“5. The national regulatory authorities shall, in pursuit of the policy objectives referred to in paragraphs 2, 3 and 4, apply objective, transparent, non-discriminatory and proportionate regulatory principles by, inter alia: (a) promoting regulatory predictability by ensuring a consistent regulatory approach over appropriate review periods; (b) ensuring that, in similar circumstances, there is no discrimination in the treatment of undertakings providing electronic communications networks and services; (c) safeguarding competition to the benefit of consumers and promoting, where appropriate, infrastructure-based competition; (d) promoting efficient investment and innovation in new and enhanced infrastructures, including by ensuring that any access obligation takes appropriate account of the risk incurred by the investing undertakings and by permitting various cooperative arrangements between investors and parties seeking access to diversify the risk of investment, whilst ensuring that competition in the market and the principle of non-discrimination are preserved; (e) taking due account of the variety of conditions relating to competition and consumers that exist in the various geographic areas within a Member State; (f) imposing ex-ante regulatory obligations only where there is no effective and sustainable competition and relaxing or lifting such obligations as soon as that condition is fulfilled.”
“either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers.”
“1. National regulatory authorities shall carry out an analysis of the relevant markets taking into account the markets identified in the Recommendation, and taking the utmost account of the Guidelines. Member States shall ensure that this analysis is carried out, where appropriate, in collaboration with the national competition authorities. 2. Where a national regulatory authority is required under paragraphs 3 or 4 of this Article, Article 17 of Directive 2002/22/EC (Universal Service Directive), or Article 8 of Directive 2002/19/EC (Access Directive) to determine whether to impose, maintain, amend or withdraw obligations on undertakings, it shall determine on the basis of its market analysis referred to in paragraph 1 of this Article whether a relevant market is effectively competitive. 3. Where a national regulatory authority concludes that the market is effectively competitive, it shall not impose or maintain any of the specific regulatory obligations referred to in paragraph 2 of this Article. In cases where sector specific regulatory obligations already exist, it shall withdraw such obligations placed on undertakings in that relevant market. An appropriate period of notice shall be given to parties affected by such a withdrawal of obligations. 4. Where a national regulatory authority determines that a relevant market is not effectively competitive, it shall identify undertakings which individually or jointly have a significant market power on that market in accordance with Article 14 and the national regulatory authority shall on such undertakings impose appropriate specific regulatory obligations referred to in paragraph 2 of this Article or maintain or amend such obligations where they already exist.”
“The aim is to establish a regulatory framework, in accordance with internal market principles, for the relationships between suppliers of networks and services that will result in sustainable competition, interoperability of communications services and consumer benefits.”
“Obligations and conditions imposed in accordance with paragraph 1 shall be objective, transparent, proportionate and non-discriminatory [...].”
“(a) to further the interests of citizens in relation to communications matters; and (b) to further the interests of consumers in relevant markets, where appropriate by promoting competition.”
“In performing their duties under subsection (1), Ofcom must have regard, in all cases, to— (a) the principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed; and (b) any other principles appearing to Ofcom to represent the best regulatory practice.”
“(b) the desirability of promoting competition in relevant markets; […] (d) the desirability of encouraging investment and innovation in relevant markets;”
“(1) Ofcom must keep the carrying out of their functions under review with a view to securing that regulation by Ofcom does not involve— (a) the imposition of burdens which are unnecessary; or (b) the maintenance of burdens which have become unnecessary.”
“(1) Before making a market power determination, Ofcom must— (a) identify (by reference, in particular, to area and locality) the markets which in their opinion are the ones which in the circumstances of the United Kingdom are the markets in relation to which it is appropriate to consider whether to make the determination; and (b) carry out an analysis of the identified markets. (2) In identifying or analysing any services market for the purposes of this Chapter, Ofcom must take due account of all applicable guidelines and recommendations which— (a) have been issued or made by the European Commission in pursuance of the provisions of an EU instrument; and (b) relate to market identification and analysis. (3) In considering whether to make or revise a market power determination in relation to a services market, Ofcom must take due account of all applicable guidelines and recommendations which— (a) have been issued or made by the European Commission in pursuance of the provisions of an EU instrument; and (b) relate to market analysis or the determination of what constitutes significant market power.”
“(1) Ofcom must not, in exercise or performance of any power or duty under this Chapter— (a) set a condition under section 45, or (b) modify such a condition, unless they are satisfied that the condition or (as the case may be) the modification satisfies the test in subsection (2). (2) That test is that the condition or modification is— (a) objectively justifiable in relation to the networks, services, facilities, apparatus or directories to which it relates (but this paragraph is subject to subsection (3)); (b) not such as to discriminate unduly against particular persons or against a particular description of persons; (c) proportionate to what the condition or modification is intended to achieve; and (d) in relation to what it is intended to achieve, transparent.”
“Member States shall ensure that effective mechanisms exist at national level under which any user or undertaking providing electronic communications networks and/or services who is affected by a decision of a national regulatory authority has the right of appeal against the decision to an appeal body that is independent of the parties involved. This body, which may be a court, shall have the appropriate expertise to enable it to carry out its functions effectively. Member States shall ensure that the merits of the case are duly taken into account and that there is an effective appeal mechanism.”
“Undersection 192 of the Communications Act 2003 , an appeal to the CAT is an appeal on the merits. It is a rehearing, and is not limited to judicial review or to points of law. This reflects the requirements of Article 4 of the Framework Directive.”
