The European, Middle Eastern and African Antitrust Review 2018

United Kingdom: Telecoms

11 August 2017

Norton Rose Fulbright LLP

The dynamic and ever-changing nature of technology is a well-observed feature of telecommunications markets. It underpins the evolution of consumer expectations and the products offered by communications service providers, and is therefore the foundation of competition that delivers innovation, choice and efficiency in these markets. The challenge for policymakers and enforcement agencies is to ensure that competition policy and regulation provides a level playing field for competitors to deliver these outcomes to consumers. Traditionally, in simple terms, this has meant providing regulated access to the legacy copper networks and maintaining market structures in mobile technology based on multiple competing networks.

This traditional approach has recently been - and continues to be - subject to challenge. Surprisingly it has not been the result of that catchphrase of the 2000s - ‘convergence' - between mobile and fixed services, although it might be argued that the proliferation of faster mobile data and superfast broadband is leading towards a convergence of sorts. Rather, the challenge for network operators (fixed and mobile) follows from the enormous costs faced in upgrading and rolling out new technology networks. This has to be funded in a world where margins remain under pressure and there is a continual threat of customer disintermediation, for example, from device makers and over-the-top service providers. Network operators face the challenging task of having to justify the cost of generational investments in new technology networks to shareholders without any certainty that consumers will be willing to pay significantly more for the infrastructure to meet their hunger for data, for greater bandwidth and for faster speeds. The only certainty might be of the emergence of new technology competitors with models that ride the coat-tails of the operators' investments in these new telecommunications highways - which in turn need to be taken into account in business cases for investments in new networks.

One way that incumbent telecommunications operators across Europe have been looking to meet these challenges is through consolidation - vertical mergers (such as the 2016 acquisition of EE by British Telecom (BT) in the UK) to integrate fixed and mobile businesses to achieve costs synergies and bring new products to market, network sharing agreements, and (where achievable under competition law rules) horizontal mergers between mobile operators to reduce costs and finance new infrastructure investments. At the same time, smaller competitors have sought to achieve wholesale access to next-generation networks on a similar basis to older technology networks so they can continue to compete for customers.

These developments present new challenges for competition and regulatory policymakers. Calls for greater tolerance of market concentration in mobile markets has put competition authorities under pressure to review mergers that increase market concentration, to allow deals that will deliver consumer benefits and at the same time protect competition. In recent years this has seen the European Commission review four-to-three mergers in mobile markets in Austria, Ireland and Germany - clearing each deal on the basis of a similar approach to concessions that preserves competition from mobile virtual network operators (MVNOs) and potential new entrants. However, a further four-to-three mobile merger - but this time in the UK (Hutchison's proposed acquisition of Telefónica's UK ‘O2' business) - was blocked by the European Commission in 2016, suggesting a stricter approach to remedies that are required to achieve clearances in Brussels.

This wave of vertical and, in some countries, horizontal consolidation also put pressure on regulatory authorities in their approach to spectrum auctions and spectrum re-farming. There are also challenges for regulators to ensure that ex ante rules are fit for purpose for next generation networks - so that wholesale access provides competitive pressure at the retail level without curtailing the investment incentives for the owners of fibre networks.

Since the last version of this chapter, ‘Brexit' (the UK's decision to leave the European Union) has introduced uncertainty across industries, leaving a question mark hanging over the UK's long-term role in the digital single market, but perhaps introducing opportunities for UK policymakers and domestic market players to shape the market in a way that best suits the individuality of the UK market. The long-running BT/Openreach saga has also entered a new chapter, with BT having agreed with Ofcom to separate Openreach, turning it into an independent entity. While Ofcom has confirmed that BT's commitments address its concerns, it remains to be seen whether the separation will put an end, for the time being at least, to concerns about BT's incumbent position in wholesale fixed markets. We describe these developments and also provide a roundup of other recent developments in competition law and related regulatory matters in the telecoms sector in the UK.

Mergers

Recently we have seen the announcement and subsequent competition review of two significant deals between major players in the UK telecoms market, which together (or even by themselves) had the potential to dramatically change the competitive landscape. One of the deals - BT's acquisition of EE - was cleared by the UK's Competition and Markets Authority (CMA) in January 2016, while the other - Hutchison's acquisition of Telefónica UK - was blocked by the European Commission in May 2016 and appealed to the European General Court in July 2016.

BT/EE

The BT/EE merger has combined the UK's largest fixed-line operator, and also the largest wholesale provider of many of the key inputs for communications networks (including mobile backhaul products) through its separately managed arm Openreach, and EE, the UK's largest mobile operator with the country's most expansive 4G network. EE itself was created by the merger of the UK mobile operations of Deutsche Telekom and Orange, which was cleared by the European Commission in 2010.

