9.3.1 The market before the review

The UK first introduced competition in the telecoms market in 1984 with the licensing of Mercury Communications as the sole competitor to BT in domestic markets. In return Mercury entered into commitments to develop a domestic trunk network, but relied on BT for local access, except in some business districts. It used the Cable & Wireless international network for overseas calls. In 1985, Oftel determined interconnection prices between the two firms that were initially favourable to Mercury, as a method of supporting entry.

In 1991, following the UK government’s review of the duopoly, this period of ʻmanaged competitionʼʼ drew to an end as other firms were permitted to enter the market. The end of the duopoly allowed cable companies, until then permitted to offer telephony only in partnership with Mercury or BT, to enter the market providing infrastructure-based competition to BT, which was Oftel’s preferred form of competition.

A further policy designed to support infrastructure competition was differential access prices for service-based and infrastructure-based competitors. The former had to buy inputs from BT at discounted retail prices, whilst the latter could buy at lower wholesale rates that were the same as BT charged internally¹⁵.

By the time of the review, the UK telecoms market was more competitive than most other markets at the retail level. BT had a market share of around 25% in the retail broadband market, 82% of exchange lines and 60% of fixed traffic¹⁶. BT’s strength in the calls market came from ʻother callsʼ (including calls to free dial-up internet access), which accounted for 47% of all minutes and in which BT had a 70% market share. By contrast, BT had only a 34% share of international call minutes, although such calls were only a small part of the market (just 2.3%).

9.3.2 The review

As early as 2002 some players in the telecoms market began to lobby for a strategic review of telecoms regulation and the break-up of BT¹⁷. Those who argued for a review believed that the market was being held back by the vertically integrated nature of BT and that separation would increase dynamic competition in retail markets. They argued that investment by competitors was being held back because they expected BT to use its integrated structure to sabotage any product development by rivals, thus preventing investors from earning a reasonable return on any investment. It was not necessary for BT actually to have harmed its rivals for them to change their behaviour; all that was required was an expectation of discrimination to deter investment. Although there is little hard evidence to support the claim that investment was being held back, the very low uptake of LLU can be seen as backing up the claim. In July 2004, there were just 13,000 LLU lines out of a total of 4.4 million broadband access lines.

Ofcom launched the TSR in April 2004 with a first phase consultation document¹⁸ in which it set out the purpose of the TSR as to:

Ofcom set out its analysis of the sector looking both at the level of competition at the time and towards the future with an analysis of technology trends. Stakeholders were asked ʻfive fundamental questionsʼ and sixteen more detailed questions. The five fundamental questions were:

In the Phase 1 consultation document, Ofcom found a mixed picture of benefits to UK consumers. It found, for example, that whilst there was plenty of competition in the fixed voice market, most of this was based on service provision and that BT still provided most access infrastructure, despite Oftel’s policy of infrastructure competition. Similarly, BT dominated the broadband access market at wholesale level, although the retail market was competitive¹⁹. Ofcom’s overall conclusion, therefore, was that the 20 years of competition prior to the TSR resulted in only partial benefits for UK consumers in both residential and business markets.

Responses were received from over eighty interested parties, including fixed and mobile operators, consumer representative organizations, independent experts and individuals with no affiliation. Although the responses were wide ranging, a central theme to emerge was the problem of discrimination and the ineffectiveness of the legal/regulatory regime to prevent such behaviour. Some operators went further and argued that both Article 10AD and the UK law allowed dominant operators to discriminate by not providing equivalent products in equivalent circumstances.

In its response to the TSR, Cable & Wireless, then the UK’s second-largest fixed line operator and which had absorbed Mercury Communications in 1997, stated:

Energis, another competitor to BT which has subsequently been acquired by Cable & Wireless, discussed the problem of ʻundue discriminationʼ. It stated:

Energis was established in 1992 by the national electricity transportation network, National Grid. It used National Grid’s network to develop a fibre-optic trunk network which formed the basis of its offering to business customers. Energis, through its subsidiary PlanetOnline, worked with the electronics retailer Dixons to create Freeserve, an Internet service provider (ISP) providing free dial-up Internet access based on an 0800 number. At its peak in 2000, Energis had a stock market valuation of £10 billion, however in July 2002 it was placed into receivership and was acquired by Cable & Wireless in 2005 for a little under £600 million.

