Influencia de los sustituyentes Evidencias experimentales

1. Our answer to this question focuses on two key issues relating to remedies which are of relevance across the review, passive remedies and cost orientation. Our views on these issues can be summarised as follows:

a. We agree with Ofcom‟s conclusion not to propose passive remedies. In particular, i. alternative remedies adequately address any competition concerns in the leased lines

market;

ii. the introduction of passive remedies could have the perverse result of reducing rather than increasing competition;

iii. passive remedies would be untargeted, i.e. they would affect all downstream markets regardless of whether SMP was found in the upstream market, and irreversible; iv. passive remedies would lead to the duplication of network infrastructure costs and

inefficient competitive entry, posing difficulties for efficient price setting and the recovery of common costs;

v. Mobile Network Operators (MNOs) have commercial imperatives to reduce costs, but this does not warrant the introduction of passive remedies as a new regulatory solution; MNOs‟ requirements are being addressed by existing solutions from BT and other CPs and through alternatives to fixed backhaul, such as microwave and radio backhaul solutions; and

vi. Other CPs‟ arguments that passive remedies for business connectivity would unlock Next Generation Access (NGA) investment as they would allow them to compete on a level playing field with BT are misplaced and there is nothing to indicate a market failure in the business connectivity market that justifies the imposition of passive remedies to address this issue.

2. We support Ofcom‟s proposal not to impose cost orientation remedies: the use of separate cost orientation remedies alongside charge controls has resulted in overly complex and unnecessarily intrusive regulation that creates uncertainty for all stakeholders with no clearly identified net benefits.

Main points on our position on Ofcom’s approach to remedies Passive remedies

3. As part of its consideration of the appropriate remedies, Ofcom has considered whether there is a need to imposepassive remedies in the business connectivity market, including the extension to business services of the PIA product allowing duct and pole sharing. This is an issue that a number of stakeholders raised in the BCMR Call for Inputs and we recognise Ofcom‟s need to properly evaluate this option. Passive remedies are a remedy available to national regulators in this market but in our view they should only be imposed where this would be proportionate and there is a clear competition problem that can only be addressed in this way. On that basis, we support Ofcom‟s conclusions, as summarised in paragraph 1.37 of the consultation document:

„ We are not proposing such passive remedies, because we consider that less intrusive remedies are likely to achieve similar benefits for consumers, while passive remedies would

66 carry significant risks of worse outcomes, both for consumers and for effective competition, including adding costs and encouraging inefficient entry.‟

4. These conclusions reflect Ofcom‟s analysis, which we believe correctly looks at this issue in two dimensions:

a. Firstly, consideration of the impact of the imposition of passive remedies on the current business services regulatory framework and competitive value-chain; and

b. Secondly, an evidence-based approach to consider whether there is any market failure that would justify the imposition of such remedies over and above the existing remedies (including any amendments proposed to these in both the BCMR and Leased Lines Charge Control consultation documents). This is considered in relation to both mobile backhaul and in supporting investment in super-fast broadband, the two areas specifically raised by respondents to the Call for Inputs.

Impact on the competitive value-chain

5. In looking at the impact of passive remedies on the current business services regulatory framework and competitive value-chain, we fully support Ofcom‟s analysis and conclusions in paragraph 8.94 when it says that:

„Our current view is that the case of passive remedies is weak because:

While we recognise that it is possible that passive remedies could improve the prospects for competition generally, our analysis of the cases put forward by stakeholders suggests that the potential benefits that could flow from doing so could to a large extent be achieved by imposing alternative remedies such as price controls on BT‟s provision of active wholesale access services.

At the same time, we consider that imposing passive remedies in leased lines markets, either in isolation or in combination with active remedies, could carry significant risks of worse outcomes than continuing to impose active remedies alone, including adding significantly to the cost of competition in leased lines markets;

encouraging inefficient entry;

narrowing the promotion of competition to the provision of high-bandwidth (and high revenue-generating) products and/or the provision of leased lines services in dense geographic clusters of businesses (such as major urban centres);

increasing the charges paid by the majority of end-users of leased lines services; undermining the recovery of common costs that underpins the current pricing of all of BT‟s regulated leased lines products.‟

6. We continue to believe that it would be uneconomic and unworkable to introduce passive remedies on top of the existing active remedies because it would create multiple levels of intervention, including additional layers of internal supply. The introduction of passive remedies would inevitably lead to the withdrawal of some of our existing regulated wholesale business connectivity products and a redrawing of the functional separation boundary within BT. The Undertakings are based on a particular view on the level at which network competition is judged not to be feasible and regulation required, with an expectation of deregulation downstream of that point. The introduction of passive remedies into business connectivity markets would involve a

67 fundamental shift in where this level is deemed to be, as well as a further layer of regulation downstream. As Ofcom identifies, this is likely to have the practical effect of reducing rather than increasing the amount of competition in these markets. Even if the introduction of passive

remedies were justifiable on a theoretical basis (which we do not believe is the case), the costs of the transition to a radically-different competition model would outweigh any perceived benefits. 7. In addition, we would particularly emphasise the fact that any passive remedies applied in this

market would be untargeted and irreversible. A distinguishing feature of passive remedies is that it is very difficult to restrict their application to particular product markets. This would be a big problem in business connectivity where there is already a mixture of SMP and non-SMP markets, and where we believe the evidence justifies further deregulation in certain markets defined by geography and/or bandwidth. For example, if the market for MISBO circuits is found to be competitive in the WECLA, it is hard to imagine how the abuse of passive remedies to provide services at this bandwidth could be prevented. Passive remedies are therefore likely to undermine the investments of other infrastructure providers, particularly in areas which are already highly competitive.

