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Did Ofcom force BT's broadband price rises?

The hefty increases in the cost of some of BT's wholesale broadband products may have been prompted by a review of competition in the UK's high-speed Internet access market
Written by Graeme Wearden, Contributor
BT's decision this week to increase its wholesale business broadband prices by as much as 30 percent may have been prompted by an ongoing official investigation into competition issues.

According to sources familiar with the case, Ofcom's review is likely to conclude that BT should alter the costs of some of its high-speed networking products in order to create more competition in the UK broadband market.

BT has refused to comment on the suggestion that it had made these price rises now because it knew that Ofcom would soon force it to make them anyway. Ofcom itself, though, has implied that there is a link.

If so, it adds weight to the theory that Ofcom is managing to regulate BT rather more tightly than Oftel, its predecessor, was able.

The price rises, reported on Tuesday, have been made to BT's IPStream Office and IPStream S range. IPStream products are bought by ISPs that sell broadband to small businesses and power users. BT told ISPs this week that the increases were made "in order to meet our regulatory obligations".

Rival telecoms operators have for some time claimed that BT's IPStream pricing is anticompetitive. These telcos use another product called Datastream that allows them to link their networks to BT's local exchanges, reaching end users down their BT line.

A Datastream operator can therefore compete with BT and sell its own wholesale broadband products to ISPs, giving these ISPs an alternative to IPStream.

Datastream users, though, have alleged that the prices that BT has been charging for IPStream and Datastream respectively are anticompetitive.

They claim that Datastream pricing has been too high relative to IPStream. This meant that Datastream operators couldn't compete effectively with BT Wholesale because the difference in price between IPStream and Datastream was so narrow that they couldn't offer a profitable alternative to IPStream.

Back in May 2003, BT cut its Datastream rates after rivals complained that the company was acting unfairly by cutting only IPStream costs.

The issue underlines the potential problems arising from the lack of effective wholesale competition in the UK broadband market.

Ofcom has been investigating this issue over the last few months. In May it ruled that BT's Home 500 IPStream service (which is the basis of many standard broadband products on the market today) failed the margin squeeze test by around £1.00.

BT effectively pre-empted Ofcom's ruling by announcing a £1 per month cut to Datastream pricing -- as well as reductions in the cost of its local-loop unbundling products -- on the same morning as Ofcom's announcement.

Stephen Carter, Ofcom chief executive, told journalists in May that Datastream pricing should continue to be set on a "retail minus" basis relative to IPStream prices, and that Ofcom would consult on a "draft determination" as to what this margin should be.

The regulator has not yet published the results of this consultation.

One industry expert familiar with the situation told ZDNet UK that several of BT's IPStream products have failed Ofcom's margin test. In the worst example, it was claimed, BT's 2Mbps IPStream products were £15 per month too cheap, given what Datastream customers were being charged.

The monthly cost of the products in question, BT IPStream Office 2000 and BT IPStream S 2000, are both now being increased by BT by £14 per month. This will effectively alter the margin by £15 per month, when the £1 per month Datastream reduction is also taken into account.

BT has declined to confirm or deny the claim that it was forced into these price rises by Ofcom.

"BT is continually reviewing prices across our wide product portfolio. This includes taking into consideration regulatory obligations which ensure continuing and appropriate levels of differentiation between product sets, so that competition is promoted at all levels of the value chain. We are not willing to comment on the specific nature or detail of the claims made," said BT Wholesale spokesman Francis King on Thursday.

The word from Ofcom is that it expects to make its concluding statements on the issue of IPStream and Datastream pricing in a few weeks.

"[It] may be that BT is anticipating this by seeking to comply with the proposals in the consultation," suggested an Ofcom spokesman.

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