February 3, 2023
As we covered in our previous report on the issue (here), the offer includes the following key items:
- Lower FTTP rental prices across all but the regulated FTTP 40/10 product.
- Pricing below the regulated FTTP 40/10 product and Ofcom’s estimated cost range for an efficient new entrant operator, across several of the higher bandwidth products.
- Erosion of the fibre premium all but eliminating the incremental wholesale cost of consuming an FTTP line over the equivalent FTTC line.
- The introduction of a Failsafe mechanism with the purpose of alleviating Alternative network (‘Altnet’) operator and Internet Service Provider (ISP) concerns over the potential anti-competitive effects of the offer in ‘overbuild’ areas.
Ofcom’s provisional view in this consultation document is to allow the latest offer to go through and therefore not to intervene or prevent Openreach from introducing Equinox 2.
This is based on the following provisional conclusions:
FTTP rental prices:
- Ofcom remains of the view the 90-day notification process is not intended to address general concerns about low wholesale prices. It has however sought to further clarify – and arguably even change – its assessment of the pricing offer from its approach in Equinox 1.
- In its latest assessment it does not look at the price levels for individual bandwidths but has instead assessed the offer in terms of its average rental price.
- On an average rental price basis, Ofcom has only analysed whether this is above its estimates of an efficient entrant operators cost range (£11.10 – £15.93) and not, as it had outlined before in Equinox 1, whether it is also above the FTTP 40/10 product.
- Its provisional view is that the average rental price is above its calculated price range and therefore does not raise a potential barrier to Altnet entry, expansion, and competition.
Forecasting requirements and Failsafe burden:
Ofcom provisionally concludes the Failsafe mechanism does not raise a potential barrier to using Altnets. Its view is that the mechanism addresses conditionality risk from the offer.
Order Mix Targets (OMTs) and conditionality of the offer:
Ofcom has reapplied its 3-stage gated test as outlined in its WFTMR Statement and as was used in its assessment of Equinox 1. It provisionally concludes the OMTs do not create a potential barrier to using Altnets, and therefore does not proceed to assess the conditionality of the offer beyond this first gate.
This means the effective date of the offer remains 1st April 2023, unless Ofcom decides to change its position in light of evidence received in this consultation process.
In this report we cover Ofcom’s position on the potential issues we raised before, and any other relevant issue raised since.
The deadline for industry response to the consultation is 4th March 2023.
If you need help in responding to Ofcom’s consultation on this and/or wish to know more and discuss this further please get in touch.
Approach to general decrease in wholesale FTTP prices
The new Equinox 2 offer sees a rental price reduction of up to 15% across its FTTP products.
In its assessment of Equinox 1 Ofcom did not consider the general drop as per se an ex-ante concern, noting:
“[…] the 90 day’s notification requirement is for commercial terms where the price or other contractual conditions are conditional on the volume and/or range of services purchased. It is not intended to address general concerns about low wholesale prices”.[emphasis added].
In this consultation Ofcom simply reiterates the above.
It does however go onto address the specific issue of pricing below the following two benchmarks:
- the regulated FTTP 40/10 product and;
- its fibre cost model estimates of an efficient new entrant operators price range.
In Ofcom’s assessment of the Equinox 1 price levels, there was no apparent risk to competition on the basis the prices were not below either benchmark.
As we noted in our previous report, the latest Equinox 2 offering sees some of Openreach’s FTTP products priced below the benchmarks above.
Below the regulated 40/10 price
On the specific issue of pricing below the regulated FTTP 40/10 product Ofcom appears to have changed its view on whether this fact is potentially anti-competitive.
In this consultation Ofcom states:
“Under the Equinox 2 Offer, Openreach’s discounted rental charges for FTTP 55/10, FTTP 80/20 and FTTP 115/20 are lower than the rental charge for the FTTP 40/10 product. As explained above, some altnets were concerned that this indicates that the Equinox 2 Offer prices are unduly low. We do not consider this to be a relevant test.” [emphasis added]
It instead turns its analysis to whether the Equinox 2 offer, on an average rental price basis is below Ofcom’s estimates of an efficient new entrant operators price range (i.e. ‘the estimated price floor’). Therefore, it only looks at one of the two benchmarks it set out in its Equinox 1 statement.
