OFCOM presses ahead regardless

OFCOM, the body in the UK responsible for promoting competition, has spent 18 months consulting with stakeholders over its plans to impose controls on the industry for the coming three years. We discussed this and shared our response some months ago.

Now, when a body responsible for promoting competition in an industry is considering price controls, one might reasonably expect that those price controls would promote competition. Anyone other than the incumbent might consider that a positive step and something very much to the benefit of consumers.

Similarly, any sensible person might assume that the act of consulting involves a degree of listening and refinement. You know, kicking the tyres together and modifying ideas based on feedback from those closer to the coal face. Spending 18 months doing that is great – lots of listening, lots of refinement.

We’re saddened, somewhat angered but entirely unsurprised to advise that both of these common sense assumptions are entirely misplaced. OFCOM the competition authority, the enforcer of a free telecommunications market and the consumer champion has confounded sense again.

On the one hand we perhaps shouldn’t be surprised. This is after all the same body who only last week, after 18 months careful deliberation, decreed that the blatantly unfair and unreasonable was fair and reasonable. In short, they decided that the ability of BT to change prices without the consent of the interconnected network (e.g. us) was symmetric with other networks requiring BT’s consent to change their prices. Aside from the insult to common sense, this is a very important judgement as they have contradicted it in under a week. But we’ll come back to that.

What have they done?

In their draft proposals to the EC on their controls on the fixed line telecoms market from 1 October 2013 to 30 September 2016, they have pressed ahead with the changes they proposed in the consultation. We consider these changes an affront to competition and against the consumers interest. You might say they haven’t just moved the goal-posts, they’ve sent the challenging side off.

When interconnected networks pass calls to each other (e.g. us and BT) – and we mean those with an actual regulated Standard Interconnect Agreement, not those reselling BT’s IPExchange managed service – the calling party pays the destination party for terminating the call. In short, BT pay to call our numbers, we pay to call BT’s. Of course, each party also charges their own customers to originate a call. Add in lots of providers in between each charging to transit their network and you have a grasp of where phone charges come from.

OFCOM has today decided that the rate to terminate a call should fall by 87% on January 1st 2014. It was supposed to be 1 October 2013 but there is insufficient notice now for that to happen. Anyway, that means any operator with geographic numbers (DDIs / DIDs) will see income on those calls fall by 87% overnight, literally. A call initiated at 23:59:59 on December 31st will be settled at the current rate; a call initiated 1 second later will be settled at 87% less.

We argued that rates falling so quickly was going to be difficult to adjust to. We further argued that this loss of income might be damaging to disruptive operators who, using products like our Virtual Interconnect, enjoyed 100% of the wholesale income on calls and used that income to fund their service.

OFCOM also proposed that origination charges – the amount BT can charge customers for placing a call – can rise 65%. They argue that this 1300% swing in favour of the originator is good. The consultation document even included a study into what level of price rise consumers may tolerate as a result.

Of course, most networks, us included, originate and terminate so in the simple world of OFCOM-towers this is taking with one hand to give back with the other and the net result is not much. The cost to terminate calls should fall broadly in line with the loss of income on terminating them.

Down here in the real world things don’t work like that; save for the incumbent.

If you happen to have started life funded by the tax-payer, you may well have copper lines to every home and business in the country. You might operate a service whereby every end-user is part of a closed network. In that circumstance this change does affect you as OFCOM intended.

However, in the modern world, sophisticated end-users and a whole eco-system of competitive Communication Providers separate origination and termination. They may use our numbering but another network’s termination. Likewise, some networks only offer termination and others only numbering. This is good, spurs innovation and promotes competition – something OFCOM should encourage. However, as a result of this move the hand taking is very well doing so from a different company to the hand giving. This is bad.

OFCOM argue that any network hosting geographic numbers has Significant Market Power (SMP) in respect of those numbers. In other words they can charge what they want for calls to those numbers and there’s nothing anyone can do about it? Is that true? Well according to OFCOM it isn’t! You did not misread that – OFCOM say it is, OFCOM say it isn’t.

We argued that because we had to seek BT consent for any price changes, we did not enjoy SMP as we could not just change prices to any level we liked. Likewise, other networks interconnecting with BT have to seek their consent for price changes so they don’t occupy SMP either. There is an edge-case of one non-BT network directly interconnecting with another non-BT network and able to set prices anywhere but commercial sense would expect parity and as either party always has the option of transiting BT there is a natural brake on any temptation.

Last week OFCOM decreed that it is fair and reasonable that networks cannot change prices without BT’s consent. This week they have decreed that the ability of a network to set prices where it likes, gives it SMP. Whilst much of this situation leaves us questioning our intelligence, are these not mutually exclusive? Which is it, it surely cannot be both? One cannot exert power over the party whose consent you require to exert that power!

Bad news still to come for porting

There’s one network in the UK that started out with near 100% market share and now has massively massively less. There’s others that started out with nothing and now have market share more than nothing. You could say that one network is a net loser of customers, the rest of the industry is a net gainer.

One process for gaining or winning an end-user is porting where contrary to popular understanding the number never leaves the original network. Calls are instead forwarded on to the new network and where they traverse the incumbent network there is a charge for conveyance (APCs).

OFCOM has held off announcing today but the original consultation document suggested that they were not changing APCs. We, and others, argued that APCs would be above the termination income on numbers and would make numbers ported in loss-making per minute.

As a result, the incumbent will gain, the rest of the industry will lose. We remind you though, just in case it may seem otherwise, that this is all in the interests of competition!

But it isn’t all bad

On a day of seemingly only bad news OFCOM announce that only 7% of Bangladeshis in the UK have DAB radio, which is considerably less than the population as a whole – 30% if you care. It will come as great comfort to those whose income plummets 87% on January 1st to know that the same tax Pounds have given them a new opportunity: the market of selling DAB to Bangladeshis has potential to more than triple. Maybe we do misunderstand the promotion of competition after all!

Seriously

The venting of frustrations aside, what does this mean? For our customers we hope the answer is very little. Customers using our numbering should see no change, customers using our termination should see little change. In honesty, we’ll see a loss of margin on one and a gain of margin on the other and can in theory cross-subsidise. Virtual Interconnect customers will see the loss directly but we will pass on the gain too.

However, this stance critically assumes the market doesn’t change. Should the market drive down termination rates for UK Fixed, we will need to follow and by contrast will need to increase the charge on numbering in one form or another. The market will decide this of course and we will need to react. Whilst we normally embrace and foster change, this is not one we’ll blink first on as we consider it destructive to the industry as a whole and detrimental to consumers.

As we argued at the time, we think for new entrants to the market it has been made more economic to innovate nothing and just resell the incumbent’s products. That is very sad but potentially presents more of a challenge to those of us originating product and service (since we have no resellers we include all our customers in that definition: you actually add value to the end user) to differentiate. If these changes swing the economic balance in favour of the incumbent and the army of clones reselling a lowest common denominator product grows, we need to compete on service, innovation and end-user choice. It would however be nice to do so with the support of the regulator responsible for promoting competition.

Final thought

There’s an assault on our businesses from all sides be it regulators, fraudsters, or competitors. We think it is important to know those you work with are on side and working with you. We’re proud to be named in no less than 9 areas of the report as a lone or minority voice on the above areas and others. The draft statement is a PDF so easily searchable. If you have 5 minutes why not see what your other carriers said and whether they fought your corner?