The essence of these responses was that preventing discrimination was not enough when the obligation of ʻno undue discriminationʼ allowed justifiably different treatment by the dominant firm of its own downstream business and that of its competitors and allowed different treatment when there was no material effect on competition.

Cable & Wireless’s example of LLU provides a good example. LLU allows competitive operators to rent the copper local loop that runs between the local exchange and the customer premises. The LLU customer needs to install its own equipment in the local exchange to allow broadband signals to be sent over the local loop. It can then sell that service to consumers. BT, like other incumbent operators in their own countries, does not use LLU to provide broadband access themselves. So BT’s retail division was buying a different product from its competitors²³.

There was a similar concern with narrowband or traditional voice access products. The externally supplied product is known as wholesale line rental (WLR) and allows a downstream competitor to rent from BT a local exchange line conditioned for voice services. BT itself did not use WLR to provide voice services at the time of the TSR.

Referring back to the legal definitions of discrimination, BT could well argue that differences between internal and external cost and terms were justified and that therefore they were not discriminating under the definition of ʻundue discriminationʼ.

However, such a defence was unnecessary as no discrimination cases were successfully brought against BT: indeed Ofcom did not find explicit evidence of discrimination during its review. What became clear, however, was that competing communications providers (CPs) lacked confidence in a system that allowed BT to duly discriminate as evidenced by the paragraphs from the Cable & Wireless and Energis responses quoted above. The expectation of different treatment was enough to change the behaviour of downstream competitors.

On 18 November 2004, Ofcom issued its Phase 2 consultation document.²⁴ This reviewed the comments received from the first phase and put forward specific proposals for future regulation of the electronic communications market.

Central to Ofcom’s analysis in Phase 2 was the concept of ʻenduring economic bottlenecksʼ (para. 1.17) which it described as those areas of the network where ʻeffective, infrastructure based competition is unlikely to emerge in the medium termʼ. In possibly the most damning paragraph in the Phase 2 consultation, Ofcom said that competing operators who rely on BT for access ʻhave experienced twenty years of:

Ofcom concluded that the ʻno undue discriminationʼ remedy by itself had proved inadequate to address the competition problems caused by economic bottlenecks and that a stronger remedy was needed. It partially laid the blame at the door of its predecessor, Oftel.

In the last sentence of this quote, Ofcom discusses what has been referred to as ʻcumulative materialityʼ. This is the idea that it is possible for there to be many minor differences between an internal and an external wholesale product which, when each difference is taken alone, appear unimportant but which when they have a cumulative impact can result in a significant disadvantage for the external customer.

9.3.3 Equivalence of input

Ofcom’s principal proposal arising from the TSR was to strengthen the non-discrimination remedy by requiring what it termed ʻreal equality of accessʼ which would prevent BT having justifiable reasons for providing different services internally and externally. This would require ʻequivalenceʼ at the product level and clear behavioural changes by BT.

At the product level, Ofcom stated that equality of access implies BT’s wholesale customers should have access to:

1. the same or a similar set of regulated wholesale products as BT’s own retail activities;

2. at the same prices as BT’s own retail activities; and

3. using the same or similar transactional processes as BT’s own retail activities. (para. 1.36)

Ofcom termed these characteristics of equality of access ʻequivalence of inputʼ. One purpose of the proposal was to strengthen the incentives for BT to provide fit-for-purpose wholesale products without intrusive regulation.

Ofcom also stated that it was important that there is equivalence throughout the product development process and product life cycle. It implied that BT’s wholesale customers have the same ability as BT’s retail activities to introduce changes or have problems addressed.