“70 […] the first limb of section 193(2) quite clearly requires that the appeal be conducted “on the merits” and not in accordance with the rules that would apply on a judicial review. This point was very clearly made in Hutchison 3G UK Limited v Office of Communications[2008] CAT 11 at paragraph [164]: “However, this is an appeal on the merits and the Tribunal is not concerned solely with whether the 2007 Statement is adequately reasoned but also with whether those reasons are correct. The Tribunal accepts the point made by H3G in their Reply on the SMP and Appropriate Remedy issues that it is a specialist court designed to be able to scrutinise the detail of regulatory decisions in a profound and rigorous manner. The question for the Tribunal is not whether the decision to impose a price control was within the range of reasonable responses but whether the decision was the right one.”
“After all it is inconceivable that Article 4 [of the Framework Directive], in requiring an appeal which can duly take into account the merits, requires Member States to have in effect a fully equipped duplicate regulatory body waiting in the wings just for appeals. What is called for is an appeal body and no more, a body which can look into whether the regulator had got something materially wrong. That may be very difficult if all that is impugned is an overall value judgment based upon competing commercial considerations in the context of a public policy decision.” […] 76 By section 192(6) of the 2003 Act and rule 8(4)(b) of the 2003 Tribunal Rules, the notice of appeal must set out specifically where it is contended Ofcom went wrong, identifying errors of fact, errors of law and/or the wrong exercise of discretion. The evidence adduced will, obviously, go to support these contentions. What is intended is the very reverse of a de novo hearing. Ofcom's decision is reviewed through the prism of the specific errors that are alleged by the appellant. Where no errors are pleaded, the decision to that extent will not be the subject of specific review. What is intended is an appeal on specific points. 77 The nature of the appeal before the Tribunal is similarly made clear in sections 193(3) and (4) of the 2003 Act. These sections make plain that it is not for the Tribunal to usurp Ofcom's decision-making role. The Tribunal's role is not to make a fresh determination, but to indicate to Ofcom what (if any) is the appropriate action for Ofcom to take in relation to the subject-matter of the decision under appeal and then to remit the matter back to Ofcom.” (Emphasis in original.)
“It is clear (and appears to be common ground) that in a case such as this the Tribunal has jurisdiction to assess and find the facts in so far as they are relevant to the grounds of appeal, and must do so in the light of the admissible material that is before it. If, having evaluated the evidence, the Tribunal finds that a material finding of fact made by Ofcom is wrong, then it must so hold and proceed accordingly. Although a finding of fact obviously involves an evaluation of the evidence, this is not an exercise of discretion, and there is no margin of appreciation (as that notion is generally understood in this context) in relation to such findings, any more than for decisions on points of law.”
“Having regard to the parties’ submissions and the authorities to which our attention was drawn, we consider that the following principles should inform our approach to disputed questions upon which Ofcom has exercised a judgment of the kind under discussion: (a) Since the Tribunal is exercising a jurisdiction “on the merits”, its assessment is not limited to the classic heads of judicial review, and in particular it is not restricted to an investigation of whether Ofcom's determination of the particular issue was what is known as Wednesbury unreasonable or irrational or outside the range of reasonable responses. (b) Rather the Tribunal is called upon to consider whether, in the light of the grounds of appeal and the evidence before it, the determination was wrong. For this purpose it is not sufficient for the Tribunal simply to conclude that it would have reached a different decision had it been the designated decision-maker. (c) In considering whether the regulator's decision on the specific issue is wrong, the Tribunal should consider the decision carefully, and attach due weight to it, and to the reasons underlying it. This follows not least from the fact that this is an appeal from an administrative decision not a de novo rehearing of the matter, and from the fact that Parliament has chosen to place responsibility for making the decision on Ofcom. (d) When considering how much weight to place upon those matters, the specific language of section 316 to which we have referred, and the duration and intensity of the investigation carried out by Ofcom as a specialist regulator, are clearly important factors, along with the nature of the particular issue and decision, the fullness and clarity of the reasoning and the evidence given on appeal. Whether or not it is helpful to encapsulate the appropriate approach in the proposition that Ofcom enjoys a margin of appreciation on issues which entail the exercise of its judgment, the fact is that the Tribunal should apply appropriate restraint and should not interfere with Ofcom's exercise of a judgment unless satisfied that it was wrong.”
“23 It is for an appellant to establish that Ofcom's decision was wrong on one or more of the grounds specified in s.192(6) of the 2003 Act: that the decision was based on an error of fact, or law, or both, or an erroneous exercise of discretion. It is for the appellant to marshal and adduce all the evidence and material on which it relies to show that Ofcom's original decision was wrong. Where, as in this case, the appellant contends that Ofcom ought to have adopted an alternative price control measure, then it is for that appellant to deploy all the evidence and material it considers will support that alternative. 24 The appeal is against the decision, not the reasons for the decision. It is not enough to identify some error in reasoning; the appeal can only succeed if the decision cannot stand in the light of that error […] If the Commission (or Tribunal in a matter unrelated to price control) concludes that the original decision can be supported on a basis other than that on which Ofcom relied, then the appellant will not have shown that the original decision is wrong and will fail.”
