Broadband blow for BT as regulator demands price limits

Telecoms giant is under pressure but rivals say regulators have not gone far enough
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BT Group suffered another blow to its dominance of the UK telecoms market yesterday when industry regulators announced yet more rules governing the former monopolist's operations.

Having watched its traditional fixed-line business undermined by alternative operators, it has also seen its mobile phone business swept away by its own shareholders who forced its demerger as a condition of supporting the group's £6bn rescue rights issue in 2001.

Now the industry regulators, Oftel and Ofcom, soon to be known just as Ofcom, have announced proposed regulations for broadband internet access which will ultimately leave BT facing even greater competition in this fast-growing area.

At the heart of the proposals are new price controls on what BT can charge competing network operators, such as Cable & Wireless and Thus, for access to BT's telecoms network.

Rivals like C&W need access to BT's infrastructure in order to offer competing telecoms services to internet providers such as AOL and Freeserve.

Without price controls being slapped on BT, the regulators are worried that choice, access and value in broadband Britain will be undermined.

At first sight the regulatory proposals for the Wholesale Broadband Access Market appear dreadfully dull and of little importance to consumers. But behind the dry-as-dust terminology and boring regulator-speak, quite the opposite is true.

If consumers are ever going to see the fruits of Tony Blair's famous Broadband Britain speech, in which the Prime Minister spelt out a vision of a country going about its e-business at high speed to the envy of the world, then yesterday's regulatory musings are crucial.

Not surprisingly perhaps, those companies who stand to benefit from the regulators' desire to see BT's dominance diluted reacted angrily to yesterday's proposals, claiming they did not go far enough.

BT, in turn, warned the regulators not to forget the crucial role it still has to play in meeting the Government's broadband dream, calling for a balance to be struck between risk and reward.

Ultimately, however, the new rules should mean cheaper and better broadband access for consumers and greater competition for BT.

As with the provision of fixed-line telephone services, the regulators want to make sure there is plenty of competition in the provision of internet access and especially the very sexy broadband version. At the moment, the regulators feel BT has it too much its own way.

David Edmonds, the director general of Oftel, said: "These proposals will address a competition deficit. They will bring clarity and predictability to a strategically important and distinct market, enabling other network operators to compete effectively against BT and, in turn, leading to greater choice and value for the consumer."

The regulators said BT had been found to have significant market power in this area that raised serious competition issues.

Stephen Carter, the chief executive of Ofcom who will become the supreme regulator of telecoms and media at the end of the month, said: "Broadband Britain needs broadband competition at the wholesale level as well as the retail level. Ofcom believes that these proposals will create the right balance of certainty, alternative supply and incentives to invest."

To most consumers there probably already seems to be a lot of competition among internet providers. Whether you use BT itself or AOL, Freeserve or Tesconet there doesn't seem to be a shortage of services to choose from. The problem is that all these internet service providers (ISPs), if they want to offer broadband services, have to do so using BT's infrastructure.

BT is the predominant supplier of so-called wholesale broadband access to ISPs, most of whom use a suite of BT products called IPStream to get their customers connected to BT's national telecoms network.

There are, however, alternative networks, built by the likes of C&W, Energis and Thus, all of whom try to compete with BT to sell these wholesale broadband access services to the ISPs.

"However," said Ofcom, "these network operators do not bypass BT's infrastructure altogether. They make use of BT's broadband-enabled local loops and typically a significant amount of BT routing network.

"They therefore connect to BT's network backbone using a family of BT products called Datastream," explained the regulator.

These alternative network operators then build their own broadband access products for ISPs on top of BT's Datastream products. The crucial issue is the price these operators have to pay for Datastream and the margin between that and the price they can charge ISPs for their services. Yesterday, the regulators said the price BT can charge for Datastream will be limited and subject to a complex formula based on retail internet prices minus a certain per cent, which will be determined during consultation. BT's rivals had wanted a cost plus formula to fix the price of Datastream.

However, to make using BT's Datastream products profitable in the first place, rival network operators also need lots of customers. To get lots of customers they need to migrate users from BT's IPStream-based services to its Datastream technology which at the moment costs £50 per user. This figure, according to Richard Sweet, head of regulation at Thus, needs to be reduced to something closer to £5.

"Yesterday's announcement is a sign that the regulators have been listening to the chorus of requests from the ISPs, the alternative network operators and consumers to allow us to compete with BT," said Mr Sweet.

Some of Mr Sweet's colleagues were rather more outspoken in attacking the proposals and BT's continuing dominance in this area. The Broadband Industry Group, which includes C&W, Centrica and Energis, said: "On the face of it this is a bad deal for consumers and they have a right to feel let down.

"The regulators have missed the opportunity to introduce cost plus pricing which would increase competition in the market and lower broadband prices for consumers. As a group we feel frustrated but remain determined to secure a fair outcome for both consumers and businesses."

A spokesman for BT said it was too early to tell what impact the proposed price controls would have on its business. However he pointed out that nearly half of the people who have broadband internet access got it though cable companies such as Telewest and NTL, which will not be subject to similar regulations.

"Regulatory initiatives must be aimed at increasing the number of new applications and services that can be created and made available to UK citizens. As part of that Ofcom must strike the right balance between risk and reward to maintain progress in broadband provision," he said.

Although the regulators have not gone far enough for some of BT's rivals, the decision to subject BT to more competition probably will end up with lower prices and better choice for consumers. Mr Blair's broadband dream came a little closer to reality yesterday.