The final stage of the TR was the issuing by Ofcom of a ʻStatementʼ including a set of undertakings by BT in lieu of a reference under the Enterprise Act 2002²⁵. Paragraph 2 (Definitions and Interpretation) of Annex A sets out what is meant by Equivalence of Input

Since the signing of the original Undertakings a number of amendments have been introduced and brought together in a consolidated version. In this consolidated version ʻsameʼ is helpfully defined as meaning ʻexactly the sameʼ.

Whereas the non-discrimination requirement left room for some degree of ambiguity, the definition of EOI makes it clear that BT must provide exactly the same products internally and externally under the same conditions, etc.

The list of products to which EOI was applied is set out in paragraph 3.1 of the Undertakings. These are:

These products existed at the time of the TSR and were offered by BT in the wholesale market. Thus it can be argued that they had to be reverse engineered to be offered under EOI terms.

However, the Undertakings also commit BT to providing certain (at the time) future services on an EOI basis (para. 3.1). These are listed as:

1. a) Wholesale Extension Service Access Product;

2. b) Wholesale Extension Service Backhaul Product;

3. c) Wholesale End-to-End Ethernet Service;

4. d) IP based Bitstream Network Access products that are the successors to IPStream or DataStream; and

5. e) A successor product to Wholesale Line Rental if:

   1. i) such a product is provided using BT’s NGN, based on Multi-Service Access Node (MSAN) access; and

   2. ii) BT is determined by Ofcom to have SMP in a Network Access market or markets which includes that product.

Looking further to what was in 2005 the future, the Undertakings place certain obligations on BT regarding the provision of next-generation networks (NGN). Section 11 of the Undertakings makes it clear that BT will provide network access to its NGN on an EOI basis.

The Undertakings seek to ensure that BT designs-inequivalence of inputs into future products. Thus whilst there may have been a cost associated in ensuring that ʻoldʼ products were made fit for EOI, new products should not incur the same costs.

Ofcom also introduced the concept of ʻequivalence of outcomeʼ which was a weaker form of equivalence, more akin to non-discrimination, and was applied to products that at the time were expected to become redundant as they were overtaken by new services such as those listed above.

The difference between the ex post remedy of non-discrimination applied ex ante and the design of the specific ex ante remedy is central to an understanding of the Undertakings and their impact on the UK telecommunications market.

EOI was and remains a radical change from the ʻno undue discriminationʼ requirement placed on BT in markets where it has SMP. Under the non-discrimination approach, BT did not have to design-in to existing products and processes the equality of treatment of internal and external customers. Each could use a different product and process and differences between the two could be justified, allowing BT to charge different prices or to impose other non-price terms.

BT, or indeed any other incumbent firm, could legitimately argue that its network was built for use by a single integrated firm and was not designed for access by other networks. It was designed to carry calls from the calling party to the receiving party (end-to-end calling) and not to pick up calls or deliver calls to other (national) networks. Therefore, BT could argue that it faced lower costs to deliver a call end-to-end on its own network than to carry calls to or from an interconnected network. Likewise it could argue that it could provide different order-processing systems internally and externally.

Therefore, under the definition of non-discrimination adopted by Ofcom, its treatment of internal and external customers differently was objectively justifiable and therefore not unduly discriminatory. Nevertheless, industry participants and Ofcom determined that the competition policy principle of non-discrimination was not sufficient to stimulate effective and sustainable competition downstream of the economic bottleneck and so a stronger, specifically ex ante remedy was required to overcome the incentive to discriminate.

That remedy, equivalence of input (EOI), requires equal treatment to be designed into products. BT’s commitment in the Undertakings is to provide the ʻsameʼ product, timescales and information with the same degree of reliability. BT is also expected to respond to requests for new services from wholesale customers using the same process: i.e., it should not distinguish between a request from BT Retail and external customers.

There has been no legal testing of equivalence but it would seem unlikely from the unequivocal wording of the Undertakings that BT could claim external customers were not in an ʻanalogous situationʼ to their internal customers.