“270. In addition, Ofcom is wrong in considering that upwards migration is a demand constraint for the pricing of Medium or High CISBO products. One must not forget that upwards migration of end users’ needs’ is actually a boon for the industry supplying wholesale leased lines - infrastructure-based operators which are multi-product firms selling both the products end users migrate from and migrate to. 271. Thus, it is not factually or conceptually consistent to portray upwards migration in user needs as an additional demand constraint: neither for each of the current infrastructure-based operators nor for the entire set of these operators (considered together as the hypothetical monopolist). All else equal, upward migration of customer needs enables each firm (and the hypothetical monopolist) to increase prices for Medium or High CISBO products, since promoting buyers’ trading up leads to higher profits for multi-product suppliers. 272. In the previous subsection, I quantified the effect of migration as a very small volume effect. In this section, I argue that this very small effect actually has the opposite implication for the purpose of product market definition than what Ofcom considered. This effect of upward migration increases the case for CISBO medium or High products to be a market worth monopolising i.e. a separate product market distinct from 10Gb - the opposite of Ofcom’s interpretation of the effect of upward migration of user needs. 273. The argument in this subsection is logically consistent with market features recognised by Ofcom, i.e. the multi-product nature of fibre networks. Thus, when defining the hypothetical monopolist e.g. of 1Gb Ethernet products it is strictly necessary (even if superficially counterintuitive) to consider that the very same hypothetical monopolist is also the supplier of 10Gb lines and thus earns the revenues after trading up is induced by the SSNIP. The hypothetical monopolist benefits from up-selling in the same way that each individual supplier of wholesale leased lines does when a price increase promotes end user migration to a higher service level.”
“75. I believe that, in the context of the BCMR, Ofcom finds itself in a more favourable position as regard evidence gathering than that faced by many other agencies that are required to undertake market definition exercises. In particular, Ofcom has a relatively long time to carry out evidence gathering, access to evidence from a wide range of market participants (which may not be the case in a discrete competition investigation) and the benefit of experience from past BCMRs, which allow it to adapt its analytical techniques in light of what has and has not worked well in the past. Ofcom also benefits from wide-ranging and intrusive information gathering powers that legally oblige market participants to respond to its information requests. 76. Thus, it is somewhat surprising to see considerable effort in Ofcom’s Defence in explaining why it was appropriate for Ofcom not to rely on evidence, especially quantitative evidence, in the context of the BCMR. 77. The Defence §156 goes as far as making the remarkable statement that one of Ofcom’s commissioned surveys (the 2016 BDRC Survey) “was not intended to be used for a quantitative analysis”
"I also consider that the evidence Ofcom presented, taken in the round, suggests a SSNIP on 10Gbit/s Ethernet connections would be likely to be rendered unprofitable by the constraint from lower bandwidth Ethernet connections (and particularly 1Gbit/s Ethernet services). I consider this constraint would be likely to come from the following sources…"
“Experts must provide opinions that are independent, regardless of the pressures of litigation. A useful test of ‘independence’ is that the expert would express the same opinion if given the same instructions by another party. Experts should not take it upon themselves to promote the point of view of the party instructing them or engage in the role of advocates.”
“[…] Expert evidence presented to the Tribunal should be, and should be seen to be, the independent product of the expert uninfluenced by the pressures of the proceedings. An expert witness should never assume the role of an advocate […].”
“Ofcom called only one witness, Mr Geoffrey Myers, who is Director of Competition Economics at Ofcom and also a Visiting Professor in Regulation at the London School of Economics. Mr Myers was responsible for overseeing the economic analysis in the Determination, and to that extent his evidence was in part as a witness of fact. He was also involved in the leased lines market review, which led to the 2004 LLMR, but not in the market reviews that led to the 2008 BCMR and 2009 LLCC. In addition, however, Mr Myers gave evidence also as an expert economist. It was put to him that he was appearing as the “champion of Ofcom” to defend the Determination but Mr Myers denied this and said that he was very conscious of his duty to the Tribunal. We accept that answer and do not find that the fact that he was employed by Ofcom impeded his objectivity.”
“[The HMT framework] starts with a focal product - in this case, a particular CISBO service (or set of services) - and it is assumed there is a single supplier of this focal product (i.e. the hypothetical monopolist). The test considers how end-users and suppliers of other CISBO services would react to a SSNIP applied to this focal product. If demand and/or supply-side switching to/from another CISBO service(s) were likely to occur on a scale sufficient to render the price increase unprofitable, the focal product is widened to include this service(s). Another SSNIP is then applied to the wider product set. The test is repeated in this way until a price increase by a hypothetical monopolist would be profitable, and at this stage the relevant market is defined.”
“144. However, BT maintains that Ofcom’s specification and/or application of the Boundary Test and/or HNR fails to achieve the objectives set out in the SMP Guidelines and BEREC Common Position. In short, Ofcom’s approach (i) does not allow the market definition to identify heterogeneity in competitive conditions and (ii) does not ensure that differences in competitive conditions are smaller within defined geographic markets than between defined geographic markets. Specifically, Ofcom has erred by: (i) treating the satisfaction of the Boundary Test as a necessary – not merely sufficient – condition for a finding of effective competition on a relevant geographic market (notwithstanding claims to the contrary); (ii) setting overly stringent conditions as to the number of alternative CPs (other than BT) required to satisfy the Boundary Test and/or failing to have proper regard to other indicators of competition such as service shares; (iii) setting overly stringent conditions as to the proportion of customer sites that must be, on average, located within a given proximity to those providers’ networks; (iv) underestimating the buffer distance for all CISBO services as measured from fibre flexibility point, which error is exacerbated by setting a single 100m “buffer distance” for CISBO services at all bandwidths, without due regard for the fact that dig distances are substantially higher for VHB than for the Lower Bandwidths; (v) using an inadequate metric for the geographic location of CISBO demand (i.e. large business sites …); (vi) defining the LP boundary based on the old WECLA Boundary minus the CLA, notwithstanding that a different boundary is justified based on (i) the High Network Reach analysis described above and (ii) Ofcom’s new dataset of “large business sites”, which differs from that used in 2013 to define the WECLA; (vii) excluding CPs that provide microwave and EFM from its assessment; and (viii) applying the HNR/Boundary Test at postcode sector level rather than postcode level.”