Ofcom’s ‘estimated price floor’ range
In another change to its Equinox 1 assessment, Ofcom is now only looking at the average rental price of the Equinox 2 offer instead of doing, as it had previously done on an individual bandwidth basis.
In its Equinox 1 statement Ofcom explains:
“[….] Further, all other FTTP rental prices under the Equinox Offer are set a level above [the 40/10 anchor product], including when ARPU-related discounts are taken into account. Therefore, we consider that the Equinox Offer prices are set at a level above our estimate of the price that an altnet would need to change in order to recover its efficiently incurred costs in Area 2.”. [emphasis added].
Ofcom now compares the average rental price against its ‘estimated price floor’ range for an efficient new entrant operator. This new range is adjusted for 2023/24 prices and is estimated to be between £11.10 and £15.93, with the price increasing depending on scale of deployment.
It is Ofcom’s view that:
“Openreach’s average FTTP price under Equinox 2 is above the top end [£15.93] of the estimated range for the unit cost of an efficient FTTP entrant in Area 2”
A case for over-recovery of costs?
In its response to Ofcom’s Equinox 1 consultation, TalkTalk submitted that the average price under the offer exceeded both Ofcom’s estimate of an Altnet’s FTTP costs as set out in the WFTMR Statement and its calculation of Openreach’s average cost. Therefore, TalkTalk’s view was that Ofcom should be expanding and lowering the price cap across all of Openreach’s FTTP product portfolio.
Indeed, this view that Ofcom should be forcing Openreach to drop its wholesale price even further has been reiterated by TalkTalk with regards to in-contract retail broadband price rises set to take effect this April.
Area 3 impact assessment
As part of the Equinox 1 consultation process a number of operators rolling out to Area 3 raised concerns over the impact the price levels and offer would have on their ability to compete in the relatively higher cost areas.
Ofcom’s response in its assessment of Equinox 1 was to side-step this issue, stating:
“[….] in the WFTMR Statement, we did not pursue an approach of setting higher wholesale FTTP prices in Area 3 given our conclusion that material and sustainable competition to Openreach in Area 3 was unlikely.” [emphasis added].
In this consultation, Ofcom applies the same approach, once again side-stepping the issue of competitive rollout in Area 3 and what impact this offer has on those operators.
For example, when assessing the price levels Ofcom states:
“Given our policy objectives, as set out in the WFTMR, we consider it is appropriate to assess the costs of a efficient altnet in Area 2, rather than an altnet located in Area 3”.
Ofcom’s assessment of the fibre premium
The fibre premium has been all but eliminated in the latest Equinox 2 offer, reducing the cost incentive for downstream Internet Service Providers (ISPs) to remain on legacy Openreach services.
Ofcom does not appear to address this point and issue directly in this consultation.
The Failsafe mechanism and confidential information
The latest offer also includes a Failsafe Mechanism:
“to remove any theoretical possibility of distorting incentives to use alternative networks” and an explicit statement on “no volume or exclusivity requirements to obtain discounts”. 
Noted previously, there remains a concern around confidentiality rings and whether the Altnets would want ISPs to necessarily share the required build and connection information with its biggest competitor, Openreach. Openreach tries to address these concerns by employing an independent 3rd party verifier to handle this information.
Ofcom’s view is that these safeguards are adequate for this purpose, particularly as:
“the Failsafe Mechanism is similar to provisions already contained in other Openreach discount contracts (e.g. GEA volume agreement) that are already in effect. This indicates that ISPs are likely to regard these contractual safeguards as adequate and acceptable.”
The Failsafe mechanism and net-burden on ISPs
The additional complexity and cost of fulfilling the Failsafe Mechanism may concern some of the ISPs. The granularity of the reporting mechanism and its frequency may have some ISPs challenging its utility and benefit to them and question whether they can utilise it in such a way which avoids them being penalised when using the Altnets.
Ofcom does not believe this is an issue for the ISPs and does not consider it a risk to them being able to use the Altnets.
Ofcom’s assessment of the Order Mix Targets (OMTs)
As it did in its assessment of Equinox 1, Ofcom looks to the details and impact of the OMTs in the latest Equinox 2 offer, as Ofcom notes in its latest consultation:
“[….] Openreach could make discounts on ISPs’ purchases in areas where it is the only provider conditional on ISPs not using altnets in areas where both Openreach and altnets are present. This could exclude altnets even if ISPs found them”. [emphasis added].
