May 24, 2023
Ofcom has today made its decision to allow Openreach’s wholesale ‘Equinox 2’ FTTP pricing offer to go to market. The decision comes after months of consultation and engagement with industry stakeholders on the matter.
In addition to its decision on the offer, Ofcom has also published commitments made by Openreach CEO, Clive Selley in a letter to Ofcom CEO Dame Melanie Dawes, earlier this month. In these commitments, Clive Selley has assured Ofcom that no further price changes are planned until 31st March 2026, and no additional conditionality concerning the volume or range of services offered in respect to FTTP rental prices is intended.
Whilst Ofcom explicitly states it does not rely on these commitments in reaching its decision, they may give a degree of comfort to alternative network operators (altnets) competing against Openreach in this market. We discuss this in further detail below with some more context.
Summary of the key points in the decision
Ofcom’s analysis and final decision can be summarised as follows:
- Conditional pricing and barriers to competition: Ofcom assessed whether the discounts offered by Openreach in the Equinox 2 offer could potentially create barriers for altnets to enter and expand in the market (‘the Question 1 test’). Ofcom examined two specific aspects of the Equinox 2 offer in this regard: the Operational Minimum Thresholds (OMTs) and forecasting requirements. In its analysis, Ofcom considered that the OMTs and the forecasting requirements individually and in aggregate do not create a barrier to using altnets.
- Rental price levels: as we identified in our report earlier this year, the new rental prices under Equinox 2 flattened the ‘bandwidth gradient’ (i.e. higher bandwidths are priced closer to lower ones) all but eroding the premium for higher speeds. Furthermore, the price levels for some of the bandwidths were lower than both the regulated 40/10 FTTP product and the ‘floor’ established in the fibre cost model, both thresholds previously identified by Ofcom in its Equinox 1 decision as ones which may give rise to competition concerns. In its assessment of Equinox 2 however, Ofcom has applied a slightly different test analysing the average FTTP price rather than the individual bandwidth price points. Ofcom has on this basis found no prima facie concerns with the Equinox 2 price levels, as they appear to be at the “top end of the estimated range for the unit cost of a reasonably efficient altnet in Area 2”.
- Signalling and further discounts: a number of stakeholders raised concerns that Equinox 2 was part of an Openreach practice of “repeatedly amending its FTTP prices that act as a barrier to altnet entry and expansion”. In this decision Ofcom has stated it has gone about collecting data, information and internal documents from providers to assess what (if any) the chilling effects on investment are and if they are having an impact on network competition. In its decision, Ofcom has considered that there are no prima facie concerns at this time.
- Onerous conditions on ISPs: one of the concerns raised was whether the Failsafe mechanism introduced as part of this offer would be onerous to ISPs. Ofcom did not find this to be the case.
Competition Act Complaint
CityFibre lodged a complaint with the Competition and Markets Authority (CMA) last year on “BT Openreach’s exclusionary strategy to suppress competition”. An update on this complaint is still pending but with this decision on Equinox 2 now in effect, it will be interesting to see where the CMA lands on the issue.
Consumer protection and retail pricing
The lower wholesale prices may come as a policy lifeline for Ofcom, in a time where it has a renewed focus in the consumer policy space and is facing increasing pressure from Government and the general public for action on increasing retail broadband prices.
The extent to which this saving at the wholesale level is passed onto consumers remains to be seen.
Future wholesale pricing and commercial strategy
As stated above, the decision mentions – albeit does not rely on – commitments made by Openreach CEO, Clive Selley in a letter to Ofcom CEO Dame Melanie Dawes earlier this month.
As Ofcom states, these commitments “may provide further clarity and be helpful for altnets and their investors”, and indeed it may. With increasing talks of M&A activity in the fixed-line market, statements from Openreach and Ofcom which point to pricing certainty in the market may help with the valuation and return on sale for some of these businesses.
However, to stress there is nothing preventing Openreach from either:
- completing changing its strategy in this regard and introducing a new pricing offer before 2026; or
- chipping away at the edges of the price paid by ISPs on the network (reducing/eliminating connection fees, reducing backhaul and migration costs etc).
As we highlighted in our previous reports on the matter (here, here and here), this decision could lead to a legal appeal. ISPs that use Openreach’s FTTP network will want to ensure they are able to benefit from this offer whilst altnets may want the decision referred back to Ofcom.
Last year’s ‘Equinox 1’ appeal demonstrated that the Judicial Review standard makes it extremely challenging to successfully contest an Ofcom decision. In the event a decision is successfully challenged and referred back to Ofcom, there is no guarantee Ofcom will change its mind.
The issue of appeal may be indeed what Ofcom was considering when looking to delay this decision by two months. In its appeal of Ofcom’s decision on Equinox 1, CityFibre argued on multiple grounds that Ofcom had failed in its process to adequately assess Equinox 1 (i.e. how it arrived at its decision to approve the discount).
CityFibre would go on to lose the appeal but not without the court concluding “we would encourage Ofcom to maintain careful scrutiny of the market at this important time, to ensure that the judgements it has made in the Statement continue to be validated by the emerging evidence of actual competitive conditions” [emphasis added].
As Ofcom has stated in its decision on Equinox 2, it has used this extra time to review an extensive amount of evidence, information and data from stakeholders on both sides of the divide. In doing so, Ofcom has arguably built up its defence in the case of an appeal for procedural failure (grounds for Equinox 1 decision appeal). This may make the successful appeal of the Equinox 2 decision that much more difficult.
Potential appellants now have two months from today to file a notice of appeal to the Competition Appeal Tribunal (CAT).
If you need help in engaging with Ofcom on this and/or wish to know more and discuss this further please get in touch.