Equivalence can therefore be regarded as a specifically ex ante approach to redress incentives for discrimination, whereas the ʻno undue discriminationʼ obligation was an ex post remedy applied ex ante.

9.3.4 Functional separation

In the Undertakings, BT also agreed to a change its organization form and incentives for managers. The new organization form became known as ʻfunctional separationʼ though the term itself is not used in the Undertakings. BT made a significant number of commitments, the three most important and relevant of which were to establish:

1. a separate Access Services business unit with a separate brand name: One of the first deliverables from BT was the establishment of Openreach, a new business unit separated from the rest of BT with responsibility for providing the majority of the input equivalent wholesale products. Although not explicit within the Undertakings, it was a perceived aim of BT, through establishing Openreach, to develop a different culture which treated all of its customers in an equivalent manner. The introduction of Openreach ensured that there was a ʻcleanʼ interface with all the operators competing in the downstream markets and greater transparency for monitoring compliance with the Undertakings;

2. a Code of Practice for employees: it was obviously essential that the detailed set of commitments made in the Undertakings was understood clearly by the employees affected and so a simple code of practice was needed, backed up by training and support services for employees;

3. an Equality of Access Board (EAB): this body provided an independent means to monitor the implementation and administration of the Undertakings, to ensure that BT remains compliant with its commitments. Although it is a body internal to BT, its independence comes from the fact that three of its five directors are required to be independent of BT.

The purpose of these organisational changes was to remove the incentive to discriminate and so to facilitate the implementation of equivalence of input. Openreach managers have a set of incentives that are not connected to the overall performance of BT, but only to the performance of Openreach. In theory at least, this should encourage managers only to consider their own division, rather than the effect of their decisions on the profitability of other divisions or the business overall.

9.3.5 Parallel actions

The signing and implementation of the Undertakings were not the only actions taken by Ofcom to attempt to stimulate the take up of LLU and therefore change the competitive dynamics in the UK market. Two other actions were important: Ofcom’s review of the wholesale local access market (WLAM) and the setting up of the Office of Telecoms Adjudication (OTA).

In May 2004, Ofcom began its market review of the WLAM in line with its obligations under the CRF. The review defined the market on technologically neutral grounds such that both copper local loops and the cable access networks fell in the same market definition. Ofcom found BT to have SMP in the relevant market and so imposed a number of ex anteremedies designed to ensure access to local loops by third parties on fair and reasonable terms.

For the purposes of this case study, the most important obligation placed on BT was that of cost orientation. Condition FA3 of the formal Notification required that BT provide network access for a price that was ʻreasonably derived from the costs of provision based on a forward looking long run incremental cost (LRIC) approach and allowing an appropriate mark up for the recovery of common costs including an appropriate return on capital employed.ʼ

To establish the appropriate cost oriented price, Ofcom also investigated BT’s weighted average cost of capital (WACC) calculating a separate WACC for BT’s low-risk local access network business and the rest of the company, and the value of BT’s copper network. Both these consultations provided Ofcom with evidence that allowed it to reduce the price of both fully- and partly- unbundled local loops.

Table 9.2 shows the development of the price of fully- and partially-unbundled loops from 2002–2009²⁶. The data show a sharp decline in the monthly rental average cost of the first year between 2003 and 2005 with some fluctuation of charges since then but at prices between one-half and two-thirds of the 2005 price.

Table 9.2 Cost of LLU, UK, 2002–2009

Data sources: European Commission, Implementation Reports 2003–2009.

The substantial reduction in the price of unbundled local loops would clearly have a significant impact on the economics of unbundling for competitive operators and may well have been at least as important as the functional separation of BT in encouraging investment by competitors.

The second parallel development was the establishment of the Office of Telecom Adjudicator (OTA) in 2005, now superseded by OTA2. The principal purpose of the OTA was to ensure that the processes for LLU and other ʻcurrent generationʼ access products (for example, wholesale line rental) were industrialised and ʻfit for purposeʼ. It was technically independent of both Ofcom and the industry although its accommodation was provided by Ofcom and its members were representatives of BT and its competitors.