Ofcom has sought to apply the 3 gated-test to assess whether the conditionality of the offer creates sufficient harm to competition for Ofcom to intervene.
In its assessment, Ofcom recognises the discounts if the OMT are met are substantial so ISPs are likely to be strongly incentivised to meet them however considers the Failsafe mechanism is sufficient in addressed concerns. As such it provisionally concludes that the OMTs do not create a potential barrier to using Altnets (question 1) and does not go onto addressing question 2 and 3.
Expected stakeholder reactions
There is no doubt the Altnets will be looking at this consultation and Ofcom’s proposal with extreme concern. Not least since Ofcom has seemingly changed its approach to assessing the Equinox 2 price levels and its impact on competition, when compared to its assessment in Equinox 1. Furthermore, Ofcom continues to avoid the issue of Altnet competitive build in Area 3.
It is likely that these Altnets will also seek to challenge the evidential basis for Ofcom’s provisional conclusion including (but not limited to): the bandwidth mix which generates the average rental price, the unit inputs which have gone into the Ofcom fibre cost model to generate the ‘estimated price floor’ range and the underlying data for the overbuild analysis.
For both Openreach and the ISPs on its network the provisional conclusions will likely be welcomed. Some ISPs may wish to push Ofcom on whether the 40/10 product remains a sufficient anchor for the higher bandwidths, in light of some products now being priced below it and equally on whether Ofcom should be doing more in terms of expanding and lowering the current price caps for FTTP products.
Rising retail broadband prices
The offer and its effects do not take place in a vacuum.
The issue of in-contract broadband price rises has been widely reported for the past month. In-contract broadband prices rises are expected to increase by up to 14% this April, depending on the ISP and their contract terms.
With consumers facing the cost-of-living crisis and with other utilities expected to increase the relevant price caps, the squeeze on consumer budgets will become even tighter.
The latest Equinox 2 could be construed as a much needed lifeline for the industry and indeed for the regulator’s performance when it comes to fulfilling its duty to protect consumers in the market.
On the other hand, there remains a question as to the level of pass-through for these offers i.e. how much of the discount does the end-consumer actually see versus how much does the ISP retain.
Wholesale network competition at risk
Ofcom will no doubt also be looking at the latest BT quarterly reports which show the impact of the economic situation on costs and returns, but which have seen BT continue to grow its network and retain its customer base. The Openreach network now covers just under 10m premises with its FTTP network and is quickly onboarding customers onto the new network, with c2.7m FTTP connections and a stated take-up rate of 50% within 24 months of availability.
The Altnets continue to hit coverage milestones including CityFibre’s recent announcements that it has now passed 2.5m premises with its FTTP network. The success stories of Wildanet and Fibrus winning contracts under the BDUK Project Gigabit programme demonstrate the commercial appetite for Altnet operators to also invest in the hard-to-reach and higher cost intervention areas.
However, with reports of Altnet restructures and the continuing increase in costs, the ability for Altnets to compete effectively against Equinox 2 all whilst trying to achieve their stated scale ambitions may be brought to in question.
The likelihood for appeal is high, whichever way Ofcom lands on the issue in its final statement. With CityFibre currently in the process of a Competition Act complaint, its experience in running a previous appeal on Equinox 1 taken together with the aforementioned restructure, it is highly likely it will appeal in the event Ofcom does not intervene to prevent the offer – albeit within the judicial review standard for appealing these decisions.
The operator is unlikely to be alone on this issue, with several of the other Altnet operators also likely to intervene, not least due to the continued ambivalence Ofcom is showing to their rollout in Area 3 contrary to current market evidence.
In the event Ofcom does a U-turn on the provisional conclusions set out in this consultation and intervenes to prevent the offer, Openreach will receive direction as to what issues they need to address. In the case no agreement can be made between Openreach and Ofcom, it is likely that Openreach and/or the ISPs will seek to appeal the decision from the other side.
This consultation process will last only 30 days, and any potential litigation/appeal activity is expected to be confirmed swiftly after. Operators will therefore need to prepare and engage quickly with both the regulatory and legal process.
If you need help in responding to Ofcom’s consultation on this and/or wish to know more and discuss this further please get in touch.