8. This means that by their nature, passive SMP remedies will likely impact all downstream markets (products, customers and geographies) whether or not any market failure has been found in them that necessitates an upstream remedy. In fact, the availability of passive remedies in business connectivity would affect a wide range of major retail services markets, since the services covered include local loop unbundling and mobile backhaul, which underpin consumer voice and

broadband services.

9. It is highly likely, then, that passive remedies in business connectivity would breach the

requirement of the EU Directives and the Communications Act that no SMP remedies be imposed in markets where there is effective competition. Further, Ofcom‟s analysis in the review would need to take into account the relevance and effects of such passive remedies in a wider range of markets than those addressed by the BCMR review.

10. This analysis shows that passive remedies would not be a good solution to address what may be limited, niche issues for certain CPs (for example, as suggested by C&WW) or in particular geographies; they would likely be disproportionate „scattergun‟ remedies, inappropriate for the majority of circumstances. As Ofcom recognises, this will also not be cost-effective.

11. Finally, unlike active remedies, it is difficult to see how passive remedies - being the most upstream remedies - could be reversed following a future market review. CPs would have set up their networks and sunk their assets based on the existence of the remedies, and all downstream market structures would be predicated on their existence. The counterfactual of withdrawal would be difficult to prove in a subsequent analysis. CPs could potentially acquire „grandfather rights of access‟ which could hinder network development by BT. The likely convergence of downstream economic markets using common upstream inputs also means that there could be major

implications for market reviews in the future. In effect, passive remedies in business connectivity would be irreversible.

12. Ofcom also rightly highlights the inefficiencies inherent in competition based on passive remedies. Investment in fibre-based networks is subject to strong economies of scale, and, while passive remedies could reduce barriers to competition based on infrastructure, any such additional competition they stimulate may not be sustainable outside some dense geographic clusters of businesses, such as major urban centres. Introducing passive remedies would also potentially add costs of competition. While passive remedies would avoid or reduce the need for BT‟s competitors to invest in building physical infrastructure, those competitors choosing a passive

68 remedy would nevertheless incur additional costs in network infrastructure. The investments would include the costs of purchasing, installing and managing active equipment and, in the case of PIA, the costs of purchasing, installing and managing fibre in BT‟s ducts. These investments would, to some extent, duplicate BT‟s, and would therefore add to total industry costs and represent an inefficient allocation of resources.

13. At the same time, introducing passive remedies in business connectivity markets could lead to inefficient competitive entry and pose difficulties for efficient price setting and the recovery of common costs. As Ofcom points out, the current charge control delegates to BT, within certain constraints, the ability to decide how to recover its common costs across the charge-controlled services and, in practice, BT recovers proportionately more of its common costs from higher- bandwidth products, which is where entry based on passive remedies is most likely to take place. This entry would take place not because those competitors could necessarily offer these higher- bandwidth services more efficiently than BT, but because of the way that BT had decided to recover its common costs. Depending on where competitive entry takes place, this may, require rebalancing of the recovery of BT‟s common costs, which may lead eventually to an increase in its charges for other regulated services, not only for those used in business connectivity markets but potentially also for others, such as local loop unbundling and wholesale line rental.

Mobile backhaul issues

14. Mobile operators have argued strongly in favour of the availability of passive remedies for mobile backhaul, particularly through the extension of PIA. In our view, Ofcom has summarised the position well in paragraph 1.39, as follows:

„A number of stakeholders argued that we should extend the scope of PIA to include

applications in leased lines. Mobile network operators (MNOs) have told us that PIA could help them to fulfil their requirements for backhaul from RBS for 4G services and to address their concerns that the costs of backhaul will escalate as demand for mobile data services continues to increase. Our current view is that if we were to continue, as we do now, to require BT to provide wholesale leased line services rather than access to its passive assets, the industry, including BT, is likely to meet MNOs‟ requirements for backhaul services in reasonable timescales, and with improving technical efficiency. We also consider that MNOs‟ concerns about the future costs of backhaul could be addressed by price controls which we are proposing to impose on BT.‟

15. It is important to consider if any market failure exists in relation to mobile backhaul or indeed if there exists any wider „mobile regulatory problem‟ that would justify such a disruptive remedy. We understand the MNOs‟ commercial imperatives to reduce costs, but that is not a reason in itself for passive remedies to be introduced as a new regulatory solution.