“too severe, crude and all-inclusive. It should have been executed more thoroughly by examining, at least, the central business districts […]. In short as the Commission’s commentary on the BCMR agreed, the analysis should have been more “ granular ””
“[Ofcom’s] determination is at odds with VM’s experience of market realities […]. It is also a manifestly flawed analysis […] pronounced differences […] exist on the face of Ofcom’s own data, between the CBDs and the RoUK in terms both of the level of infrastructure competition and BT’s market shares. As regards infrastructure competition, the CBDs exhibit a materially different set of characteristics from those elsewhere in the RoUK by reference to key metrics that Ofcom deployed […]. By reference to each metric, infrastructure competition was: greater in the CBDs than in other areas of the RoUK; greater in the CBDs than in the LP; and more closely proximate to the conditions found by Ofcom in the CLA. These points would have become clearer still had Ofcom applied (as it did in 2013) a “buffer” of 200m instead of unjustifiably raising the bar by imposing a buffer of 100m […]. In any event, on either “buffer” distance, and both for lower bandwidths and VHB services, it is evident from Ofcom’s own analysis that levels of infrastructure competition differ appreciably between the CBDs on the one hand and the other areas of the RoUK on the other. That conclusion is reinforced by the disparities which exist between EFM provision within CBDs on the one hand and in other areas of the RoUK on the other. Ofcom failed to have regard to those disparities because it erroneously excluded EFM from its network reach analysis.”
“In relation to the CBDs, Ofcom was concerned to establish whether the competitive conditions in those areas were sufficiently distinct from the surrounding area (the RoUK) as to make it appropriate to define them as separate geographic markets. As Ms Curry explains, that would have been appropriate if the analysis had suggested that the CBDs might have a distinct SMP analysis or distinct remedies. Ofcom concluded, however, that (unlike the LP) the competitive conditions in the CBDs were such that they would be likely to have the same SMP finding and remedies as the RoUK. Accordingly, it was appropriate to include the CBDs within the same geographic market as the RoUK.”
“In the event that the Tribunal considers that Ofcom erred in its identification of the appropriate product market then it would be appropriate to remit to Ofcom the questions of Product Market Definition, Geographic Market Definition, Significant Market Power and remedies.”
“2. Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which competition policy is applied by the Commission. The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involved face. The objective of defining a market in both its product and geographic dimension is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings' behaviour and of preventing them from behaving independently of effective competitive pressure. It is from this perspective that the market definition makes it possible inter alia to calculate market shares that would convey meaningful information regarding market power for the purposes of assessing dominance […]. […] 13. Firms are subject to three main sources of competitive constraints: demand substitutability, supply substitutability and potential competition. From an economic point of view, for the definition of the relevant market, demand substitution constitutes the most immediate and effective disciplinary force on the suppliers of a given product, in particular in relation to their pricing decisions. A firm or a group of firms cannot have a significant impact on the prevailing conditions of sale, such as prices, if its customers are in a position to switch easily to available substitute products or to suppliers located elsewhere. Basically, the exercise of market definition consists in identifying the effective alternative sources of supply for the customers of the undertakings involved, in terms both of products/ services and of geographic location of suppliers. […] Demand substitution 15. The assessment of demand substitution entails a determination of the range of products which are viewed as substitutes by the consumer. One way of making this determination can be viewed as a speculative experiment, postulating a hypothetical small, lasting change in relative prices and evaluating the likely reactions of customers to that increase. The exercise of market definition focuses on prices for operational and practical purposes, and more precisely on demand substitution arising from small, permanent changes in relative prices. This concept can provide clear indications as to the evidence that is relevant in defining markets. 16. Conceptually, this approach means that, starting from the type of products that the undertakings involved sell and the area in which they sell them, additional products and areas will be included in, or excluded from, the market definition depending on whether competition from these other products and areas affect or restrain sufficiently the pricing of the parties’ products in the short term. 17. The question to be answered is whether the parties’ customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5% to 10%) but permanent relative price increase in the products and areas being considered. If substitution were enough to make the price increase unprofitable because of the resulting loss of sales, additional substitutes and areas are included in the relevant market. This would be done until the set of products and geographical areas is such that small, permanent increases in relative prices would be profitable. […] In the application of these principles, careful account should be taken of certain particular situations as described within paragraphs 56 and 58.”
“( 26 ) […] Although the SSNIP test is but one example of methods used for defining the relevant market and notwithstanding its formal econometric nature, or its margins for errors […], its importance lies primarily in its use as a conceptual tool for assessing evidence of competition between different products or services.”
