Ofcoms broadband framework

17 February 2005

Oliver Holland


Ofcom’s proposals in Phase 2 of its Strategic Review of Telecommunications include its continued strategy to promote competition in broadband. In particular, in areas with high customer densities this will be based on access to the local loop through local loop unbundling.

Ofcom announced a number of proposals in 2004 intended to increase sustainable and effective competition in broadband data content and voice services. These proposals focus on:the use of local loop unbundling to allow other operators into the broadband market without having to construct their own network

  • the establishment of a Telecoms Adjudicator to oversee Local Loop Unbundling process

  • the findings of Ofcom’s statement on its Wholesale Broadband Access market review and the conditions imposed to promote competition within the broadband market on a wholesale level

Ofcom’s annual plan for 2004/5 explains that during this period it will be a priority to:

“promote effective and sustainable competition in the broadband market at both the retail and wholesale level, encouraging (the often substantial) investment that will be necessary for continued roll-out and upgrading infrastructure.”

Local Loop Unbundling (‘LLU’)

LLU operators are currently able to obtain cost-based wholesale local access and backhaul as inputs from BT which they can then enable, so as to constitute elements of wholesale broadband asymmetric origination. Operators can currently connect to BT’s network in the following ways:

  • IPStream – this product runs all the way from the customer’s premises through BT’s own broadband network to the operator’s network broadband

  • DataStream – this product connects to the main network switches at the core of BT’s transmission infrastructure, before routing data onto the operator’s own broadband network

  • BT’s copper local loops – other operators connect to BT’s local loops in the exchange

Such access gives LLU operators the ability to compete with BT and cable companies in the market for asymmetric broadband origination without having to incur the substantial costs of network build (although costs relating to co-location will need to be paid).

However, Ofcom states that on the basis of current price levels and structures, LLU operators are unlikely to materially affect competition in the broadband market. Ofcom states this is due to investments that need to be made, and to the economies of scale associated with deployment, which act as significant barriers to entry and expansion. At the end of 2004, only 11,500 loops in total had been unbundled and, of these, only 4,700 were shared access and so being used to offer asymmetric broadband origination services.

Despite this, Ofcom believes that in the medium to long term, entry by LLU operators or the credible threat of entry may provide an increasingly important constraining effect on the market power of BT and cable operators. Ofcom believes that as demand for asymmetric broadband services increases, LLU operators will become more confident of being able to recover sunk costs of entry and will be more able to benefit from the economies of scale available in the provision of these services.

BT forecast[1] that by 2004 there would be 275,000 local loops of which 115,000 would be shared access. However, Ofcom noted recently that the current total is a small fraction of the figures predicted, and stated that the figure BT has forecast for next year represents an extremely challenging target even if changes were to be reduced immediately and substantially.

As such, Ofcom believes that a renewed focus on the local loop will be critical. Stephen Carter, CEO of Ofcom, stated in a speech on Ofcom’s Broadband Framework that:

“Ofcom believes that Local Loop Unbundling offers the greatest potential for downstream service and price competition; but requires substantial facilities and network investment by competitors.”

Ofcom is expecting new Internet Protocol (IP) based networks to increasingly replace the older STM-based networks. The advantages of IP networks is that the increased efficiency means that the local loop and local broadband exchange may provide much greater scope for infrastructure competition in the future.

Independent telecoms adjudicator

On 6 July 2004 Ofcom confirmed the appointment of an independent telecommunications adjudicator, Peter Black, who has been given a specific mandate to resolve operational matters relating to the deployment of LLU. Twelve operators including BT, have agreed to work with the adjudicator to find a “prompt mediated resolution of working-level implementation disputes.”

Ofcom explains that the adjudicator will work with the industry to help develop new local loop unbundling products and processes which are fit-for-purpose and industrialised to cope with large volumes over time. Ofcom’s aim is to see second-generation broadband services develop in the UK on the basis of LLU over the course of the rest of the decade.

Ofcom hopes to follow in the line of France and Japan where tens of thousands of loops are unbundled each month and where voice, rich media and television services are provided over xDSL on unbundled loops.

Ofcom review - wholesale broadband access markets

In line with the new regulatory framework as laid down by the five EU Communications Directives, Ofcom must carry out reviews of the competition in communications markets to ensure that regulation remains appropriate in the current market conditions. The relevant review for the wholesale broadband access market commenced with a consultation documentation in December 2003. An Ofcom statement, detailing their findings was published in May 2004.

Ofcom identified the following economic wholesale markets in accordance with competition law principles:

i) asymmetric broadband origination market in the UK (excluding Hull), a market which BT has significant market power (‘SMP’) in

ii) asymmetric broadband origination market in the Hull area, a market which Kingston has SMP in

iii) broadband conveyance market in the UK, a market in which BT has SMP

Due to the fact that BT and Kingston have SMP in these markets and as such, the ability to behave independently of the market, Ofcom has decided that the following the conditions should be imposed on BT and Kingston in respect of their relevant asymmetric broadband markets:

  • requirement to provide Network Access on reasonable request;requirement not to discriminate undulyrequirement to publish a reference offerrequirement to notify terms and conditionsrequirement to notify technical informationrequirement to have accounting separation

In addition, Ofcom imposed on BT in relation to their SMP market position in the broadband conveyance market:

  • a requirement to provide quality of service informationa requirement to establish a statement of requirements for new access

As a result of imposing these conditions, Ofcomdiscontinued the continuation notices that were issued under Schedule 18 of the Communications Act 2003. These notices continued caused licence conditions in BT’s and Kingston’s licences to continue in force, filling the regulatory gap between the revocation of telecommunications licences and the time taken to conduct a market review.

Ofcom hope that the imposition of these requirements will allow other service providers to use these networks to provide broadband services thus increasing competition in the marketplace with ultimate benefit to consumers. Ofcom believe that by taking action at the wholesale level, regulation should address SMP problems in the relevant wholesale market and will, in turn, feed through to the level of competition in the downstream markets that rely on these wholesale inputs. Ofcom explains:

“Regulation at the wholesale level will…help to increase the level of competition in the downstream market and this will in turn help to ensure the benefits in terms of price, choice and quality are optimised for retail consumers of broadband internet services.”

[1] The survey was conducted on behalf of BT by Gartner Group in November 2002