Ofcom’s definition of Significant Market Power (and porting)

Simon Woodhead

Simon Woodhead

16th August 2015

We’ve just responded to Ofcom’s legal direction to provide commercial information on the call charges we’ve levied on BT and others for the last 3 years for our own number ranges and those of Virtual Interconnect customers. This is in preparation for the next Narrowband Review and presumably to assess the scale of damage they did with the last one. In doing so, we came across something that had bemused us in the last one and provides insight to Ofcom’s “logic”. We thought we’d put it here as it aptly illustrates quite a lot!

If Ofcom declares an organisation has “Significant Market Power”, it can effect a remedy to address that. It made sense in the context of a former state monopoly and continues to do so in markets that the incumbent continues to exert, erm, significant power in the market. Where it makes no sense whatsoever is in the context of a small Communications Provider with some number ranges, or less so if that CP is not even trading. This was the context it was applied in the last Narrowband Review. We found the following in the 2013 review which shines some light on the “thinking”:

“We concluded in the 2013 Narrowband Statement that given our market definition each number range holder has 100% of the market for calls terminating on its numbers. We found there was unlikely to be any incentive for a CP to allow another CP to terminate calls to its number ranges (in effect giving up its monopoly) and there was insufficient countervailing buyer power to counteract the terminating CP’s position of strength as a unique provider of termination to the number range in question. As such, we concluded that each CP held SMP in respect of wholesale call termination to its number range.”

Any market requires supply and demand, and the combination of the two sets the price and level of consumption. Telecoms is slightly more complicated in that there are other links in the chain but the fundamentals are the same. If we were to try and set a price above what the market thought was acceptable then there’d be no demand. In practice BT simply refuse to add a number range at anything above the Ofcom directed termination rate and if they refuse, given their capacity as former incumbent, one might as well not bother. If BT do build the range, how could one then impose a higher price on anybody else in the market when they have the option of transiting BT to get there? There is some mutual win-win ground in between in splitting BT’s transit charge but the fundamentals remain unchanged: by virtue of their dominant position BT set the basic price even if they’re not in the call flow.

Ofcom’s view of the world is that if I am a man who makes biscuits I have absolute control over the price I charge for those biscuits. Because nobody can eat my biscuits unless they agree to my price, I have Significant Market Power in relation to my biscuits. In the language of bureaucrat, utterly divorced from reality, and pulling a very funny face that sort of makes sense. In the real world I make biscuits because I want to sell them!! If I set my price too high I will sell few or none and be out of business so why on earth would I!? I have very limited power in the sale of my biscuits unless I am the biggest biscuit producer in the market, far bigger than any of my customers.

Telecoms isn’t nearly so simple as biscuit sales in that I don’t just need to find a price equilibrium to sell enough biscuits to make a profit, I need to be in the position that anyone anywhere fancying a biscuit is able to buy one of mine. If they cannot buy one of mine I have no business. The power therefore lies with those that provide access to my biscuits and that power is proportionate to their market share and my business is about supplying them within those price constraints.

So many areas of actual significant market power were neglected in the last Narrowband Review that we dread the next one. They can only deprive CPs of 86% of income once but they can do other crazy things in respect of the former incumbent – removing regulatory controls in certain places for example and the price being allowed to increase to extortive levels, enabling them to promote their unregulated managed services as viable alternatives. We can hear the twisted justification for doing so now and do not look forward to that review given the utter lack of sense, reason, and market awareness that has preceded it.

One area we concede CPs do have actual SMP is in respect of Number Portability – if a customer wants to leave their service and that CP hasn’t provided the means to do so, they’re stuck. It is a good job therefore that Ofcom has a key rule for that: GC18. It is a shame though that they a) rendered porting loss-making in the last Narrowband Review by allowing BT’s revenue/charge (APCCs) to remain higher than the new rates they imposed on CP’s because it was “out of scope for this review”, b) they have done absolutely nothing to make the process in any way operationally functional or first-world and c) put disproportionate resources into avoiding doing anything about blatant (seriously) breaches of that rule with, in our opinion, utter contempt for the harmed end-user. That last point will be a blog post all of its own in the future, complete with an astounding email thread once non-prejudicial, as frankly we’ve had enough of them meddling and causing harm in the market, while end-users who they are there to protect are being shafted and they refuse to act! In addition to our own experience we have a few FOI requests in to assess the extent to which they do anything when given blatant reports of abuse. Right now we think the telecommunications market would be a healthier, happier and certainly safer place without Ofcom in it and that is a very sad state of affairs.

Related posts