The original OTA was established to ʻfacilitate swift implementation of the processes necessary to enable competitors to gain access to BT’s local loop on an equivalent basis to that enjoyed by BT’s own businesses. The Telecommunications Adjudicator will also be able to bring all parties together to find a prompt mediated resolution of working-level implementation disputes.ʼ

OTA2 has a slightly different objective: ʻOTA2 will facilitate the swift implementation of processes where necessary to enable a wider range of Communications Providers and End Users to benefit from clear and focused improvements, in particular where multi-lateral engagement is necessary.ʼ

The OTA2 website sets out a six point ʻvisionʼ:

1. the OTA2 will champion end user issues;

2. Communications Providers will benefit from a competitive telecommunications infrastructure based on Openreach products that has no operational barriers to success;

3. there will be implementation (as quickly as is reasonably possible) of new product functionality, features and services relating to In-scope Products that will be seamlessly introduced;

4. migrations between broadband and narrowband products of both BT and other Communications Providers will be seamless, timely and with minimal interruption to service for end users;

5. dips in operational quality performance of In-scope Products provided by Openreach will be unusual and will be proactively managed by Openreach to ensure the least impact on Communications Providers and end users; and

6. participation by Communications Providers in the OTA2 Scheme will be widespread and representative.

Although OTA2 mentions end users in its objectives, the scheme participants are all drawn from the supply side of the market with no user representatives. The main scheme participants are the larger communications providers: BT, Openreach, BSkyB, Cable & Wireless, Everything Everywhere, Exponential-e, Global Crossing, O2, Scottish and Southern, TalkTalk Group and Virgin Media. Smaller communications providers are represented through the Federation of Communications Services.

Equivalence of inputs and functional separation, reduced LLU prices and the OTA can be seen as a three-pronged strategy to encourage the development of LLU as the principal wholesale product for broadband access. It may not be possible to separate the effectiveness of any one part of the strategy and of course it may be that the three together were critical to ensure increased adoption of LLU. In the next section of this case study we examine the UK broadband market today, at both the retail and wholesale levels.

9.4.1 The retail market

Broadband penetration has increased substantially since July 2005 and now stands at 22.1 million lines or 83.7% of households²⁷. This level of household penetration places the UK ninth in the OECD countries and 6^th in the EU, behind Sweden, the Netherlands, Denmark, Finland and Luxembourg. South Korea, Iceland and Norway also have higher levels of household penetration than the UK.

Figure 9.2 below extends Figure 9.1 to cover the period 2002–2013. A comparison of the rate of growth of broadband lines in the UK before and after the Undertakings shows no significant difference: diffusion of broadband continues to show the classic ʻSʼ shaped growth. There appears to be a slowdown in the growth of broadband in the wake of the 2008 financial crisis, with growth resuming in late 2010.

Figure 9.2 Broadband Penetration, UK, 2002–2013

Data sources: ECTA; Ofcom.

The retail broadband market has also seen substantial consolidation amongst suppliers. The four largest suppliers (BT, Sky, TalkTalk and Virgin Media) now have a combined market share in excess of 90%. At the time of the Undertakings, neither Sky nor TalkTalk was a significant player in the retail market, so both have entered the market on the back of an improved climate for LLU.

Sky’s market growth has been largely organic, benefiting from its strong position in the Pay-TV market to cross sell broadband to its existing customer base. TalkTalk Group, by contrast, has been acquisitive, acquiring the UK customer bases of AOL and Tiscali.

Table 9.3 shows various acquisitions that have taken place in the market over the period 2006–2009.

Table 9.3 Selected ISP mergers, UK, 2006–2013

Data source: Ofcom Communications Market Report 2013.