On 5 February 2015 BT announced a deal to purchase EE from Deutsche Telekom and Orange. The CMA launched its merger inquiry on 18 May 2015 and, after considering the parties' fast-track request, referred the investigation to a Phase II review on 9 June 2015, with its final report published on 15 January 2016 (after an eight-week extension to the standard statutory deadline). The deal closed later in 2016.

Through the transaction BT has moved back into the mobile market, a market which it exited in 2002 when it spun off its Cellnet mobile division, which became O2 and is now Telefónica UK. BT now has the ability to offer mobile, fixed and TV bundles in the UK - in competition with other operators that already offer triple- and quad-play bundles. The CMA focused its attention on 10 theories of harm, and the most widespread concern expressed by competitors regarded BT potentially favouring its own mobile business through access to its regulated and unregulated backhaul.

In August 2015 Ofcom (which worked closely with the CMA during the investigation) responded to concerns in a submission to the CMA by commenting that BT could not discriminate against competing wireless operators due to Ofcom's rules requiring it to provide access to Openreach on the same terms, and at regulated prices, to all customers. These requirements would also make it difficult for BT to discriminate against other mobile operators that use its mobile backhaul services. In addition, market forces (such as operators that use Openreach's regulated inputs, and those that provide their own backhaul) would also add a check and balance, according to Ofcom.

The merger was also significant for three procedural reasons.

First, the size and value of the transaction is unusually large to fall for review by the CMA under the UK merger control regime. Typically, a transaction on this scale would fall within the jurisdiction of the European Commission in Brussels, as have nearly all of the significant telecoms mergers in recent years. This has allowed the European Commission to build up a team with experience in reviewing telecoms markets and to apply a consistent approach to analysis and remedies. However, in this case, the specific UK focus of both parties meant that the CMA had jurisdiction under the ‘two-thirds' rule in the EU Merger Regulation, and the transaction fell for review pursuant to its Enterprise Act 2002 powers.

Second, the merger inquiry is the first time that the CMA has fast-tracked a merger to a detailed Phase II investigation. This option is provided under the Enterprise Act, at the request of the parties, for more complex transactions where it is clear that a Phase I clearance will not be forthcoming. It allows the parties to avoid rehashing arguments that are necessarily complex and are likely to require a detailed, in-depth assessment by the CMA. On 18 May 2015, when the CMA launched its formal investigation, it announced that the parties had requested the fast-track reference. The CMA subsequently undertook a short-form Phase I assessment, including consultation, to satisfy itself that the test for a reference to Phase II was met - that it may be the case that the transaction may result in a substantive lessening of competition in any market in the UK.

Third, a further indication of the complexity of the issues that were considered in assessing the transaction is that it is the first time the CMA has put out a call for third-party comments prior to receiving a notification and formally opening the merger inquiry process. This occurred in pre-notification discussions, which are typically private discussions between the CMA and the parties to confirm that the notification will include all the information that the CMA will need to make its Phase I assessment within the 40-working-day statutory time limit. Given the strict timetables now in place for its Phase I investigations, the CMA may look to make greater use of the pre-notification period in this way to ‘pre-load' its work in other suitable merger situations.

Hutchison/Telefónica UK

On 25 March 2015 Hutchison Whampoa (parent of the smallest UK mobile operator Three) announced it had agreed to purchase Telefónica's UK mobile business (which predominately trades under the O2 brand). The deal was notified to the European Commission on 11 September 2015, referred to a Phase II review on 30 October 2015 and blocked on 11 May 2016 (after an extension to and suspension of the statutory timetable). The merger would have created a larger combined mobile network operator than EE by reducing the UK mobile market from four main players to three, together with several MVNOs. In July 2016, Hutchison lodged an appeal against the Commission's decision with the European General Court, although any victory may only be pyrrhic; as in UPS/TNT, the competitive landscape will likely have moved on by the time this appeal, and any subsequent appeal to the ECJ, have worked their way through the EU court.

Unlike the BT/EE transaction, the merger fell squarely within the jurisdiction of the European Commission, although very strong submissions were made by the CMA and Ofcom to the Commission concerning the appropriate review of the deal.

In October 2015 the CMA requested under article 9 of the EU Merger Regulation that the Commission refer the case to the CMA, on the basis that (i) the impact of the potential merger would be limited to UK retail and wholesale consumers; (ii) that it had experience of investigating telecoms mergers (as BT/EE was ongoing at this time); and (iii) the BT/EE and Hutchison/Telefónica UK cases were linked. The request was unsuccessful, in line with the Commission's response to requests in earlier telecoms mergers, including the Telefónica Deutschland (Telefónica)/E-Plus deal in Germany (2014) and the Orange/Jazztel deal in Spain (2015). The CMA's 2016 concurrency report noted that the CMA and Ofcom worked closely in formulating the request, and following the Commission's refusal to refer the case, the CMA made submissions (with Ofcom's assistance) to the Commission on aspects of the merger and potential remedies.