“It cannot be stressed enough that defining relevant markets on a basis that is not consistent with the principles of the Hypothetical Monopolist Test will, almost by definition, fail to take properly into account demand-side and supply-side substitution possibilities. In consequence, any market shares calculated from such market definitions will not provide, except purely by chance, a good proxy of market power. Although the Hypothetical Monopolist Test is often proposed as one possible way of defining relevant markets, no alternative that is consistent with the principles of assessing demand-side and supply-side substitutability has been proposed. […] the Hypothetical Monopolist Test provides a coherent framework in which to consider the relevant issues relating to the competitive constraints faced by firms under investigation and consequently assists in moving the analytical debate beyond ad hoc introspection and focuses it explicitly on the key concepts of demand-side and supply-side substitution. Although the Hypothetical Monopolist Test is often seen as necessarily involving quantitative analysis, this misrepresents its true value which lies more in its role as providing a conceptual framework within which to conduct the analytical assessment. The Commission itself implicitly notes this possibility when it states in the Notice that the Hypothetical Monopolist Test can “be viewed as a speculative experiment”
“Introduction […] 35. Market definition is not a mechanical or abstract process but requires an analysis of any available evidence of past market behaviour and an overall understanding of the mechanics of a given sector. In particular, a dynamic rather than a static approach is required when carrying out a prospective, or forward-looking, market analysis. […] […] Demand-side substitution 49. […] In determining the existence of demand substitutability, NRAs should make use of any previous evidence of consumers’ behaviour. Where available, an NRA should examine historical price fluctuations in potentially competing products, any records of price movements, and relevant tariff information. In such circumstances evidence showing that consumers have in the past promptly shifted to other products or services, in response to past price changes, should be given appropriate consideration. In the absence of such records, and where necessary, NRAs will have to seek and assess the likely response of consumers and suppliers to a relative price increase of the service in question. […]”
“3.7 Evidence on substitution from a number of different sources may be considered. Although the information used will vary from case to case and will be considered in the round the following evidence and issues are often likely to be important: • Evidence from the undertakings active in the market and their commercial strategies may be useful. For example, company documents may indicate which products the undertakings under investigation believe to be the closest substitute to their own products. Company documents such as internal communications, public statements, studies on consumer preferences or business plans may provide other useful evidence. • Customers and competitors will often be interviewed. In particular, customers can sometimes be asked directly how they would react to a hypothetical price rise, although because of the hypothetical nature of the question, answers may need to be treated with a degree of caution. Survey evidence might also provide information on customer preferences that would help to assess substitutability […]. • A significant factor in determining whether substitution takes place is whether customers would incur costs in substituting products. High switching costs relative to the value of the product will make substitution less likely. • Evidence on product characteristics may provide useful information where customer substitution patterns are likely to be influenced significantly by those characteristics. […] • Patterns in price changes can be informative. For example, two products showing the same pattern of price changes, for reasons not connected to costs or general price inflation, would be consistent with (although not proof of) these two products being close substitutes. Customer reactions to price changes in the past may also be relevant. Evidence that a relatively large proportion of customers had switched to a rival product in response to a relatively small price rise in the focal product would provide evidence that these two goods are close substitutes. Equally price divergence over time, without significant levels of substitution, would be consistent with the two products being in separate markets. • Evidence on own or cross price elasticities of demand may also be examined if it is available. The own price elasticity of demand measures the rate at which demand for a product (e.g. the focal product) changes when its price goes up or down. The cross price elasticity of demand measures the rate at which demand for a product (e.g. a rival product) changes when the price of another product (e.g. the focal product) goes up or down. • In some cases critical loss analysis may be relevant. One definition of critical loss is the minimum percentage loss in volume of sales required to make a 5 (or 10) per cent price increase on a product unprofitable. The critical percentage tends to be lower when an undertaking has a high mark up over unit costs (since each sale lost entails a relatively large loss in profit). However, the fact that an undertaking can set a high mark up might also demonstrate that its current customer base is not particularly price sensitive. These potentially opposing effects might need to be balanced and assessed in conjunction with other evidence (e.g. estimates of elasticities of demand); and • Evidence on the price:concentration relationship may also be informative. Price:concentration studies examine how the price of a product in a distinct area varies according to the number (or share of supply) of other products sold in the same area. […].”
“[…] for reasons set out in detail below, we apply a qualitative version of this test , looking at evidence on the likely degree of switching in response to a SSNIP on the services in question by both the demand and supply sides of the market.” (Emphasis added)
“126. One of the principal submissions made by Aberdeen Journals is that the Tribunal should accept a ‘hierarchy’ of evidence, in which objective economic evidence, such as consumer surveys, market studies or statistical analysis, should be accorded greater weight than what Aberdeen Journals describes as “subjective” evidence deriving, for example, from the statements or conduct of the parties. In particular, says Aberdeen Journals, evidence on the demand side from consumers or users is of crucial importance, and likely to be more significant than evidence from the supply side. The relative lack of evidence from consumers or users in this case is, says Aberdeen Journals, unprecedented in EC law […]. 127. In our view, there is no set “hierarchy” of evidence in Community law on issues such as market definition. As the European Commission puts it at paragraph 25 of its Notice on Market Definition OJ (1997) C272/5: “There is a range of evidence permitting an assessment of the extent to which substitution would take place. In individual cases, certain types of evidence will be determinant, depending very much on the characteristics and specificity of the industry and products or services that are being examined. The same type of evidence may be of no importance in other cases. In most cases, a decision will have to be based on the consideration of a number of criteria and different items of evidence. The Commission follows an open approach to empirical evidence, aimed at making an effective use of all available information which may be relevant in individual cases. The Commission does not follow a rigid hierarchy of different sources of information or types of evidence.” 128. Similarly, although evidence of the attitudes of consumers or users will often be highly pertinent to an analysis of the relevant product market, there is in our view no rule of law which requires the Director to base his case on consumer surveys or market studies if he considers that his case is sufficiently proved by other evidence. What evidence the Director chooses to rely on to establish a relevant product market is a matter for him. Whether that evidence is sufficient to prove the case, is ultimately a matter for the Tribunal. In deciding whether the evidence is sufficient, the Tribunal will pay attention to evidence about the attitudes of consumers or users, or the absence thereof, but that is only one element of the Tribunal’s assessment of the evidence as a whole. In this case we propose to look at the evidence “in the round” in reaching our conclusion.”