16. MNOs understandably want to reduce costs at the same time as meeting rising demand and improving the efficiency of their network architectures but this does not constitute „market failure‟. As Ofcom rightly identifies, BT and other providers are seeking to address these requirements, alongside a growing trend for MNOs to collaborate (including formal alliances/joint ventures) in commissioning network solutions from a position of stronger buyer power and a greater ability for MNOs to self-build.

17. It has been suggested that a mobile data „explosion‟ due to the growth of smart phones, in particular enabled by the availability of 4G spectrum, will effectively create a new bottleneck with

69 MNOs dependent on BT for backhaul services. We appreciate the uncertainty in this area but are not convinced that there will be a bandwidth „explosion‟ in the way that some people have suggested. The impact of the release of 4G spectrum is unclear, certainly in the period covered by this market review given likely auction dates, as is the on-going impact of smartphones given the extent to which these are actually used over Wi-Fi rather than mobile networks. To help evaluate this issue, we asked Analysys Mason (see report attached to this response) to carry out an independent assessment of the demand and supply options available for mobile backhaul in Europe, including a focus on the UK.

18. The Analysys Mason report shows that microwave and radio backhaul solutions represent an effective alternative to fixed backhaul in the light of new radio technologies and network

architectures. On the issue of bandwidth demand itself, as Analysys Mason cover in their report, the general expectation from commentators is that MNOs will address future demand issues by moving from macro to small cell solutions and that this change in architecture will lend itself to a greater use of wireless backhaul. This supports our view that there is no market failure in relation to mobile backhaul which would justify the imposition of passive remedies

19. As part of the range of solutions available to MNOs, BT offers a managed service for Radio Base Station (RBS) backhaul known as Managed Ethernet Access Service (MEAS) from BT

Wholesale. The service connects an MNO‟s RBS sites to its core network of switches. BT Wholesale implements MEAS by integrating Openreach‟s wholesale fibre-based Ethernet services with unregulated components of BT‟s 21CN network, hence offering an aggregated and economic solution designed to meet MNOs‟ developing requirements. The MEAS service has overcome some past operational issues and is expanding its footprint and evolving technically in step with customer requirements.

20. Ofcom has looked in detail at MEAS and whether there are any competition issues raised by the underlying components, including synchronisation facilities. Ofcom has concluded that there no bottlenecks or other regulatory problems caused by MEAS that would require any regulation over and above the component parts, where those are already the subject of SMP obligations. We agree with these conclusions.

21. On synchronisation specifically, we largely agree with Ofcom‟s conclusions discussed in detail in Section 11 of the consultation document. BT does not have a timing source at every local exchange or ASN. As a by-product, wherever a SDH Add Drop Multiplexor at 155M or higher is deployed, access to the bitstream transmission allows timing to be recovered that may be

sufficiently accurate and reliable enough to be used to synchronise today‟s mobile networks. This equipment is only available at some of BT‟s exchanges, and the same is true of other CPs‟ networks. To meet the needs of future mobile networks a different approach is required. Any network operator that wishes to offer a timing service to an MNO in addition to backhaul provision faces the identical design choices that are available to BT. Timing conveyance is no longer provided as a result of the transmission protocol used and alternative means for the generation and transmission of a suitably accurate and reliable clock signal need to be developed. There is no certainty which method will eventually provide the most efficient solution and BT has no access to resources that are not available to competitors.

22. Overall, we support Ofcom‟s conclusions that the scale and pace of deployment of BT‟s MEAS, together with the evidence of entry by competing providers such as Virgin Media, suggests that the industry is currently likely to deliver fibre-based services to the RBS sites where MNOs require

70 them within a reasonable time. Amongst the developments in competitive entry in mobile

backhaul was the announcement by MBNL, a joint venture between Everything Everywhere and H3G, in July 2011 that they have signed a deal for Virgin Media to provide fibre-based Ethernet backhaul to the joint venture partners‟ RBS sites. More recently, we have seen the takeover of C&WW by Vodafone, which according to Vodafone‟s own prospectus to C&WW shareholders will enable this MNO to reduce its backhaul costs. In addition, O2 and Vodafone have announced proposals for further network sharing arrangements that are designed to reduce costs, including backhaul costs.

23. Finally, Ofcom states that BT‟s competitors are likely to depend on Openreach‟s provision of wholesale Ethernet access services to a significant proportion of sites because the coverage of their own physical networks, unlike BT‟s, is not ubiquitous. Given the extent of Virgin Media‟s footprint as well as the ability of MNOs to use alternative backhaul methods such as radio or microwave, we would question that this is the case in relation to a significant proportion of sites but, to the extent that this is the case and Openreach‟s Ethernet services represent a bottleneck, then Ofcom‟s remedies, including the price control proposals contained in the current Leased Lines Charge Control consultation, are sufficient to support competitive provision and ensure MNOs can access a cost-effective RBS solution.

Extension of allowed uses of PIA to support investment in super-fast broadband

24. Ofcom mandated the PIA product in the last WLA market review as a means of supporting