This request was followed by public statements by the chief executives from both agencies. In January 2016, Ofcom's Chief Executive Sharon White set out in the Financial Times Ofcom's objections to the potential merger, having also put its arguments to the European Commission. In the piece, Sharon White notes that ‘competition, not consolidation, has driven investment' by UK mobile companies, who have been investing billions in rolling out 4G while maintaining cash flow margins above 12%, and sets out Ofcom's key concerns - which are heavily reflected in the Commission's decision. In April 2016, Alex Chisholm, Chief Executive of the CMA, wrote to the Commission, setting out a possible remedy for the transaction by calling for Hutchison to divest (to an appropriate buyer, approved by the Commission) either Three's or O2's mobile network business, including ‘infrastructure and sufficient spectrum'.

The significance of the European Commission's prohibition decision in the case was the apparent departure from the approach it had taken in reviewing and clearing other four-to-three mergers in recent years, for example in Germany,1 Ireland2 and Austria.3 In particular, the Commission concluded that - absent a clear structural remedy to create a fourth effective competitor - the detriment to competition was such that it should be prohibited. The Commission came to a different conclusion in this case for the following reasons:

  • The merged entity would have been part of both of the UK's network-sharing agreements, Mobile Broadband Network Ltd (the joint venture between Hutchison's Three UK operation and EE), and Beacon (the joint venture between Vodafone and O2). This would have allowed the merged entity to have sight of the network plans of its remaining competitors, Vodafone and EE, and would have hampered the future development of mobile infrastructure in the UK (for example, through rolling out 5G technology) - all to the detriment of consumers and businesses.
  • Reducing the number of mobile network operators from four to three would have had adverse consequences for MVNOs whose operations rely on network infrastructure. With fewer network operators willing to host them, the MVNOs would have had a weaker negotiating position for obtaining wholesale access terms.
  • The combined entity would have become the UK market leader, with a share of over 40%. The Commission decided that this would reduce the entity's incentives to compete with Vodafone and EE, and would have reduced choice and quality of service for UK consumers. The Commission's analysis also showed that the reduction of competition would have led to higher retail mobile prices for all UK operators.

Appeal

Hutchison has appealed to the European General Court to annul the Commission's decision, claiming that the Commission committed several errors of law, manifest errors of assessment and infringements of essential procedural requirements in:

  • its interpretation and application of the legal test for the horizontal non-coordinated effects in the market for retail mobile telecommunications services in the UK;
  • its analysis of the counterfactual scenario;
  • its assessment of the horizontal non-coordinated effects arising from network-sharing;
  • its assessment of the horizontal non-coordinated effects arising in the wholesale market for access and call origination on public mobile networks in the UK; and
  • its evaluation of the commitments offered by Hutchison in respect of concerns relating to the retail and wholesale mobile telecommunications markets in the UK.

It remains to be seen what Telefónica's next step will be in the market - but given the success of BT/EE, it could be through a vertical, rather than horizontal, combination. While Telefónica has, for now, decided to retain ownership of O2, it has been reported that private equity outfits and telecoms companies (such as Sky and Liberty Global) have been considering whether to bid for O2 - perhaps to bolster quad-play competition against the newly merged BT/EE.

Capita/Vodafone

In February 2017 Vodafone announced the sale of its legacy paging business to Capita. The deal had been notified in March to the CMA, which in May announced its decision to refer the deal for a Phase II investigation. The referral was based on a concern that the merger might result in a substantial lessening of competition, price rises and reduced quality of coverage, given that Vodafone and Capita were the only two suppliers of wide-area paging services in the UK. Paging technology is of course old and far removed from the world of messaging apps and other data services, and a number of other European countries only have a single paging business in operation to serve legacy customers, if any such service at all. The decision to refer the deal for a costly Phase II investigation may have appeared disproportionate. Indeed, the result has been that Vodafone instead decided to close its paging business - perhaps resulting in the same, or worse, outcome for pager consumers than may have been achieved if the deal had been cleared at Phase I.

Enforcement

Competition enforcement investigations - concerning articles 101 and 102 of the Treaty on the Functioning of the European Union and the equivalent UK provisions, the Chapter I and II prohibitions under the Competition Act 1998 - are relatively rare. However, a feature of the UK system is that Ofcom, the telecommunications regulator, has concurrent powers to enforce competition law within the sector.

