67. We provide detailed commentary on the service shares by product market in Section 4.4 having made our general position clear on the inadequacy of the metric that Ofcom has chosen and acute difficulties of data collection and interpretation for the industry
68. We strongly concur with Ofcom‟s [5.175] point about bidding markets and believe that this issue extends way beyond consideration of just any postal sector but is material across the industry and much of the UK. We discuss this matter in the SMP assessment. Ofcom [Footnote 73] refers to just one academic paper on this subject which we feel is somewhat dismissive toward what is a key facet of this marketplace. We refer to the Dotecon Report on this matter.
6 In a separate section, Ofcom [4.293] only refers to competitive conditions in WECLA. However there are many
exchanges outside WECLA where BT is not dominant in the provision of broadband and for example Virgin Media not only self-supplies its own backhaul but we understand also supplies backhaul to third parties from BT exchanges.
149 Section 4.4 – Economic Review of the Market Power Assessment
Section 4.4 – Economic Review of the Market Power Assessment
Summary
1. Our views on the general criteria used by Ofcom [7.12-7.60] are as follows:
We acknowledge that Ofcom has to address the criteria that are set out by the Commission but feel that given the acute difficulties in measuring market shares, Ofcom should have given greater weight to other criteria including barriers to entry and countervailing buyer power. Additionally, Ofcom should have assessed whether alternative market definitions would have given the same result and that all sources of price constraint are fully taken into account.
Whilst discussed separately by Ofcom, in practice, three criteria - control of infrastructure, economies of scale and scope and barriers to entry and expansion - overlap to a considerable degree1. Ofcom‟s assessment of these criteria appears to be based
primarily on qualitative and conceptual arguments and presents little evidence, and in our view appears to overestimate the barriers to competition presented by these criteria. All of these factors indirectly or directly relate to the underlying trade-offs between site value and customer density and we feel that Ofcom is likely to understate actual and potential competition for sites at higher values/bandwidths. We discuss this in more detail in our response to the Geographic market boundary.
Profitability is used by Ofcom in a judgemental fashion with a degree of asymmetry such that BT services with high profitability are regarded as supportive of BT having market power (in conjunction with other factors) but low profitability may be disregarded as an indicator of absence of market power. In the case of low profitability for legacy TI services, Ofcom argues this supports an SMP finding as entry is deterred. Aside from conceptual aspects of interpretation, we have considerable reservations on the use of adjusted ROCE values, particularly for legacy products as both the adjustments and the overhead attributions exaggerate economic profitability.
In general Ofcom gives too little weight to countervailing buyer power which is very strong in this marketplace if due account is given to the distribution of businesses by value and the position of CPs purchasing wholesale products where alternative technologies are feasible such as for mobile backhaul.
Our main conclusion is that the only criterion which has a substantive role to play in Ofcom‟s market power assessment is historic estimates of service shares. We have material concerns on a range of issues including: Ofcom‟s choice of metric; the circuit count methodology; and Ofcom‟s interpretation of CP data. We consider that all of these are unreasonably exaggerating BT‟s market presence. This is particularly the case for small volume sub-national product markets such as MISBO and where errors of estimation are likely to be very substantial but also for AISBO services both in and out of WECLA.
1 Indeed Ofcom [5.38, 5.39 and Footnotes 29 and 30] actually link all three factors of CP presence, barriers to
150 Section 4.4 – Economic Review of the Market Power Assessment
2. Our key conclusions on the assessments for the specific product markets are as follows: For TI services in general, we consider that these are in a clear market of one-way
substitution mostly (but not entirely) to broadband and AI services, and Ofcom is not recognising this in the SMP assessments of both wholesale and retail TI services.
Specifically, we consider that all wholesale services including Trunk TI should be deregulated in WECLA certainly above 2Mb/s.
We do not feel that Ofcom is able to justify its finding that BT has SMP for AI services in WECLA and most certainly for 1Gbit/s services. End-users purchase bundles of services and the value of the site is usually considerably greater than just inter-site connectivity. For MISBO services we have concerns that Ofcom‟s definition of the focal product is not
well defined at the technical level and that service shares are hugely uncertain. We particularly believe that Ofcom has failed to identify significant competitors to BT outside WECLA and that these services are fully competitive throughout the UK irrespective of precise market definition.
Ofcom has not recognised the extent of competition for both LLU and MNO backhaul outside WECLA. We disagree with Ofcom‟s economic assessment of these services where we consider that there is strong countervailing buyer power and for well over half of the MNO footprint of base stations, there are real alternatives of fixed infrastructure as well as self-provide from wireless solutions.
On the specific issue of data centres, we believe that Ofcom has not identified the precise scope of these centres which unquestionably are competitive and form the basis of network nodes. We consider that these can be identified and deregulated with no undue regulatory burden.
By definition, these Data Centres are „carrier-neutral‟ and therefore have competitive multiple CP infrastructure. BT believes that these sites are in effect core nodes and so circuits connecting them to CP‟s core network should be excluded when looking at market shares for MISBO services.