“4.135 In the BCMR 2013, we found that, at the time, there was a clear break in the product chain between 1Gbit/s Ethernet services on the one hand, and higher bandwidth Ethernet and WDM services of any bandwidth on the other hand. The primary evidence we relied on was the substantially higher costs of the equipment used to provide MISBO services (both Ethernet >1Gbit/s and WDM services) and also the large step change in the per circuit price when moving from 1Gbit/s to above 1Gbit/s Ethernet services. We considered that this significant price difference, which the available evidence suggested could be explained by equipment cost differences, made it unlikely that there would be material substitution between circuits of more than 1Gbit/s and lower bandwidth circuits. In other words, users would be unlikely to respond to a small price change given large cost-related differences in prices of different bandwidths. […] 4.137 Evidence gathered for this review suggests there have been material changes. Price differentials have declined significantly such that we may now expect to see significant switching to VHB services in response to a SSNIP on lower bandwidth CISBO services (and vice versa). Whilst differentials remain, our pricing meetings with CPs suggest these are now consistent with differences lower down the bandwidth chain and are not sufficiently large to deter switching. As noted above in relation to our discussion of Figure 4.1, BT’s new EAD 10Gbit/s service offers ten times the capacity of a 1Gbit/s Ethernet service for approximately double the price. We observe that in the 2013 BCMR Statement, we included 100Mbit/s and 1Gbit/s Ethernet services in the same (AISBO) market, and these services had a similar price differential. 4.138 The evidence on migration trends from the Analysys Mason […] and the February 2016 BDRC CI surveys, from CPs’ internal documents and from our discussions with CPs, suggests that demand for bandwidth continues to increase and that a material proportion of lower bandwidth users is likely to consider upgrading to VHB services over this review period. Results from the February 2016 BDRC CI survey support the view that the decision to migrate is heavily influenced by price, suggesting a SSNIP on lower bandwidth products would be likely to bring forward the migration decision for a material group of lower bandwidth users. Moreover, internal documents from CPs suggest they are pricing services with a view to influencing the migration decision from 1Gbit/s to VHB. 4.139 Despite these migration trends, the February 2016 BDRC CI Survey suggests the potential for substitution is not one way. A material proportion of current VHB service users indicated they would consider switching to a lower specification service (for example, by reducing bandwidth or number of lines) in response to a SSNIP. As those users who recalled migrating cited changes in price as an important factor in the decision to migrate, it is perhaps unsurprising that an increase in the higher bandwidth service might then trigger switching back to a lower bandwidth service. The same survey showed a high degree of similarity in usage of 1Gbit/s and VHB services, suggesting the potential for functional substitutability in both directions. These pieces of evidence suggest the potential for demand-side switching down the bandwidth chain, as well as up.”
“4.162 […] we apply a qualitative SSNIP framework in assessing the likely degree of switching from 1Gbit/s to 10Gbit/s in response to a small but significant increase in the price of 1Gbit/s services. We do this by first looking at price differentials across the bandwidth chain and then considering evidence on price sensitivity and any barriers to switching. 4.163 As set out in paragraphs 4.45 to 4.52 above in our updated analysis of prices, price differentials have narrowed considerably since 2013. The resulting degree of substitutability between 1Gbit/s and 10Gbit/s services will depend to an extent on the distribution of end user demands for bandwidth, which we are unable to observe. As noted above, users wanting 2Gbit/s will already face a finely balanced choice at the margin and the degree of substitutability could be very high. At 3Gbit/s and above, users may already find it cheaper to switch to 10Gbit/s. Our discussions with CPs suggest that where increments of 1Gbit/s are involved, multiple 1Gbit/s circuits and single 10Gbit/s circuits (with excess capacity) are used interchangeably (for example our discussions with Vodafone and SixDegrees). A change in the relative price of services for these users could be expected to prompt a significant volume of switching. 4.164 Indeed, we discuss in paragraph 4.175 below evidence presented by Analysys-Mason that suggests demand for multiple 1Gbit/s is a significant proportion of BT’s 1Gbit/s EAD volumes (20%). If this demand were representative of the wider market, then in the context of the SSNIP test, 20% is a material proportion of links that are likely to be highly sensitive to small changes in relative prices of 1Gbit/s and 10Gbit/s services. 4.165 Even for users currently taking a single 1Gbit/s circuit only, we consider there is potential for a material degree of switching to a 10Gbit/s circuit in response to a further narrowing of the differential (such as might be seen following a SSNIP at 1Gbit/s). The evidence we have seen from the Analysys Mason survey for Openreach, our own BDRC CI survey, CPs’ internal documents and pricing meetings with CPs suggest that a material proportion of current users of 1Gbit/s are likely to migrate to 10Gbit/s services within the course of this review period. The February 2016 BDRC CI survey suggests this decision to migrate is likely to be sensitive to price, which is consistent with our understanding from CPs’ internal documents that some CPs are trying to encourage this migration through the way they set their prices of 10Gbit/s services. In light of our assessment that the costs of migrating between bandwidths are likely to be insignificant (see below) and in any event less relevant in a context of increasing demand for bandwidth, we conclude that there is potential for switching between 1Gbit/s and 10Gbit/s services in response to a small relative increase in price of 1Gbit/s. 4.166 In response to BT’s comment that we should exclude from our assessment of switching those customers who plan to migrate anyway, we disagree. For an assessment of whether a SSNIP would be profitable for a hypothetical monopolist of 1Gbit/s services today, the migration that would occur earlier than planned as a result of any SSNIP is a relevant constraint as it would result in a reduction of revenues relative to the counterfactual. In the wider context of considering whether there is still a break in the chain of substitution at 1Gbit/s for the forward-looking period covered by this review, the fact that a material proportion of users of 1Gbit/s plan to migrate to 10Gbit/s is also relevant as the new users of VHB services will increasingly be those who have recently migrated from lower bandwidths. As discussed in Annex 5, BT is likely to have an advantage in retaining its existing share of these customers as they migrate. 4.167 We also find evidence from the February 2016 BDRC CI survey of the potential for switching in the reverse direction, i.e. for current users of VHB services to switch to (multiple) 1Gbit/s services if they were faced with an increase in the price of their service (see paragraph 4.139 above). This provides further support for a chain of substitution linking 1Gbit/s with VHB services as it suggests that switching could occur both up and down the chain for these bandwidths.”
