Wednesday, 27 January 2016

Ofcom - hoist on their own petard

Ofcom are the 'independent regulator and competition authority for the UK communications industries'. They are indeed huge fans of competition. This quote from that article in particular is interesting.

We sometimes hear the simplistic view that more competition means less potential for investment. I don’t believe that such a trade-off is inevitable, or even necessary.

Insufficient competition can lead to insufficient investment; lack of investment can, in turn, undermine choice and quality. At Ofcom we have usually found that it is better to promote competition between providers, and rely on this to spur investment.

There’s no doubting the strength of competition in the UK: we have the most competitive fixed and mobile markets in the EU.

I have a few issues with this.

At Ofcom we have usually found that it is better to promote competition between providers, and rely on this to spur investment.

How, exactly, does having a wide variety of providers reselling the same Openreach and/or BT Wholesale products spur investment in infrastructure? The hundreds of retail operators have essentially two options: use products provided by BT Group or build their own networks. Building networks in the UK is extraordinarily expensive and out of reach for most leaving BT Group products as the only option.

Sure, they can tweak a little around the edges, they can purchase their own backhaul from BT's exchanges and use their own networks to reduce costs somewhat, they can install their own equipment in BT's exchanges and rent the copper loop between the customer and the exchange but it's essentially the same service.

That isn't competition at anything bar the most superficial level. It doesn't spur investment in infrastructure, as is evident by the lack of alternative networks built in the past 10 years. It does, however, spur pricing competition and some value added extras to broadband products such as TV.

The result of this aggressive price competition? Customers who are extremely intolerant of spending any more than they absolutely have to, service providers who are as a result extremely price sensitive, and an infrastructure provider that, having deployed FTTP, sees £7.40 in additional income per line per month on the most commonly purchased product.

Obviously the proof is in what's offered by the big players. So let's have a look at Virgin Media UK's broadband offerings. Top product is 200Mb downstream, 12Mb upstream, and comes in at nearly triple the performance of the competition's most widely available product. From there perhaps jump to the Republic of Ireland. Similar market, but no Ofcom devoted to introducing competition. Virgin Media Ireland must be miles behind, right? Oh. Their lower package appears to be 240Mb downstream, 20Mb upstream, with the higher package 360Mb downstream, 36Mb upstream.

On the upside of course Virgin Media UK do offer cracking deals, especially if you call up and haggle. Let's hear it for that competition Ofcom have brought us.

I've had conversations with people from both Virgin Media and BT. Both very much wish that they could start charging more for broadband services, however it's very difficult when large players either charge so little they're running themselves into the ground or throw the broadband in free of charge, with TV. In lieu of increases to broadband pricing line rental has been rising instead, both to cover loss of call charges, relied on by some to subsidise broadband pricing, and to cover increasing usage of broadband.

People are using the Internet more and more, making it ever more expensive to deliver services to them, but resent any kind of price increases on their broadband bills.

Consumers therefore benefit, but investment has also flourished, whether it is mobile operators each spending billions of pounds on their UK infrastructure, BT investing £2.5 billion in fibre broadband, or Virgin Media planning a five-year, £3 billion expansion of cable.

Looks more to me like investment is 'flourishing' despite Ofcom, not because of them. Openreach only invested when Ofcom agreed to keep out of trying to price control the new products for a period. VM's boss thinks Ofcom should do more to promote building of new infrastructure and doesn't agree with separation of Openreach.

I entirely agree with Ofcom that the status quo isn't good enough and can't remain. However this is the market Ofcom have created, and the market they are now trying to regulate their way out of, potentially by forcing divestiture of BT.

Perhaps if they are so concerned about consumer value they could take a moment to wonder how Sky can offer a TV bundle for £20 a month, with free broadband if you pay line rental of £17.40 a month, and throw in a free 32" TV or a £100 voucher or pre-paid Mastercard.

The joys of not having to build your own network to people's homes and getting access to someone else's investment at regulated rates. Great for the consumer in the short term, not so hot when it comes to return on investment in multi-billion pound network upgrades and what happens when what we all have now just isn't enough.

Either we as customers need to get used to paying more for broadband, hope that the government steps in with a whole bunch of cash to subsidise, or consider not complaining if we get left behind.

No-one has built consumer FTTP to scale in the UK in competition to BT for really good reasons. One attempt abruptly failed. I'd suggest that Ofcom are most directly to blame. An obsession with competition at the retail level making competition at the infrastructure level not feasible for a new entrant. Their regulatory effort would perhaps be far better spent working to lower barriers to entry for companies that want to invest and less on squeezing a pound or two a month more out of retail pricing.

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