Ofcom explains the spate of mergers and acquisitions in the sector by the increased need for scale as a result of the increase in the uptake of LLU. For each unbundled exchange, the unit costs fall with each additional subscriber, meaning that scale is important for an ISP operator to be profitable, compared with using wholesale bitstream products from BT.

Whilst consumers’ choice of supplier may have diminished since 2006, consumers have benefited from an increase in the average connection speeds available.

Figure 9.3 shows the average actual broadband data rates for the period 2009–2013, which has grown steadily from 4 Mbit/s in 2009 to over 14 Mbit/s in 2013. Between 2012 and 2013 there was an exceptionally large increase in actual access data rates as more customers signed up to ʻsuperfastʼ broadband products based on fibre to the cabinet or DOCSIS3.

Figure 9.3 Average broadband connection data rates, UK, 2009–2013

Data source: Ofcom.

This increase in average connection data rates has largely been driven by the upgrade of DSL lines from ADSL to ADSL2⁺ and by the upgrade of the Virgin Media cable network to DOCSIS3.

Table 9.4 below shows a selection of super-fast broadband implementations and trials as identified by Ofcom in July 2009.

Table 9.4 Selected super-fast broadband implementations and trials, UK, July 2009

Data source: Ofcom Communications Market Report 2009.

Since July 2009, there have been a number of further announcements, in particular by BT and Virgin Media.

In October 2010, Virgin Media announced plans to upgrade to 100 Mbit/s from December 2010 with the entire network being upgraded by mid-2012²⁹. In March 2011, Virgin Media announced that its 100 Mbit/s service had passed one million homes and was on track to meet the 2012 deadline. In November 2013, Virgin Media announced plans to increase the access data rate to over 150 Mbit/s to all of the 12.5 million homes its network passes in 2014³⁰.

BT has responded to Virgin Media’s various upgrades, and arguably to political pressure, by launching Fibre to the Home (FttH) and Fibre to the Cabinet (FttC) products, which it retails under the brand ʻInfinityʼ. This fibre based service provides access data rates of up to 40 Mbit/s. Infinity was first trialled in exchanges in London, Cheshire and Glasgow and in January 2014 was available in around 1,900 local exchange areas covering over 75% of UK homes³¹.

In January 2013, according to the EC Broadband Scorecard, 14.5% of broadband lines provided data rates of 30 Mbit/s up to 99 Mbit/s, while 0.9% provided data rates of 100 Mbit/s or above.

9.4.2 Broadband services

With the growth in the average access data rate has come a change in how the Internet is used. One of the most important applications that demands high bandwidth is ʻcatch-up TVʼ, through services such as BBC i-player, and the equivalent from the other TV channels, which has enjoyed particularly strong growth. In March 2013, there were 272 million requests for TV and radio programmes on BBC i-Player, up from 78 million in 2009³². Equivalent data on ITV Player were not available.

BT has also entered the TV market offering IPTV over its FttC/H network. In 2013 BT secured the rights to show Champions League football matches live with a bid of over £800 million putting it squarely in competition with Sky’s and Virgin Media’s TV offerings. In fact, over 2013 there has been a noticeable shift in the locus of competition in broadband markets from Internet access to TV, with products such as ʻSky plusʼ and Virgin Media’s TiVo becoming increasingly popular.

9.4.3 The wholesale market

Whilst there have been many changes in the retail market, it is perhaps the wholesale market that has seen most change since the Undertakings were signed.

In 2006, 2010 and 2013, Ofcom conducted market reviews of the wholesale broadband access (WBA) market . This market lies at the intermediate level between the wholesale local access market (WLAM) and the retail broadband market (RBM). Whereas BT and Virgin Media self-supply the whole broadband value chain, most other ISPs operate only in the WBAM or retail market. LLU operators enter at the WBA level, buying unbundled local loops as their input, while retail ISPs enter at the retail level, buy bitstream access either from BT or an LLU provider that operates in the WBA market, as illustrated in Figure 9.4. It should though be noted that most LLU operators also buy bitstream access from BT in areas where it is uneconomic for them to place their own equipment in exchanges and purchase unbundled loops.