The CMA monitors regulators that hold concurrent competition powers through its annual concurrency report, and last year's government budget announcement included a proposal that the CMA, as part of this role, is required to estimate the impact of its contribution to competition enforcement cases led by sector regulators, monitoring benefit to cost ratios - adding further pressure for concurrent regulators such as Ofcom to use their powers. In the government's Autumn Statement 2016, it was announced that £0.7 billion would be spent to support the market to roll out full-fibre connections and future 5G communications. In the latest spring budget, published in March 2017, the government set out its intention to bring forward a green paper to examine ‘inefficient or unfair markets' and its intention to legislate at the earliest opportunity to allow consumer enforcement bodies, such as the CMA, to ask the courts to order civil fines as a deterrence measure. The legal basis on which such action would be taken remains unclear.

Ofcom has exercised its concurrent powers in a number of cases over the last 10 or so years, in particular looking into complaints alleging an abuse of dominant position by incumbent communications providers. In the 2017 concurrency report, the CMA noted that in the past year Ofcom has focused on implementing the Strategic Review of Digital Communications, securing the separation of Openreach from BT, progressing its wholesale local market access review, closing its investigation into BT's compliance with cost-orientation obligations and finalising its decision in the Ethernet investigation.

The most recent telecoms enforcement case brought by a third party concerns a complaint made in 2013 by TalkTalk, predominately a fixed-line and broadband operator, alleging that BT was abusing a dominant position by failing to maintain a sufficient margin between its upstream (wholesale) costs and downstream (retail) prices in the superfast broadband access market. TalkTalk alleged that BT was therefore operating an abusive margin squeeze that was detrimental to its competitors, contrary to the Chapter II prohibition against abuse of a dominant position.

Ofcom ultimately closed the competition case in October 2014, on the basis of a decision that there were no grounds for action. Its analysis of BT's costs and revenues, including the net costs of the television channels provided by BT Sport (which BT currently offers free of charge to its broadband consumers), concluded that BT (at the time) would make a sufficient margin to cover its downstream costs (including in providing ‘free' sports content). Ofcom believed that this margin would enable an equally efficient operator to compete with BT's offerings. Subsequently, however, Ofcom introduced ex ante regulation to prevent BT in future applying a margin squeeze in relation to virtual unbundled local access (VULA), which was unsuccessfully appealed by both TalkTalk and BT to the Competition Appeal Tribunal (CAT), as discussed in the VULA margin squeeze control section.

Further, in its 2017/2018 annual plan4 Ofcom set out its long-term goals, which include its statutory obligation to promote competition and ensure that markets work effectively for consumers, through, among other things:

  • implementing the conclusions from its Digital Communications Review, including monitoring the implementation and effectiveness of BT's voluntary notification to strengthen Openreach's independence;
  • increasing network capacity by awarding further mobile spectrum (2.3GHz and 3.4GHz bands);
  • enable investment by competing operators in super-fast and ultra-fast fixed-line networks through improved duct-and-pole access;
  • promote competition for fixed-line services through strengthening Openreach's independence; and
  • improving fixed and mobile coverage and quality of services.

These objectives will be relevant to Ofcom's assessment of whether new cases should be prioritised as enforcement investigations.

New regulation, regulatory proposals and strategic reviews

As required under the EU telecommunications framework, Ofcom conducts regular reviews of specific telecommunications markets to identify and remedy areas of limited competition. Several of these are currently ongoing or at formative stages. In addition, Ofcom's programme of work includes a forward-looking strategic review that attempts to address the challenges for policy, competition from new technologies and market evolution.

Business Connectivity Market Review

In the Business Connectivity Market Review (BCMR), undertaken every three years, Ofcom assesses the markets for the provision of leased lines in the UK. These are lines used for dedicated point-to-point transmission services, including by mobile and fixed service providers. Ofcom undertakes a two-stage assessment, first analysing which providers have ‘significant market power' (SMP) in each product market and then refining or imposing regulations to address concerns about the effects on competition. In May 2015, Ofcom published its provisional findings for consultation, in which it concluded that BT has significant market power in a number of wholesale markets; that wholesale price controls should apply in respect of leased lines; and that BT should provide access to its ‘dark fibre'. In April 2016, Ofcom published its final statement, setting out its analysis of the relevant markets and the remedies that it is imposing to address the competition issues it has identified - including imposing price controls on BT. This has subsequently been appealed by BT, TalkTalk and CityFibre (see below).

The regulator believes price controls are necessary to prevent BT imposing excessive charges on buyers and to incentivise BT to achieve efficiency gains. Ofcom has imposed inflation-linked controls on the wholesale prices charged by BT for products using leased lines. This is intended to protect downstream competition for the provision of high-speed data links for businesses, superfast broadband and mobile services.

Ofcom has found that BT's quality of service in providing ethernet leased lines is not acceptable - and that its acceptable quality of line repairs could deteriorate if BT simply diverts resources to improving the quality of provision. While recognising that BT is already working to address these issues, Ofcom has imposed minimum standards of service on BT to ensure that its concerns are properly addressed.

