UK Regulator: BT Cannot Set Wholesale or Retail High Speed Access Rates "Too Low"

Facilities-based competition might be the best alternative, where it is possible, but competition based on wholesale access often is the only available choice to regulators. But there are some obvious limits to the degree of innovation possible when the range of features is fixed, by definition. Since all contestants use the same platform, the services and features also will be the same.

The other problem is the range of pricing options. In such wholesale-based markets, the typical marketing tack is “same service, lower price.” By definition, price is the main form of potential differentiation (though suppliers are free to try and create value in other ways).

Oddly enough, wholesale prices can be set too low! In other words, the magnitude of difference between wholesale cost and BT retail pricing, U.K. regulators maintain, must be large enough to allow a competitor to buy wholesale service and then at least match BT’s retail price, while still allowing the wholesale customer a reasonable profit margin.

The new pricing rule means that BT must maintain a sufficient margin between its wholesale and retail high speed access prices that other providers can match BT prices and make a profit.

Essentially, the rule means BT will not be able to set retail prices for high speed access,or wholesale prices, that prevent competitors from making a profit when matching BT’s own retail prices for the same services.

How much that will help is always a debatable matter. In the U.S. market, a brief period of experimentation with wholesale-based competition showed that many competitors were possible when the spread between wholesale and retail price offered by the competitors was in the 40-percent range.

That competition collapsed when a rule change reduced the spread between wholesale cost and competitor retail cost to about 20 percent.

That will require complex monitoring of estimated BT costs, as a way of maintaining wholesale discount rates. The other complicating factor is that Virgin already has more share than BT in the 25-Mbps and faster portion of the market.

In December 2013 Virgin had 57 percent market share of all connections operating at 25 Mbps or faster. Overall, BT had the largest Internet access market share at 32 percent, followed by Sky with 23 percent and Virgin having 20 percent share.