“4.139 Despite these migration trends, the February 2016 BDRC CI Survey suggests the potential for substitution is not one way. A material proportion of current VHB service users indicated they would consider switching to a lower specification service (for example, by reducing bandwidth or number of lines) in response to a SSNIP […] These pieces of evidence suggest the potential for demand-side switching down the bandwidth chain, as well as up. […] 4.167 We also find evidence from the February 2016 BDRC CI survey of the potential for switching in the reverse direction, i.e. for current users of VHB services to switch to (multiple) 1Gbit/s services if they were faced with an increase in the price of their service (see paragraph 4.139 above). This provides further support for a chain of substitution linking 1Gbit/s with VHB services as it suggests that switching could occur both up and down the chain for these bandwidths.”
“Easier for customers to consume. The introduction of an EAD 10G will also help limit churn, particularly from our EAD 1G customers. Currently, customers reaching capacity on a EAD 1G service often look to purchase a second EAD 1G service to provide the additional capacity required, or they churn to one of our competitors. EAD 10G will ensure there is an Openreach EAD 10G service customers can upgrade to, rather than churn to a competitor, and the solution will support them as their bandwidth needs continue to grow. The 10G market and our competitors’ pricing are continually evolving, therefore pricing principles presented are latest indicative thinking only, and final pricing will be set in summer 2015 to ensure it is still competitive […] Our intended price for EAD 10G is 2.5 – 3 times the post price review EAD 1G service, which aligns to industry expectation and specific price point feedback from CPs. This would deliver a 3 year TCO … slightly higher than Zayo and Virgin discount rate, though currently still a competitively price point [sic] in the market […] Increasing pricing beyond 3 times EAD 1G pricing will compromise its competitiveness in the market, representing a higher 3 year TCO than competitors and exceeding the price point industry have advised needs to be achieved.”
“We believe pricing at this level would also represent a competitive price in the market, based upon insight received on competitor pricing.”
“ EAD 10G Price Point Right Level : EAD 10Gb price point is proposed to be set at the higher level of industry requirements, allowing scope to reduce further in the future if required, to ensure competitive position in the market.”
“Pricing at this level would: - Ensure pricing aligns with historic bandwidth ratios : EAD 10Gb should be less than or equal to 3 times 1Gb. Pricing higher than 3 times would reinforce a perception we are exploiting the bandwidth gradient linked to greater than 1Gb de-regulation and passives (See Annex 2 for more detail).”
“There is a degree of uncertainty around EAD 1Gb to EAD 10Gb substitution, though EAD 1Gb and EAD 10Gb will service different customer needs and are therefore not directly substitutional.”
“Rationale for 1 Year Minimum Period at 2.6 times the current EAD 1G Price Customers consider Total Cost of Ownership (TCO) to be amongst the most critical factors when choosing a supplier because they require low cost 10G solutions. In addition, the 10G market is increasingly competitive and our key competitor in the market on a national scale is Virgin media. Within London the key players with the most market share are Colt and Zayo who compete with us alongside Virgin media. Feedback from our indicative pricing of 3 times current EAD 1G pricing is that this would sit on the higher end of the market and would be above Virgin Media and other key London players on a 3Yr. TCO. Our recommended pricing will allow us to be competitive on a national scale, including in London. A graph showing EAD 10G prices vs. the 10G market is shown below….”
“Based on the above, we recommend reducing the bandwidth gradient for the EAD 10G launch pricing from the indicative 3 times, to a more competitive 2.6 times EAD 1G pricing.”
“All customers currently consuming Ethernet services from Openreach. Particularly those consuming 1Gbit/s Ethernet services. a. Ethernet 10G is also focused on defending our existing customer base and is a mechanism to limit churn, particularly from our 1G EAD customers b. Incentivise customers reaching capacity on 1G EAD to move on to a 10G EAD solution.”
“FASTER FOR LESS The new EAD 10G service is a variant of our existing EAD portfolio – offering 10 times the bandwidth of 1G from around 2 times the cost.”
“Overall the discussions supported a view that there is strong pricing interdependence throughout the bandwidth chain.”
“the same rule of thumb for pricing bandwidth differentials applied throughout the bandwidth chain, including VHB services.”
“Relative pricing: the higher the bandwidth the price per Mbit/s comes down. Proportionately more for less. Multiplier of three - 10 Gbit/s is three times 1Gbit/s, 100 Gbit/s costs three times 10 Gbit/s. Broad rule of thumb is that the price increases as a square root of the increase in bandwidth.”
“Setting prices: Market environment and what the competition is doing is the main determinate. Also make an allowance for the building types that are being connected.”
“Does price drive market demand? Actually, demand drives price. Customers change bandwidth because they need to. Once they need more bandwidth it becomes a timing issue and when to incur the cost. Vast majority of upgrades are driven by business demand. Not price - as there is not that big of a price difference, business opportunity far outweighs this. Bandwidth increase is a business decision, not a finance decision. Although businesses may possibly consider scaling back demand growth internally.”
“Relative Prices: 10Gbit/s is around 4-6 times 1GBit/s (only ‘gut feel’). The difference in price between a marginal increase from 1GB to 1.5 GB needs will probably need a 10GB access tail from BT, so costs increase significantly, leading to a non-linear pricing structure. In some cases we may decide to go for a 2x1Gbit/s circuit because it will be cheaper.”