Ofcom's dark fibre proposals concern the provision of next-generation fixed broadband and mobile backhaul. ‘Dark fibre' refers to fibre-optic lines that a communications provider has put in the ground to reduce long-term investment costs by future-proofing against expected increased demand in bandwidth. Access is controversial because operators that make the investment typically want to maintain future capacity for their own use, and tend to argue that providing access is a short-term remedy rather than encouraging wider investment from a variety of telecoms players. Ofcom has, however, identified the potential that access to dark fibre would have to allow competing companies to take direct control of their connections using their own connection equipment, requiring the provision of physical access only, rather than through managed wholesale services.

Ofcom imposed remedies that companies providing leased lines should be granted access to BT's dark fibre (by placing their own equipment at either end of that fibre cable). Ofcom has imposed requirements for BT to provide dark fibre in a manner and at a price consistent with its 1GBit/s wholesale ethernet leased line services (ie, from October 2017, BT will be required to provide dark fibre access at the same prices as the 1GBit/s active service, minus the long-run incremental costs of the active elements of that service - a pricing approach Ofcom describes as ‘active-minus'). BT is likely to continue to oppose the new proposed controls.

Consistent with its overall strategy to improve communications services for consumers rather than increase regulation, Ofcom states that it is deregulating where BT does not have SMP, namely where there is a sufficient choice of alternative infrastructure to ensure healthy competition. One such opportunity to deregulate is the provision of modern technology leased lines in the central London area. It has also deregulated certain types of older technology, lower bandwidth, leased lines, and has released a report focusing solely on this type of line.

The BCMR's short-term remedies are balanced by longer-term commitments set out in the strategic review of digital communications, some of which overlap, or complement each other, in the two reviews. For example, while the BCMR sets out remedies for dark fibre access, in its strategic review of digital communications (which covers a 10-year, rather than three-year, period) Ofcom has committed to greater physical infrastructure access (including access to BT's underground ducts) - which will help to encourage investment in building competing fibre networks, rather than encouraging market players to rely on the infrastructure of the few through shorter-term dark fibre access remedies.

Strategic review of digital communications

In March 2015, 10 years after completing its first strategic review, Ofcom announced its second-ever major review of the UK's digital communications markets, and published its initial conclusions in February 2016.

This review encompasses competition, investment, innovation and availability analyses in respect of the UK's broadband, mobile and landline markets. The review is wider than its three-yearly reviews of individual telecoms markets and is designed to ensure that communications services and providers are meeting the needs of consumers and businesses. Ofcom focused on three overarching questions that could result in significant changes in regulation:

  • how incentives for efficient private sector investment can be maintained and strengthened to ensure widespread availability and high quality of services;
  • what the focus should be in future competition policy for networks; and
  • whether there is scope for deregulation of networks and services downstream.

Ofcom's initial conclusions and action points are designed to ensure the UK is a ‘world-leading' digital economy over the next decade. Its key proposals included:

  • a strategic shift to large-scale investment in more fibre to premises, by opening up Openreach's infrastructure - creating more choice for consumers and reducing reliance on Openreach;
  • increasing operators' quality of service through publication of quality performance data, introducing automatic compensation and imposing more stringent minimum standards on Openreach (as seen above in the BCMR);
  • reforming Openreach's governance to increase its independence from BT, to assist it in serving equally all wholesale customers (as detailed below in the Openreach separation section);
  • working with the government to ensure a universal right to broadband for homes and small businesses, as well as increasing mobile coverage through obligations in spectrum licences;
  • providing more accessible and engaging information on services available to consumers, as well as improving the switching process - empowering them to make informed choices; and
  • deregulating and simplifying where the market no longer requires regulation (for example, as seen with certain leased lines in the central London area, as set out in the BCMR).

Through this review, Ofcom identified a number of workstreams for the year ahead. These include setting the new standards of quality of service for Openreach, detailing how access to Openreach's network can be provided, and engaging with the European Commission on these points, consulting with it on (i) the introduction of automatic compensation, and (ii) improving the switching process for mobile customers, and monitoring and publishing quality of service tables.

Duct and pole access

In April 2017, Ofcom launched a consultation on Openreach's duct-and-pole access product (physical infrastructure access (PIA)). The consultation proposes the imposition of ‘a specific access remedy in the form of PIA which would require BT to allow other telecoms providers to deploy their own networks in BT's underground ducts and chambers or overhead on its telegraph poles.' Ofcom's provisional view is to relax the current PIA usage restriction to allow ‘mixed usage'. The consultation remains open until 15 June 2017.

Openreach separation

Following its Strategic Review of Digital Communications, Ofcom decided in early 2016 that it was necessary to reform the structure of BT by separating Openreach as an independent legal entity. This was due to Ofcom's concerns that Openreach had an incentive to offer preferential treatment to BT over its other wholesale customers.

