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March 19, 2015

Ofcom confirms BT superfast broadband margin rule

New measure takes effect on 1 April.

By Vinod

Ofcom has confirmed a measure requiring BT to maintain a margin between its wholesale and retail superfast broadband charges.

The UK telecoms watchdog announced that from 1 April, BT would have to maintain a sufficient margin between its wholesale and retail superfast broadband charges, or VULA margin, to allow other providers to profitably match its prices.

While BT is currently maintaining a sufficient margin according to Ofcom, the new measure is intended as a safeguard.

The measure was first outlined in a draft decision in January and has been confirmed following consultation with the European Commission.

The new rules take into account BT’s need to cover the costs of providing its BT Sport service free to superfast broadband customers, a consideration supported by TalkTalk.

Due to its huge assets and dominant market position, BT has often been accused of holding a monopoly in the UK.

"Our approach is designed to ensure that other communication providers have sufficient margin to be able to compete with BT in the provision of superfast broadband packages to consumers," Ofcom stated. "It also continues to provide BT with pricing flexibility for VULA that preserves its investment incentives in relation to superfast broadband."

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The report added: "It appears to us that the VULA margin condition is appropriate for the purpose of promoting efficiency.

In the absence of regulation, we believe that BT would have the ability to price squeeze. There is also a significant and real risk that it has an incentive to do so. As explained in Section 3, we consider that if BT were to maintain an insufficient VULA margin, this is likely to result in a distortion of competition in retail superfast broadband.

"Competition is a key driver of both static and dynamic efficiency incentives, furthering incentives for cost minimisation (productive efficiency) and investment and innovation (dynamic efficiency), as well as leading to prices which may better reflect forward-looking costs (allocative efficiency).

"If BT is able to stifle the ability of rivals to compete in the superfast broadband market segment through imposing a price squeeze, such efficiency incentives may also be diluted."

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