Ofcom ruling

[#1]

BT suffered a setback on Thursday as regulators proposed cuts in the price of the telecoms company’s wholesale products.
Ofcom, the telecoms regulator, proposed that BT reduce the price of its wholesale broadband products in order to improve internet access in rural areas.
The regulator is aiming to ensure that broadband prices fall for consumers in rural areas, and, potentially, to increase their download speeds.
To achieve this objective, Ofcom is proposing that BT should reduce the price of its wholesale broadband products in parts of Scotland, Wales and Northern Ireland, together with certain English rural areas.
Those are all areas where BT is the sole provider of wholesale broadband services and are mainly places not covered by infrastructure owned by Virgin Media, TalkTalk or British Sky Broadcasting.
In those areas, Ofcom is proposing annual cuts in the price of BT’s wholesale broadband products of between 11 per cent and 15 per cent over the next three years, after inflation.
Ofcom’s calculations of its price controls for BT are partly based on its estimate of the company’s cost of capital.
Ofcom proposed a lower cost of capital for BT Openreach, the subsidiary that provides the company’s rivals with access to its fixed-line connections running to homes and offices.
The watchdog reduced BT Openreach’s weighted cost of capital from 10.1 per cent in May 2009 to 8.6 per cent in January 2011, partly to reflect lower interest rates. Analysts said this would in turn cut the price of the subsidiary’s wholesale products across the country.
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TalkTalk, and other companies that use BT Openreach’s products, could pass on any reduction in its wholesale charges to their customers. In these circumstances, BT Retail might feel obliged to make a similar move. If it did, group revenue could be cut by £150m in 2013-14. Earnings could decline by 8 per cent.
B
It added that Ofcom’s price controls for BT’s wholesale broadband products should “strike the right balance between control and incentives to invest in rural areas”.
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[#2]

Oh which muddled thinking is that again
Whoopee 
1 cut your costs to the remote areas
2 then spend a lot of money in those areas to give then higher speeds
Both admirable thoughts, but the equation doesnt seem to balence

[#3]

It doesn't as others have commented, reducing the price to rural communities is no where near as important as actually getting a service to rural communities.
What is needed is not encouragement for rural users to sign up, but for providers to provide.

[#4]

I don't get it.
Forcing BT to cut their charges isn't going to trigger any new LLU activity - so there is no improvement in competition, and BT will remain the only supplier. And it might force some exchanges that were borderline-cases for LLU out of the equation.
Yet this will make rural exchanges *less* profitable, so get less attention from BT. And there's nothing to incentivise them to rethink.
Wouldn't it be better to force BT to reduce the charge where the service was reduced? For example, where the speed was too low, or a VP was congested. Then at least there is some sort of incentive to get the profitability back.
Confused, and off to read the Ofcom site...

[#5]

Somehow, they think it will encourage the likes of Plusnet to somehow provide a better service, since Plusnet (and other providers using BT Wholesale) will be making more money.  But that makes no sense to me at all, since how can Plusnet or anyone in a none LLU exchange offer a better service than BT offer?!
This OFCOM decision appears to be off the wall, and a total miss in terms of getting more services to rural areas.

[#6]

The summary of the consultation document is here. A link to the full document is given at the foot of the summary.

[#7]

Ah, right. Found at Ofcom website, and following further link at the bottom. Sometimes tricky, but interesting, and overdue for bed now!
I have a few answers to my questions, as my reading shows a few areas that differ from the original financial press cutting that Gel provided (at least it looks like press, so sorry if you wrote that Gel!). In particular, the consultation *is* structured in a way that incentives BT to be able to provide better services to rural areas - or at least that Ofcom believes so, anyway.
My summary:

• First it is the opening of a consultation, which I guess contains Ofcom's opening position. Not close to a ruling yet - maybe another 6 months away.


• The proposal for market 1 is to keep ADSL1's 8Mbps WBC products within cost-control, and to reduce the wholesale prices (around RPI-12% per year).


• In turn, Ofcom hopes this impacts the retail market in 2 ways. Their words:
  (a) "Ofcom expects competition between retail ISPs, who will benefit from the lower wholesale prices, to lead to reductions in retail prices which will benefit consumers."
  (b) "The changes may also lead to better quality services by enabling ISPs to allocate more bandwidth per customer which could deliver faster broadband services."
  


• Cost-control(and therefore the price reductions) will apply to monthly rental, bandwidth over ATM, and things such as the setup & cease charges. It also appears to apply to some of the 20CN interconnects, but I'm less sure of this.
  


• The cost-controls also allow for the bandwidth usage to increase at 23% per year, within the same headline 8Mbps products.
  


• BT can choose how the reductions are to apply across the various components (particularly the monthly rental and the bandwidth).
  


• The prices will be the same for the 8Mbps product, no matter whether delivered over 20CN or 21CN.
  


• ADSL2+ and Fibre products would not be cost-controlled if BT ever scheduled such upgrades into the Market 1 exchanges - Ofcom says this could be an incentive to BT:
  (a) to upgrade the services offered to end users, in order to charge differently for these premium services.
  (b) to consider rolling out 21CN to market 1, to make more internal savings. Customers would stay on 8Mbps products carried over 21CN, but BT would be allowed to keep the extra profit from the same controlled prices.
  Of course, BT still has to roll its own numbers to see if the improved profits available, if any, would justify such a roll-out - Ofcom is just giving it the possibility.
  


• While they mention Market 2 in the early parts of the document (ie when they point out that there is insufficient competition, so they have put in place price controls for both markets 1 and 2), this document says nothing about any change to the controls for Market 2.

Other interesting snippets:

• 77% of UK premises are in market 3, 10% in market 2, 12% in market 1.


• Market 1 = 3888 exchanges


• They estimate bandwidth growth to be 23% per end user, per year over the next 3 years.


• Most of market 1 exchange have a 155Mbit/s ATM backhaul, though only a portion of it might be in use. If you need to add another ATM backhaul, then its a whole new DSLAM needed!


• There's an interesting section on the pre-purchase of ATM backhaul capacity by an ISP, and the impact on user-experience. I guess this relates directly to the way PN have to handle the purchase of extra bundles of GB for each user.


• Average ATM backhaul allocation per end-user is 48kbit/s in 2010/2011, and expectations are for it to rise to 59, 73 and 89. This is how much backhaul capacity (on average) is being booked by ISPs for their end-users.