Broken threads in the competitive canvas?

By | April 13, 2017

For wholesale connectivity, Ofcom’s Ethernet charge control will deliver wholesale prices that are approximately 50% cheaper after a three-year period. Good news?  Maybe not.

Everyone (except perhaps BT) would welcome greater competition – especially in the wholesale connectivity market. Competition here would surely feed through to retailers and thence to end-users. Not only that, competition might even spark service innovation?

BUT, by setting prices so low, has Ofcom effectively inhibited investment from firms seeking to build competing infrastructure?

How does that happen? It’s the rules M’Lud.

Put simply, the costing methodology Ofcom uses is based on all the scale advantages enjoyed by BT and cannot be replicated by a younger challenger firm in the short term.

Smaller market entrants cannot compete with those massive economies of scale and still make a reasonable return and so they will either cease to exist or scale back/slow down investment in network expansion.

Surely that’s not what the Treasury doctor ordered?

Ah – perhaps that’s why we have a Competition and Markets Authority (CMA).

But no. The CMA looked at the Ofcom proposal to check if they were correctly following the rules. And [*boring detail alert*] the CMA decided that Ofcom was correct to set some wholesale prices in the business connectivity market on the basis of BT’s scale and using its Current Cost Accounting Fully Allocated Costs (CCA FAC) methodology.

Result: short-term price reductions seem to be implemented at the expense of long-term competition. Crucially that decision hinges on analysis of the market structure and assumptions of demand in a very dynamic digital environment.

Ofcom’s market management microscope is focused on fine detail but in stitching together the broken threads are we losing sight of the wider competitive canvas?