In March 2017, it was announced that BT had agreed to the legal separation of Openreach through a series of commitments that provide for Openreach to be incorporated as an independent legal entity with its own staff, management and board, its own assets and strategy, and independent control over its budget. Ofcom has confirmed that these commitments address their concerns and that further regulation will not be required to implement the changes.

VULA margin-squeeze control

In March 2015, as an outcome of its recent fixed markets access review, Ofcom decided to impose new obligations on BT which control the margin between BT's wholesale and retail prices for superfast (fibre) broadband. The new ex ante regulation has been designed to protect the retail competition that is provided through access to BT's next-generation fibre broadband network, via a wholesale product called VULA. The concern about the potential for BT to set an insufficient margin and squeeze competitors had been explored in Ofcom's investigation into the TalkTalk competition complaint referred to above. Although Ofcom concluded that there was no evidence that BT had applied a margin squeeze to TalkTalk, the new VULA control acknowledges that BT may have both the incentive and the ability to do so. Ofcom was particularly concerned about the risk that BT could apply a margin squeeze to gain market share as greater numbers of consumers migrate from standard to superfast broadband in the next few years.

A particularly contentious issue was Ofcom's assessment of the relevance of the cost of BT's acquisition of sports content, and BT's strategy of offering this free of charge to fibre broadband customers with bundled television. In response to comments from the European Commission on the draft VULA proposal, Ofcom revisited its cost assessment model, and has provided for a longer-term horizon for BT's cost recovery of sports content. Nonetheless, the final Ofcom decision was unsuccessfully appealed to the Competition Appeal Tribunal by each of TalkTalk and BT, as we explain below in the regulatory disputes and appeals section.

Spectrum

Ofcom continues preparations for the next spectrum auction, which will make available further spectrum for the mobile sector to meet consumer demand, in particular ever-increasing demand for high-speed data services and bandwidth. The released spectrum will allow companies to expand their 4G coverage and quality, and also allow development of 5G technology. The allocation of new spectrum will therefore inevitably affect the conditions for competition in the mobile market.

In May 2015 Ofcom published a statement and consultation regarding public sector spectrum release, which will award companies the 2.3 and 3.4GHz spectrum bands, which Ofcom notes could be suitable for providing very high-capacity data transmission. Potential bidders were asked to provide their views on how best to proceed with the auction, particularly in light of the BT/EE and Hutchison/Telefónica UK mergers that were being assessed at the time - Ofcom had suggested that it may release a lower volume of spectrum than originally planned, but this was not supported by stakeholders.

Following responses to its May 2015 consultation, Ofcom published a further statement in October 2015 that addressed stakeholders' responses, set out its conclusions on the auction design and reserve prices, and concluded that, given the demand for spectrum, the auction process would start in December 2015.

However, in December 2015 and following letters from Telefónica UK and Hutchison threatening judicial review proceedings against Ofcom's decision to commence the auction process prior to the Commission's merger decision, Ofcom instead released a statement that it would delay commencing the auction process until the European Commission announced the outcome of the Hutchison/Telefónica merger. Since then, the BT/EE merger was approved, while the Hutchinson/Telefónica merger was blocked. Three argues that there is an asymmetry in the market of the total useable spectrum currently held by operators: BT/EE has 45%; Vodafone has 28%; O2 has 15%; and Three has 12%. Three has been lobbying Ofcom to impose a spectrum cap of around 30% to prevent a new monopoly forming, which would hinder BT/EE and Vodafone's ability to bid.

Ofcom published a consultation on 21 November 2016 on the competition issues and auction regulations concerning the award of the 2.3 and 3.4 GHz spectrum bands, as well as notice of Ofcom's proposals to make regulations in connection with the award of spectrum. The key concern for Ofcom is the potential worsening of asymmetry in the amount of spectrum held by different operators as a result of the auction. Ofcom proposed a cap on the 2.3GHz band that is immediately usable at 255 MHz. This represents 42% of available spectrum of this band and is at the level of BT/EE's current mobile spectrum holdings (therefore BT/EE will not be eligible to apply for this band). There is no similar cap for the 3.4 GHz band.

The closing date for comments was 30 January 2017, but at the time of writing Ofcom is still in the process of publishing the non-confidential responses. After considering the responses, Ofcom is expected to publish a statement setting out its final decisions on competition issues, publish the final auction regulations and update the Information Memorandum. The 2.3 and 3.4 GHz spectrum bands are expected to be awarded by the end of 2017, but threatened legal challenges could delay this process.

