UPDATE2 BT Battle Over UK Fibre Broadband Costs Could Result in GBP2 Cut - ISPreview UK
BT’s stock market price has been sent tumbling (falling from 381 on Monday to 360 on Tuesday) after industry rumors began to spread that the telecoms giant might soon be forced to cut the wholesale cost of its superfast “fibre broadband” (FTTC) lines by £2 per month, with Ofcom expected to launch a consultation on the subject in May 2014.

The situation peaked last year after TalkTalk lodged a formal competition complaint against BT with the communications regulator. The complaint to Ofcom alleged that BT was “abusing a dominant position” by conducting an “alleged margin squeeze in superfast broadband pricing” (here).

At the time BT responded by saying that that there was a “lack of any evidence” to support TalkTalk’s case and that they “completely refute the basis” of the ISPs complaint (here). Never the less Ofcom, upon launching its initial probe, said there were “reasonable grounds” for examining whether BT had failed to maintain a sufficient margin between its upstream costs and downstream prices.

The regulator is now due to report back and an article in today’s FT (paywall) suggests that Ofcom will separately launch a formal consultation into BT’s wholesale fibre pricing during May 2014, which appears to have been enough to give BT’s stock market price a kicking.

<Chart showing drop in share value>

The FT piece includes a brief quote from Redburn Partners, which claims to be Europe’s largest independent equities broker and provides institutional investors with conflict-free research.
A Redburn Partners Spokesperson said:

We think Ofcom’s margin squeeze test could reduce BT wholesale fibre prices by at least £2 per month initially, with on-going monitoring potentially leading to further cuts.”
Since last year’s probe began, BT and TalkTalk have at times almost appeared to be involved in a ‘War of the Roses’, with each side taking snipes at the others claims in various different ways. For example, in October the CEO of TalkTalk, Dido Harding, said that she wanted BT to cut the related wholesale price that it charges ISPs to around £4 +vat a month (here).

Meanwhile BT earlier this year published a report that called on Ofcom to “level the playing field” by ending its “pricing distortion” policy, which they claim allows rival ISPs to offer cheaper services (here). By contrast Vodafone has separately accused BT of being in breach of its regulatory commitments by allegedly making profits of nearly £5bn more than the level that Ofcom is claimed to deem acceptable (here)

Suffice to say that the tit for tat battle has shown no sign of abating and now the big decision rests with Ofcom, which will be keen to balance the outcome alongside their on-going Fixed Access Market Review(s). We have requested a comment from Ofcom and are awaiting their response, although it’s likely that they won’t be able to say much until the conclusion is published.

UPDATE 10:52am


Ofcom has confirmed to ISPreview.co.uk that they “expect to issue a consultation in the spring relating to our approach to future fibre pricing“, although the regulator stressed that this would be “quite separate from TalkTalk’s complaint, which relates to BT’s current wholesale fibre prices“. Separate but still related.

UPDATE 1:44pm


A spokesperson for BT told ISPreview.co.uk: “The analysis in this broker’s note is flawed as it understates the revenues and overstates the costs that would be taken into account in any margin squeeze assessment. Any suggestion that BT is margin squeezing in the provision of fibre is nonsense. BT Consumer makes a profit from selling fibre based on Openreach’s wholesale prices and Sky and Talk Talk have publicly stated that they do too. This clearly undermines the basis of the original complaint. We remain confident that Ofcom will find there is no case to answer and are pressing them to come to a swift conclusion.”

BT also indicated to us that they believed the share price movement might have also been hit by some other factors as well as the Redburn report, although they don’t indicate what those might have been.