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The rights and wrongs of squeezed margins

toothpaste squeeze

via Flickr © Nick Harris1 (CC BY-ND 2.0)

Another chapter in the ‘more technical than technology’ field that is competition regulation has just played out, with BT claiming a small victory and its adversaries claiming nothing has changed…  it’s one of those.

UK regulator Ofcom published its draft rules designed to prevent BT from ‘margin squeezing’ its competitors who use its infrastructure on a regulated wholesale basis to deliver broadband to their own customers - these being unbundlers, including the likes of TalkTalk and Sky.  

At issue is the all-important margin between the costs BT says it accrues to provide the infrastructure and the retail prices it charges. Ofcom proposed what it called a margin squeeze test (after a long campaign by the competitive operators) to make sure all was fair. BT said things were already competitive and the test wasn’t necessary.  

The European Commission was included on the mailing list for the draft and it has now come back with a criticism of the proposed approach, although its points are not binding on Ofcom

The EC says Ofcom’s test did not sufficiently factor in the high costs BT bears to secure rights such as Premier League football, and that BT should be allowed more flexibility in how it spreads its costs  “in light of uncertainties relating to the scale and costs of future auctions”. Ofcom originally proposed recognising these costs within 6 months.

So BT is now claiming a small victory and says it is encouraged by the commission’s response. TalkTalk, one of the main advocates of the margin squeeze test, claims to “welcome the Commission’s endorsement of fibre margin squeeze regulation…. as we’ve said before, this must be the beginning of the journey to bring down superfast broadband pricing and make consumers and Britain better off," says the canned statement.

TalkTalk is happy overall, BT prefers to dwell on the non-binding suggestion that more flexibility be introduced -  hardly an endorsement of the BT view that Ofcom’s approach is “flawed”.

So why the fuss?

Extending the period over which BT Sport costs can be recovered, means that BT is able to show a narrower margin between its wholesale/unbundled costs  and retail prices. That doesn’t sound like much of an advantage -  usually businesses try to make the margin as big as possible - but in the world of unbundling, thinner is better for the incumbent since a thin regulated margin gives its competitors less room to extract a profit (or compete on price) when it comes to reselling the incumbent’s lines or services.  

So if BT can show a thin margin it is able to bump up the wholesale price which, of course, it not only collects from itself, but from its competitors.

Cutting it some slack by extending the period takes into account that BT does not yet wield significant market power in UK TV and that it therefore needs the flexibility to recognise those costs as part of an overall market-building strategy.

Does it?

There’s a problem here, since BT is using the ‘free’ BT sport to add value to its broadband connection proposition, and in broadband provision it does have significant market power.

Here’s another interpretation: extending the time period as Ofcom has been asked to do by the EC, would mean BT’s competitors being forced to indirectly help BT cost-cover its TV service and drive its customer acquisition programme by loosening the regulations designed to protect them from abuse.

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