One of the outcomes of the strategic review of digital communications was that Ofcom will assess how to impose new obligations on operators bidding for spectrum, to ensure that coverage is increased (particularly in rural areas). Ofcom expects that the 700MHz band, which is currently used to deliver digital terrestrial television (DTT) services and to transmit wireless audio PMSE devices, should be made available for mobile by 2022 (although Ofcom has stated that it aims to bring this date forward to the second quarter of 2020).

Ofcom is at an early stage in determining the possible use of the 3.6-4.2GHz band; however, in response to its 2016 call for input on the matter it concluded that while several responses focused on the potential to deploy mobile services in this band, Ofcom does not consider this band a high-priority candidate band for mobile services in the UK.

Secondary spectrum market

In its efforts to maximise efficient use of spectrum, in July 2015 Ofcom published a consultation on a new framework for assessing opportunities for spectrum sharing, and following active stakeholder engagement which sets out a wide range of views, in April 2016 Ofcom published the framework it will apply to future spectrum authorisation decisions to assess spectrum sharing opportunities. Ofcom says the framework will evolve as technology develops, but for now comprises three elements to help identify opportunities for sharing spectrum, which can broadly be categorised as: (i) identifying the characteristics of use of the spectrum; (ii) identifying barriers that limit the potential to share spectrum (notwithstanding that liberalisation of spectrum licences and the commercial, secondary market of spectrum trading and leasing are other tools outside of this framework that may assist with lifting such barriers); and (iii) identifying regulatory tools and market and technology enablers that (a) complement the characteristics of use and (b) overcome identified barriers, to enable spectrum sharing.

The Digital Economy Act 2017

The Digital Economy Bill was introduced in the House of Commons in July 2016, and received Royal Assent on 27 April 2017. It promises various consumer protection measures.

Among other things, the Act includes provisions for a universal service obligation, giving consumers the right to request fast broadband services; the powers of Ofcom to impose fines for failure to comply with licence commitments; compensation to consumers for failure to meet internet service requirements; the powers of the Information Commissioner's Office to impose fines on nuisance callers; and Ofcom's regulation of the BBC.

 

Regulatory disputes and appeals

Disputes and appeals concerning regulatory and competition issues have long been a feature of the UK sector. Disputes between operators are generally subject to first review by Ofcom, with decisions being heard in the CAT. In addition, changes in regulation resulting from Ofcom's reviews often provide fertile ground for appeals to the CAT for both fixed and mobile telecommunications companies.

VULA appeals

For example, in May 2015, BT filed an appeal with the CAT regarding Ofcom's approach to VULA margin in its fixed access market review decision of March 2015 (mentioned above). BT contested, among other things, Ofcom's analysis and claimed it was incorrect, because it failed to properly take into account the European Commission's views on the draft proposals to reflect certain costs of BT's sports content. BT further contended that Ofcom was stifling pay-TV competition by introducing a regulatory barrier to BT's expansion in the market because of how Ofcom requires BT to recover its fixed sports costs, as a competitor in the broadband/TV/fixed-line market would not necessarily need to incur the same sports content costs.

Sky and TalkTalk were granted permission to intervene in the appeal, on the grounds that BT's appeal, if successful, would have a direct impact on them as purchasers - although their involvement had been limited to their statements of intervention, rather than their proposals of assisting the Tribunal with its understanding of the superfast broadband market from their perspective.

A hearing on the non-specific price control matters took place in December 2015, and by judgment of 24 March 2016 the CAT dismissed this aspect of BT's appeal. By order of 5 January 2016, the specified price control matters were referred to the CMA (as is required under section 193(1) of the Communications Act 2003).

The entirety of the appeal referred to the CMA (but for one of BT's challenges regarding the length of the compliance period for the LRIC+ test) was dismissed.

The CMA's final determination on the price control aspects of BT's and TalkTalk's appeals was published on 13 June 2016 and the CAT subsequently issued a ruling in July 2016 disposing of both appeals in accordance with the CMA's determination, directing Ofcom to make the adjustments described in the CMA's determination.

APCCs appeal

On 15 January 2016, BT filed an appeal with the CAT against Ofcom's determination of 11 November 2015 to resolve disputes between BT and Gamma, and BT and Vodafone, regarding BT's average porting conveyance charges (APCCs) - finding that BT should have assessed costs on an LRIC, rather than LRIC+, basis. Ofcom found that the difference in calculations resulted in Vodafone and Gamma being charged around 50% more than they should have been since 1 January 2015. Ultimately, Ofcom found that BT should amend its charges and make repayments with interest to Vodafone and Gamma.

BT disputed Ofcom's findings, and Gamma argued that some of BT's grounds for appeal were time-barred. In its judgment of 4 November 2016, the CAT dismissed BT's appeal as well as Gamma's time-bar argument.

