to get installation. The whole process can sometimes take over a year, with major implications for business. There is insufficient competition outside the M25 to drive lead times down.”

Another said, “We find we have to rely on BT Openreach for laying fibre, whoever we are procuring the service from… the [network build-out] process is very slow, and it is hard to get firm dates and prices. It’s holding the business back.”

More than half (56%) were concerned about true physical route diversity, mainly to improve service resilience. CSMG noted this was because carriers are reluctant to share their route data, but one user reported having a clause in its contract that required its provider to reveal updates to its network annually. Another said BT charged a premium, “but at least they can confirm they are using a fully diverse route.”

Opinions on dark fibre were split. Some said it is relatively easily available, others that the market is “immature”. Two heavy users of dark fibre thought market consolidation will see less dark fibre on the market as the remaining carriers could choose to offer only higher margin lit services.

Six of the eight respondents who expressed concern about business rate taxes on lit fibre said they were having to take lit services rather than buy dark fibre, as they would prefer, because of the high rates of tax payable on lit fibre. Two were currently using much more dark fibre than lit, but said they may have to move back to lit services in future because of the high rates, CSMG said.

Two end users wanted more clarity regarding the use of self-managed dark fibre, especially who has to pay the rates on lit fibre. One believed he was exempt because he was using the fibre himself rather than reselling it. However, he was still having to pay an unexpected bill for three years’ rates.

One of the wholesale buyers was keen to build out more of his own fibre, but said the rates payable on lit fibre were damaging the business case.

Three interviewees believed that BT was advantaged by the fibre rates regime. This was unfair on smaller operators and end users who bought dark fibre, they said.

“The very high level of the fibre tax is a major reason why we have to limit the use of high bandwidth fibre services. We feel that the level of fibre tax which BT pays is unfair. We would like to see everyone paying the same rates as BT – or preferably, no tax at all.”

Another said, “The fibre tax is arbitrary and unfair – we do not see why smaller, more agile players should get taxed while more dominant players such as BT are given tax relief.”

A wholesale buyer said, “Costs are currently prohibitive for new entrants to the market, and for existing players looking to expand their network. In particular, the fibre tax is not helping the business case for network build-out, and gives larger players – particularly BT – an unfair tax advantage.”

Vtesse Neworks earlier took the fibre tax issue to the Appeal Court, which ruled two to one against the carrier. Responsibility for the fibre tax lies variously with the Treasury, the department of communities and local government, the Valuation Office Agency and local councils. The incoming coalition government promised to “review” the tax, but as these comments suggest, has failed to level the playing field. Ofcom may be entitled to redress any advantage that might accrue from the allegedly unfair treatment, but has not done so.

Where Ofcom has also done less than it could is in opening up duct access. It did persuade BT to introduce a new product, Physical Infrastructure Access, to allow third parties to use BT ducts and poles. However it also allowed BT to impose terms and conditions such that there has been no large-scale take-up of the product. In fact, these terms and conditions were largely responsible for seven of the nine carriers invited to bid dropping out of the BDUK next generation procurement framework .

CSMG reported, “Four interviewees, including two wholesale buyers, were disappointed at the lack of duct access available in the market, which was preventing them undertaking more widespread build-out.”

As these comments were not within Ofcom’s brief to CSMG, it is unlikely anything will come of them. This leaves us with the actual outcome – the proposed 11% price cut.

One could say it’s better than nothing. However, CSMG found that end users and systems integrators can negotiate discounts, especially where there is competition. Fifteen respondents, including all five wholesale buyers, reported being able to negotiate on price. Three won discounts of around 30% and one got a 50% cut on a dark fibre service, CSMG said.

That makes Ofcom’s proposal look like small beer indeed.


Written by Br0kenTeleph0n3

2013/03/03 at 19:35

3 Responses

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  1. In my own personal view I agree its a stupid move by Ofcom. “Because the competition is so poor we’ll make BT reduce its price”. There by killing any business case for a competitor to build an alternative.

    Can’t keep running this industry this way.

    dark fibre and duct services are just not manageable products. Have a look at any duct from any provider in the UK and you’ll find its full of crap and needs clearing before use.


    2013/03/03 at 21:39

  2. […] The VOA is the same organisation that saw fit to subject lit fibre to business rates and introduce three different ways of valuing it, two of which favour BT and Virgin Media. A recent Ofcom report on the market for >1Gbps services found the fibre tax is a serious inhibitor for investment. […]

  3. […] stated on the Ofcom website and those in the legislation which created it . Ian Grant’s commentary on the deeper problems beneath the recent price changes revealed in the CSMG report which was part of the supporting evidence for that price review are […]

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