The European, Middle East and African Antitrust Review

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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 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 higher 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 recently completed 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 earlier this year, suggesting a stricter approach to remedies that are required to achieve clearances in Brussels.

This wave of vertical and, in some countries, horizontal consolidation has 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.

The UK is often viewed as having market structures that facilitate effective competition in telecommunications – through the prototype regulatory rules for fixed wholesale access provided through the BT Openreach commitments, and through a strong four-operator mobile market with significant MVNO competition. As we describe in this chapter, the past 12 months have seen some significant changes in the UK telecoms landscape that could have significant implications for competition in the UK, through the outcomes of two significant mergers and new regulatory rules and market reviews that are likely to result in further changes yet. We describe these developments and also provide a roundup of other developments in competition law and related regulatory matters in the telecoms sector in the UK.

Mergers

Last year saw 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.

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,1 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.¹ 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).²

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 was regarding 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 cannot 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).³ 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.

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 Regulation⁴ 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, most recently in the Telefónica Deutschland (Telefónica)/E-Plus deal in Germany (2014) and the Orange/Jazztel in Spain (2015). The CMA’s 2016 concurrency report⁵ noted that the CMA and Ofcom worked closely in formulating the request, and since the Commission’s refusal to refer the case, the CMA has made submissions (with Ofcom’s assistance) 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 puts its arguments to the European Commission. In the piece, Ofcom 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 per cent, and sets out Ofcom’s key concerns – which are heavily reflected in the Commission’s decision.⁶ In April 2016, Alex Chisholm, Chief Executive of the CMA, wrote to the Commission,⁷ 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,⁸ Ireland⁹ and Austria.¹⁰ 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:¹¹

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 per cent. 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.

It now remains to be seen what Telefónica’s next step will be – but given the success of BT/EE, it could be through a vertical, rather than horizontal, combination. It has been reported that private equity outfits and telecoms companies (such as Sky and Liberty Global) are considering whether to bid for O2 – perhaps to bolster quad-play competition against the newly merged BT/EE.¹², ¹³

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 this year’s government budget announcement included a proposal that the CMA, as part of this role, will be 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 2016 concurrency report,¹⁴ the CMA noted that in the past year Ofcom has focused the use of its competition powers on broadcasting and postal services, rather than telecoms – although it has published a number of significant reviews such as the Business Connectivity Market Review and Strategic Review of Digital Communications (set out below).

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.

The most recent telecoms enforcement case 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.¹⁵ 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 has been separately appealed by TalkTalk and BT to the Competition Appeal Tribunal, as discussed in the next section.

Further, in its 2016/17 annual plan¹⁶ Ofcom set out its long-term goals, which include its statutory obligation to promote competition and ensure that markets work effectively for consumers, through:

creating opportunities for large-scale deployment of more ultra-fast networks;
increasing Openreach’s independence;
ensuring that European regulatory frameworks work for the UK;
supporting competition in fixed-line services, through Ofcom’s market reviews;
improving consumers’ and businesses’ ability to make informed choices; and
monitoring price increases, providing advice and information on pricing, and making sure all consumers receive value from their communications providers.

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 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’.¹⁷ 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.¹⁸

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 resource to improving 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 own connections using their own connection equipment, requiring the provision of physical access only, rather than through managed wholesale services.

Ofcom has 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.¹⁹

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 the 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 2016.²⁰

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 of 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 include:

a strategic shift to large-scale investment in more fibre to premise, 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 (with full structural separation remaining an option if required);
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.

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.²¹ 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,²² 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 has been appealed to the Competition Appeal Tribunal (CAT) by each of TalkTalk and BT, as we explain below in the regulatory appeals and disputes section.

Spectrum

Ofcom is preparing 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.²³ 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 2015²⁴ that addressed stakeholders’ responses, set out its conclusions on the action 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.

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 will be suited for this purpose and expects to begin the auction process in late 2018 or 2019.

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.²⁵ 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) identification of 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) identification of regulatory tools and market and technology enablers that (a) complement the characteristics of use and (b) overcome identified barriers, to enable spectrum sharing.

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).²⁶ 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 is 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 for now their involvement is 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) and determination is pending at the time of writing, but due by
5 July 2016. Following the CMA’s determination on the price control aspects of BT’s appeal the CAT will then reach its own full determination. There will then be a period of one month for an appeal to the Court of Appeal on those findings.

TalkTalk has also appealed Ofcom’s approach to imposing a VULA margin on BT to the CAT, and claimed that Ofcom’s regulatory aim in preventing margin squeeze has not been achieved owing to flaws in its analysis. BT has intervened in TalkTalk’s appeal.

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.²⁷ Ofcom found that the difference in calculations resulted in Vodafone and Gamma being charged around 50 per cent 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 disputes Ofcom’s findings, and has requested that the CAT remit the dispute to Ofcom for redetermination. A hearing was scheduled to take place between 18 and 25 May 2016 but at the time of writing had not been reported.

Conclusions and predictions

The past year has seen the continuation of 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. 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. All eyes will be on Telefonica’s plans for its UK O2 business, which remains a stand-alone competitor for now, but its ownership will be subject to a new direction in the short to medium term.

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 its actions resulting from the 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.

Further, the trend for private enforcement of Ofcom’s regulations and charge controls seems unlikely to cease in the coming year. For example, on 6 June 2016 Ofcom announced that it had been asked to resolve a dispute between TalkTalk and BT regarding the correct level of charges for special fault investigation services and time-related charges, in light of the price controls imposed by Ofcom in its 2010 Wholesale Local Access Market Review.²⁸ 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 – which Ofcom plans to consult for later in 2016. The outcome could be that price regulation is imposed for fibre services – potentially paving the way for further private enforcement of price controls.²⁹

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 reviews over the past 12 months have sought to achieve this balance; it remains to be seen over the course of the next year how their conclusions work in practice.

United Kingdom: Telecoms