Ofcom Needs a New Formula
Friday, 12 November 2004 Better data, more consultation and new methodology required
UK’s leading Internet trade association calls for urgent review of the telecom industry’s Margin Squeeze Test
Many Internet companies in the UK are facing a cap on their growth unless the Office of Communications (Ofcom) reassesses the Margin Squeeze Test (MST), the formula it uses to ensure competitiveness in the wholesale broadband market.
Following several meetings with BT in the search for solutions, the Internet Services Providers’ Association (ISPA), the UK’s leading Internet trade association, is today (12/11/04) calling on Ofcom to urgently review its methodology for setting wholesale broadband prices.
The Margin Squeeze Test was introduced to regulate the pricing of BT’s two main wholesale broadband services – DataStream and IPStream. The formula was intended to engender competition in the wholesale broadband industry, enabling Internet Service Providers’ (ISPs) to purchase IPStream services from a variety of telecommunications companies, not just BT. These wholesale services are then resold as retail broadband services to home and business users. Matthew Hare, MD of Community Internet and Chair of the ISPA Subgroup on Broadband said, “We need an urgent review of the MST which has effectively placed a cap on the growth of SME ISPs. Although the current formula supports the home Internet user market, the impact on business Internet services - often retailed by small and medium sized ISPs - could be devastating.” Flawed assumptions in current formula
Harsh Impact on Business Broadband
The current margin squeeze test is having a particularly harsh impact on small and medium sized ISPs (SME ISPs).
Mr. Hare continued, “ISPs operate a variety of business models, but the MST was only developed by assessing the BT model. An effective understanding of the profit margins an industry operates on requires an assessment of the industry as a whole, not just one company, no matter how big.”
ISPA believes that a margin squeeze test is required but the current Ofcom formula is based on some flawed assumptions that have caused undesirable consequences.
James Blessing of Zen Internet and member of the ISPA Council said, “Ofcom rushed the consultation on one of the most important regulatory devices to ensure effective competition in the Internet access markets. A six-week consultation period is not enough. Only data from BT was used when researching how the formula should work. Fundamentally the test should be based on how much it costs BT to provide the service plus an appropriate mark-up, rather than assessing the retail price of broadband services and subtracting the costs.”
ISPA also believes that the MST principle – effectively and appropriately defined - should be applied to all wholesale broadband services.
Matthew Hare concluded, “At present IPStream Central is excluded from the MST. It does not make sense that a wholesale service that accounts for 40 per cent of the market is excluded from necessary regulation.” The views expressed in this release are those of the Internet Services Providers' Association (ISPA UK) and do not necessarily reflect the corporate policies of the individual companies that are members of the Association or other organizations that may be mentioned in the release.
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About the Internet Services Providers’ Association
The Internet Services Providers’ Association (ISPA) was established in 1995 as a trade association to represent providers of Internet services in the UK. ISPA promotes competition, self-regulation and the development of the Internet industry. For a list of members or other information about ISPA, please consult the website: www.ispa.org.uk