Figure 9.4 Broadband market structure, UK, 2013

Legend: WNIA: Wholesale Network Infrastructure Access (Market 4 in the EC 2007 Recommendation); WBA: Wholesale Broadband Access (Market 5); RBA: Retail Broadband Access (not included in the 2007 Recommendation); VM: Virgin Media (the cable operator).

When Ofcom’s predecessor, Oftel, first reviewed the WBAM in 2003, it was only able to identify one national market³³ and Oftel found BT to have SMP in that market. By the time Ofcom reviewed the market again in 2006 and 2010, it found there to be three geographic markets based on the number of LLU operators plus Virgin Media present in exchange area. According to the 2010 market definition the three markets are defined as:

1. Market 1: exchanges where only BT is present (11.7% of premises);

2. Market 2: exchanges where two Principal Operators (POs) are present or forecast and exchanges where three POs are present or forecast but where BTs share is greater than or equal to 50 per cent (10.0% of premises); and

3. Market 3: exchanges where four or more POs are present or forecast and exchanges where three POs are present or forecast but where BTs share is less than 50 per cent (77.6% of premises).

In the final statement Ofcom found BT to have SMP in Markets one and two, but no firm was found to have SMP in Market 3. This means that in exchange areas covering more than three quarters of all premises, BT is no longer dominant. Although the market definitions and size of the markets was somewhat different in the 2006 WBAM review, the finding of SMP was the same.

By 2013, the market had developed yet further and Ofcom found only two markets:

1. Market A: exchange areas where there are no more than two Principal Operators (POs) present or forecast to be present, which accounts for 9.6% of UK premises.

2. Market B: exchange areas where there are three or more POs present or forecast to be present, which accounts for 89.7% of UK premises³⁴.

This finding is a major change from the 2003 market review. Ofcom found that effectively competitive markets were operating below the retail level and thus the retail market in some 90% of the UK was not dependent on regulation at the wholesale level, albeit it is dependent on regulation at the LLU level.

This change in the market structure, and thus the finding of SMP, has come about because ISPs have substituted LLU for bitstream or wholesale access. TalkTalk Group now has over 2,700 exchanges enabled, covering some 24 million homes within 5 km from the exchange, 97% of all households. Sky has enabled over 2,300 exchanges covering 23.3 million homes within 5 km³⁵.

Figure 9.5 shows the number of wholesale copper access lines, i.e., those not offered by BT, by type: resale, bitstream and LLU. Resale lines peaked in January 2007 as LLU began to take an increasing share of the market. Until January 2006 almost no customers accessed broadband via LLU, but by January 2008 LLU was the most popular single method of wholesale copper access and by July 2010 two-thirds of wholesale copper access lines were via LLU. In July 2010 some 29% of all retail access lines were via LLU, whilst bitstream and resale combined reached around 22%.

Figure 9.5 Wholesale copper access methods, UK, 2002–2009

Data source: Based on ECTA Broadband Scorecard.

Over the same period, cable’s share of the market has declined from 59% to 20%. In part, this decline is due to BT extending its broadband availability to around 99% of homes whilst cable still only reaches about 55% of homes: BT’s larger physical reach ensures that twisted copper wire has been able to gain a larger market share.

What we have seen in the UK therefore is a dramatic change in the nature of competition from one based on a mix of cable and the reselling of BT’s bitstream products, to one where LLU has a significant and growing market share with unbundled loops largely replacing bitstream.

This change in the wholesale market is important as LLU allows ISPs considerably more control over their own products. Whilst care should always be taken over simple correlations, especially over time, Figure 9.6 shows a strong correlation between LLU as a share of all competitive copper access lines and the weighted average access data rate enjoyed by users. However, it should be noted that the greatest percentage increase in access data rates happen when LLU had only a very low market share (less than 10%).

9.6 Relationship between LLU and average access data rate, UK, 2002–2008

Data source: Ofcom.