Final determination of the Ethernet appeals

On 4 May 2017 the Court of Appeal upheld the CAT's judgment on BT's appeal on the Ethernet disputes between BT and each of Cable & Wireless Worldwide (now Vodafone), Sky, TalkTalk, Verizon and Virgin, concerning BT's charges for Ethernet services between 2006 and 2011. Ofcom's finding that BT had overcharged for these services in breach of the SMP obligations imposed on BT by Ofcom was appealed to the CAT, which rejected the appeals. On the outstanding issue of the rate of interest payable in respect of BT's overcharges, the Court of Appeal found that Ofcom has power to award interest in resolving a regulatory dispute. Ofcom has therefore issued its final determinations.

In summary, Ofcom's final determinations calculated the correct amount of overcharge (approximately £94 million) and the correct amount of interest payable by BT on the overcharge (approximately £22 million), as well as the total amount repayable by BT to the other parties (also approximately £22 million).

BCMR appeals

In July 2016, TalkTalk, BT and CityFibre each appealed Ofcom's final statement on its BCMR review - both on various price control grounds, and as regards BT and CityFibre, market definition grounds. Price control matters were referred to the CMA, who handed down their final determination in April 2017, siding with Ofcom in the case of CityFibre's appeals, but in the TalkTalk appeal, requiring Ofcom to rethink its dark fibre access pricing methodology (which may not be achievable before the CAT's separate review of the dark fibre access remedy - in the meantime, the remedy should continue to be applied). The non-price control related appeals continue to be heard by the CAT.

Conclusions and predictions

There have been recent transformative changes to the structure of the UK telecommunications market, in particular through the cleared merger between BT and EE, and clarification from the European Commission regarding the suitability of four-to-three mergers in the UK telecoms market through the blocked merger between Hutchison's Three and Telefónica UK. A knock-on effect of these potentially market-altering mergers was that Ofcom had to consider the implications of the mergers for areas of regulation that were under review, for example, delaying the next spectrum auction pending the outcome of the Hutchison/Telefónica merger appeal and related potential legal challenges to awards of spectrum in the meantime. In addition, further consolidation or partnerships may follow as other competitors in the market develop their own strategies to deal with the challenges to new technologies and challenges from disruptive competitors looking to piggyback operators' investments in next generation networks. In particular, it is clear that horizontal mergers between mobile network operators are, under current market conditions, not possible in the UK, although vertical combinations may still present opportunities.

Regulators will need to continue to be nimble in developing competition policy and using regulatory tools to address competition in these fast-changing markets, and we will see further progress in the coming year as Ofcom implements through its annual plan its actions resulting from the previous year's BCMR and strategic review of digital communications. Theirs is an unenviable task - achieving a balance between the need to take decisive steps where intervention is required to protect competition, against the risks of getting it wrong at the outset with premature or excessive interventions that will impact negatively on the roll-out of next-generation networks and services and on the development of future innovations - potentially reducing the UK's competitiveness and attractiveness to businesses at a crucial time, in light of Brexit.

Further, Ofcom's regulations and charge controls, bringing Openreach's infrastructure to competitors on a more regulated basis, seems unlikely to cease in the coming year. For example, see Ofcom's continued drive towards the next Wholesale Access Review - in May 2016, Ofcom set out its proposals for its intended approach to cost modelling if estimates of the costs of fibre-based access are required for its upcoming Wholesale Local Access Market Review - the outcome of which could be that price regulation is imposed for fibre services - potentially paving the way for further private enforcement of price controls. In March 2017, Ofcom published two consultation documents which together form a set of proposals for the Wholesale Local Access Market Review: the first sets out Ofcom's market analysis, broad approach to remedies, and proposals for the access products BT will be required to provide; , the second sets out Ofcom's proposals to address quality of service issues on BT's fixed access network.

In light of last year's Wholesale Market Access Review 2010 dispute between TalkTalk and BT, and this year's BCMR appeals, private enforcement of Ofcom's regulations and charge controls has continued in earnest, and seems unlikely to cease.

For consumers, the development and roll-out of new technology networks bring exciting times - the ability to consume more content, in more places, at faster speeds, and the prospect of bundled product offerings. This, of course, is contingent on policy makers getting the balance right between measures to promote investment and innovation on the one hand, and setting rules and taking enforcement action to ensure that competition is not stifled and prices are not too high on the other. The recent reviews have sought to achieve this balance; it remains to be seen how the resulting actions work in practice.

  1.  Case M.7019 - Telefónica Deutschland/E-Plus.
  2.  Case M.6992 - Hutchison 3G UK Holdings Limited/Telefónica Ireland Limited.
  3.  Case M.6497 - Hutchison 3G Austria GmbH/Orange Austria Telecommunications GmbH.
  4.  https://www.ofcom.org.uk/__data/assets/pdf_file/0027/99621/Annual-Plan-2017-18.pdf.

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