U.K. Regulator Proposes Cutting BT Wholesale Prices to Boost Rural Broadband Take-Up

The U.K. regulator has proposed significant reductions in BT's wholesale prices in rural areas, in order to boost competition and stimulate the take-up of broadband in remote regions. Regulator Ofcom proposes cutting the fees BT charges its rivals for access to its fixed-line network by between 10.75% and 14.75% below the inflation rate, with the area affected covering nearly 12% of U.K. households, or around 3 million homes and businesses.

Ofcom says consumers in rural areas—mainly parts of Scotland, Wales, Northern Ireland, the South-West of England, Yorkshire, Norfolk, Cumbria and Northumberland—are paying more for broadband than consumers in urban areas, due to a lack of competition. This is partly because BT hasn't yet implemented local loop unbundling (LLU), which allows rival operators to bring their own equipment to exchanges in order to use BT's lines to offer broadband services such as ADSL. BT is required to open its network to LLU by law, but this hasn't happened in some remote regions as the alternate operators do not see it as commercially viable—something Ofcom hopes to address with the price cut.

Ofcom also added that there are also fewer available bundled offers in these regions, such as triple-play where consumers take phone, internet and television services from the same operator, as it costs more to deliver broadband to customers in these areas due to limited infrastructure.

The regulator has now launched a consultation into the proposals, and has also suggested the implementation of revised cost of capital estimates for BT, which it uses when it calculates the charges the operator is allowed to make to rivals.

Outlook and Implications

• Ofcom Looks to Boost Competition and Incentivise Efficiency: Ofcom has conceded that BT has made huge progress in opening up its network, and estimates that some 78% of U.K. households are now served by effective competition in the fixed-line telephony and broadband sectors. However, BT remains the sole provider of services in many rural areas, and the regulator now hopes to increase competition between the retail broadband providers, ultimately leading to cheaper services, while incentivising BT to continue improve its efficiency. Ofcom added that the fee changes may also lead to better quality services, by enabling alternative operators to allocate more bandwidth per customer, which could deliver faster broadband services.

• BT Voices Concerns about Effect on Investment: BT has responded, saying it understood the desire to move to a more formal wholesale broadband pricing control in rural areas, but said it must not deter investment. However, the former incumbent said it did not think the proposals would have a "material impact", and pledged to engage fully in the consultation process which follows. BT is the United Kingdom's key investor in rural broadband, and recently announced a further 41 market towns that will benefit from the next phase of its fibre-optic network roll-out, as part of the next stage of its £2.5-billion (US$3.9 billion) fibre investment, part of which is committed to delivering faster broadband speeds to more rural parts of the United Kingdom, and hopes to bring high-speed broadband to two-thirds of U.K. premises by 2015 (see United Kingdom: 6 December 2010: BT to Trial 1-Gbps Fibre Broadband, Extends Existing Network).
  
  Former incumbent BT and Virgin Media are currently the only telecoms companies with national fibre networks for super-fast broadband, with rivals completely dependent on renting infrastructure to offer their own broadband services. BT recently published its proposed prices for access to its fibre-optic cable ducts and telephone poles, following the decision by the U.K. regulator that the former incumbent must offer wholesale access to this infrastructure (see United Kingdom: 17 January 2011: BT Sets Out Pricing Proposals for Fibre Duct and Pole Access). Meanwhile, the regulator has recently denied pleas from the incumbent to be allowed to raise its wholesale fees to help make up the shortfall in its pension fund (see United Kingdom: 16 December 2010: U.K. Regulator Denies BT Request to Raise Wholesale Fees to Plug Pension Gap). While the government is keen to boost competition, it must do so without penalising BT—particularly since it has slashed its own spending pledges for rural broadband roll-out.

• Public Rural Broadband Funding Slashed: The U.K. government recently unveiled details of the next phase of its planned broadband investment, which includes £50 million set aside to bring services to underserved rural and remote regions. The plans are part of a total investment pot of some £830 million over the next seven years, with a target of bringing broadband speeds of at least 2 Mbps to every U.K. home by 2015 (see United Kingdom: 7 December 2010: U.K. Government Announces Additional US$79-Mil. Funding for Rural Broadband Roll-Out). However, the government's plans are increasingly sounding like hollow rhetoric, as more than 70% of U.K. households already have broadband. BT has offered to contribute further funding, matching public money invested by the government as part of its own planned broadband roll-out scheme. As public funding is slashed, however, it is unlikely whether this investment will be enough to stop the United Kingdom falling further behind in terms of "superfast" broadband. Meanwhile, the government has recently pushed back the auction of 800-MHz "digital dividend" spectrum until early 2012, thereby fuelling fears that the roll-out of next-generation mobile broadband services could be delayed further (see United Kingdom: 17 November 2010: U.K. Regulator Delays Digital Dividend Auction Until 2012, Further Delaying LTE).