Ofcom confirms introduction of fibre broadband margin rule from 1 April

20 Mar 2015

Despite criticism from the European Commission (EC), UK telecoms regulator Ofcom has confirmed a new measure which it claims will ‘promote competition and investment in the growing market for superfast broadband’.

As per the new regulation, which was initially unveiled back in January 2015, from 1 April a pricing rule will require fixed line incumbent BT to maintain a sufficient margin between its wholesale and retail superfast broadband charges. With this designed to allow alternative operators to profitably match the broadband market leader’s prices, Ofcom has noted that the new rule does preserve current flexibility to set its wholesale fibre prices, which in turn it claims provides incentives for future investment. At the same time, however, the regulator has said the new measure means BT will not be able to set prices in such a way that might prevent other operators from competing profitably for superfast broadband customers.

BT is currently obligated to allow other providers to use its network to sell superfast broadband to consumers under a process known as ‘virtual unbundled local access’ (VULA), and Ofcom has claimed that the telco is currently maintaining a sufficient margin between wholesale and fibre prices under the new rule. As such, it says the new measure will act as a ‘safeguard which limits BT’s ability to reduce retail margins in future, and ensures that any increases in BT’s costs must be reflected in its prices’.

As previously reported by CommsUpdate, last month the EC had argued that the proposed margin-squeeze test did not take into enough consideration the high costs that BT has to pay in a highly competitive market to secure rights for content such as Premier League football. Arguing that the telco should be given more flexibility in how it spreads the costs than the six-monthly reference period proposed by Ofcom, the Commission noted: ‘Ofcom’s proposed approach lacks the necessary flexibility in particular with regards to the treatment of costs for BT Sports … The Commission considers that the proposed static approach unduly limits BT’s commercial activity with regards to a market in which it does not have significant market power.’ Now though, in confirming the introduction of the new regulatory condition, Ofcom clarified in its final statement on the matter how, when assessing BT’s compliance with the rule, it will take account of changes to how the operator distributes and charges for sport content. With regards to this it noted: ‘We have therefore decided that our approach in regulating the VULA margin should be to include the costs and revenues of all bundled elements when assessing the VULA margin. It is clear that BT has bundled BT Sport to increase the attractiveness of its superfast broadband packages as a means of driving customer acquisition and retention. We consider that the exclusion of BT Sport would leave a ‘gap’ in the VULA margin regulation, as this would allow BT to set a margin that is insufficient for rivals to profitably match the price of BT’s superfast broadband offers.’

United Kingdom, BT Group (incl. Openreach), Ofcom