OFCOM review of the fixed narrowband services markets

In February OFCOM published a consultation on its proposals for change in the fixed-line marketplace. Whilst neither Simwood nor our customers operate fixed lines in the form of copper to customer premises, these changes affect those using geographic numbering, in particular those who have their own numbering assignments and receive 100% of the wholesale income through our Virtual Interconnect Inbound service.

The most contentious of the changes from our perspective is a 96% reduction in the amount operators charge each other for terminating calls to geographic numbering. For Simwood this charge enables us to offer effectively unlimited capacity on geographic numbers and for customers to operate entirely inbound services if they chose to. For customers using our Virtual Interconnect Inbound service, this represents revenue to fund disruptive services and in some cases is all of their income.

Second is the refusal to look at reducing average porting conveyance charges – the amount operators pay each other for handling calls to ported numbers – and the amount paid to BT for the call transiting its network. Presently the income and expense of ported in numbers approximately equate before considering the other associated overheads. The reduction of one side of the balance combined with the reluctance to look at the other results in ported in numbers representing a loss per minute for us and any operator who ports in numbers.

Combined we consider these measures undermine the business model of many of our customers and favour the incumbent operators and mobile networks. We do not see any benefit for the consumer in them at all either directly in terms of rate reductions or long term through competition.

We have already discussed the changes with all Virtual Interconnect customers (and prospective customers) who will be affected by the change. Unfortunately we feel it is inevitable but hope that OFCOM can be encouraged to give a little more time for the change to be absorbed. Customers using our numbering or termination need not worry as we do not presently envisage any fundamental change.

We have today responded to OFCOM on the proposed changes and our response is below. The numbers refer to the specific questions asked in the consultation document.

Please do not hesitate to contact us with any queries.

As we elaborate below we consider that reducing FTRs by 96% from today’s rates will be disruptive to our business and the prospect of it is affecting new business already. Combined with ported numbers being loss making this change will substantially affect the business model for young innovative CPs and we can think of customers of ours who’s business will be destroyed as a result – specifically those who are heavily inbound and relying on FTR revenue to fund services. We fear CPs not already established will struggle to find a business case for investment and will default to reselling BT products where the return is predictable and investment negligible. We fail to see how stifling competition and innovation in any way benefits the consumer and consider the fact that the most contentious (to us) of these changes are welcomed by the mobile operators and large retail CPs to be telling.

We and our customers operate in a dynamic space which is delivering innovation and financial benefits to consumers. We embrace and encourage change and operate with a real expectation of termination and origination rates falling. However, this is the first example of OFCOM imposed change we recall which we consider disruptive to our business and contrary to consumer interest.
We would favour reduced FTRs being phased in over a period that enabled other changes to take place and participants to adapt, or better still made conditional on other changes such as an effective removal of the need for APCCs and a reduction in transit rates.

6.3

We do not agree that each CP has SMP in respect of termination to their geographic number ranges. BT is the default transit provider and to all practical extent we do not consider it feasible to establish a contract for a geographic number range at anything other than the FTR imposed on BT. Where CPs directly interconnect any commercial conditions are tempered by the fact that BT transit will be available, and therefore the BT transited FTR represents a ceiling on the price. We can envisage no practical scenario where a CP could exercise SMP and inflict a high FTR on the industry, whilst in theory this is possible. We would therefore favour measures which neutralised the theoretical risk rather than disrupted the actuality.

8.1

We disagree with the fundamental assumptions and consider capping FTRs at LRIC will be disruptive to our business and that of our customers. We would therefore favour a longer glide path or other compensatory measures.

The review assumes that CPs have relative parity of origination and termination volumes, a common customer for both, and that there are generally only two CPs involved in a given call. Our business exists as an enabler of voice services, facilitating primarily PSTN connectivity for innovators in the VoIP space. On that basis our wholesale origination and termination pricing face separate not combined market pressures – a CP may use us for origination but buy termination elsewhere. It is therefore false to assume that the revenue lost in reduced FTR will flow through in increased margin on origination as the reality for us and our customers is that origination prices will be forced lower by the market. Thus, a reduced FTR is a direct loss of income. A good number of our CP customers are heavily inbound and this change will eradicate much of their income.

Whilst we appreciate that OFCOM would consider the FTR should not be a profit centre, for innovative young providers operating on a lower cost-base than incumbents, this revenue enables innovation and development which will not be economically viable.
We consider that the presumptions benefit larger operators with a retail customer base. We know in many cases they may be operating bill-and-keep between themselves and this change will afford higher margins on any traffic flowing off-net outside of those arrangements. That comes at the expense of income for non-retail operators, in particular those who are heavily inbound, with no compensatory increase in revenue attainable elsewhere.

Overall we consider this is a review which favours larger CPs, all but eliminates income to innovators, and leaves a new CP with little economic alternative but to resell BT’s products rather than develop their own. This does not benefit the consumer and seems alarmingly out of kilter with OFCOM’s mandate and track record.

11.1

The change to FTRs is going to represent a net loss of income for us and our customers. The mere prospect of it has caused innovative CPs exploring business opportunities with us to have to rethink their business model and lost us potential income. We understand that if we were in the position of the mobile operators we would welcome this change yesterday, and if we were a large retail CP able to shift lost FTR to origination margin we would also want it quickly. The reality for us and our customers is that this change will cause termination income to drop by 96% with limited scope for offset. Whilst those most affected will be at the smaller and more nimble end of the market, in some cases that represents the majority of their income and by OFCOM decree it will vaporise overnight. The result will be CPs offering services which benefit the consumer ceasing to have a viable business. Them ceasing trading eliminates such services from the market-place, causes customers to flow to the larger CPs which can be viewed in no way other than as anti-competitive.

We would welcome a much gentler approach which did not affect the commercial viability of entire services and CPs. Reducing margin over a period can be accommodated and all disruptive CPs operate on an assumption that the price of the minute is heading towards zero anyway. Whilst we appreciate that it may be arguable that killing their business quickly is less painful, this change occurring over a more prolonged period affords the chance to re-negotiate supply arrangements and tweak business models to accommodate the newly imposed order.