“Ofcom asked if there were any barriers to the customer side from switching from 1Gbit/s to 10Gbit/s other than just not needing more bandwidth. Is there a case of a desire to switch but the product is just too expensive? Has Verizon seen from customers particular responses at price points. Verizon replied that no, it did not tend to see spikes in order. It stays constant regardless of relative price changes. Ofcom then queried whether what Verizon is seeing suggests that bandwidth fundamentally drives customers' requirements as opposed to being sensitive to price. Verizon replied yes and then explained that when Openreach do special offers (such as free connections) this does not drive more interest. […][ " ]”
“[…] In my own experience, I have not observed a willingness to pay for bandwidth in excess of the customer’s bandwidth requirement. High bandwidths are purchased where specific business applications dictate this (e.g. very high bandwidth needed for financial services applications).” [25] Commenting on the LLU and MNO sectors, Mr Yardley opined: “16. In general, bandwidth requirements on any given circuit will be driven by the number of customers served by that circuit and the average peak traffic per customer. An operator will generally seek to minimise the costs of meeting that bandwidth requirement whilst ensuring a suitable customer experience (or quality of service). […] 17. It is also important to note that there is little or no revenue upside for any operator in achieving a much higher quality of service than is absolutely necessary. […] [T]he value to an operator of any additional bandwidth (over and above the required bandwidth) will generally be very low, and the timing of bandwidth migrations is unlikely to be sensitive to small changes in the relative price of circuits.”
“[…] the February 2016 BDRC CI Survey suggests the potential for substitution is not one way. A material proportion of current VHB service users indicated they would consider switching to a lower specification service (for example, by reducing bandwidth or number of lines) in response to a SSNIP. As those users who recalled migrating cited changes in price as an important factor in the decision to migrate, it is perhaps unsurprising that an increase in the higher bandwidth service might then trigger switching back to a lower bandwidth service. The same survey showed a high degree of similarity in usage of 1Gbit/s and VHB services, suggesting the potential for functional substitutability in both directions. These pieces of evidence suggest the potential for demand-side switching down the bandwidth chain, as well as up.”
“Figure 1.3 shows that there are [ x ] [ " ] 1xEAD1000 links, [ y ] [ " ] 2xEAD1000 and [ z ] [ " ] 3xEAD1000. Is [ y ] [ " ] the number of consumers that have 2xEAD1000 links so therefore the total number of EAD1000 links for these consumers will be [2* y ][ " ]? Does the same apply for the 3xEAD1000 consumers so that there is a total of [3* z ] [ " ] EAD1000 links for this group?”
“We can confirm that the data do indeed relate to customers as you indicated and are of June 2015 (we believe – the Analysys Mason analyst is away at the moment). The number of links are therefore multiples as you suggest. As a point of information, not shown on the Figure 1.3 are additional customers who have more than 3 1G circuits and there are at least another […][ " ] ‘customers’ with at least 4*1GBit/s links.”
“3.6 The important issue is whether the undertaking could sustain prices sufficiently above competitive levels. Customers may take time to respond to a sustained rise in the price of the focal product. As a rough rule of thumb, if substitution would take longer than one year, the products to which customers eventually switched would not be included in the same market as the focal product. Products to which customers would switch within a year without incurring significant switching costs are more likely to be included in the relevant market. However, the relevant time period in which to assess switching behaviour may be significantly shorter than one year: for example, in industries where transactions are made very frequently. A case by case analysis of switching is therefore appropriate.” (Emphasis in the original. Footnote omitted.)
“The DoJ/FTC guidelines refer to a two-year period over which substitution responses take place. A period of at least one year would appear to be appropriate since we are interested in the responses of customers and suppliers to a permanent change in relative prices; to adopt a short time frame over which substitution can occur would lead to important competitive constraints that affect competitive outcomes being ignored. Surprisingly, the Relevant Market Notice is silent on this question and this has led in practice to an implicit very short time period being considered, which has led to a bias towards defining relevant markets narrowly.”
“62. In its Notice on market definition, the Commission drew attention to certain cases where the boundaries of the relevant market may be expanded to take into consideration products or geographical areas which, although not directly substitutable, should be included in the market definition because of so-called ‘chain substitutability’. In essence, chain substitutability occurs where it can be demonstrated that although products A and C are not directly substitutable, product B is a substitute for both product A and product C and therefore products A and C may be in the same product market since their pricing might be constrained by the substitutability of product B. The same reasoning also applies for defining the geographic market. […]”
“For example, […] where products A to E [are] all substitutes for each other (to varying degrees) and where a hypothetical monopolist of three products next to each other in the chain could profitably sustain supra competitive prices. In this case, if the focal product is B alone, it is possible to define products A, B and C to be the relevant market. However, when investigating the conduct of an undertaking that supplies both products B and E, the appropriate frame of reference for the competitive assessment may include products A to E. […]”
“58. From a practical perspective, the concept of chains of substitution has to be corroborated by actual evidence, for instance related to price interdependence at the extremes of the chains of substitution, in order to lead to an extension of the relevant market in an individual case. Price levels at the extremes of the chains would have to be of the same magnitude as well.”
“Les niveaux de prix aux extrêmes des chaînes doivent aussi être du même ordre de grandeur.” (Emphasis added.)
“( 50 ) Evidence should show clear price interdependence at the extremes of the chain and the degree of substitutability between the relevant products or geographical areas should be sufficiently strong.”
“chain substitutability occurs where it can be demonstrated that although products A and C are not directly substitutable, product B is a substitute for both product A and product C and therefore products A and C may be in the same product market since their pricing might be constrained by the substitutability of product B. ” (Emphasis added).
“As long as the evidence suggests adjacent links are all effective substitutes for one another, there will be a chain of substitution linking the products into a single market : even though the extremes of the chain may not be a direct substitute for one another.” (Emphasis added.)
“8. ‘Relevant geographic markets’ are defined as follows: ‘The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area’. 9. The relevant market within which to assess a given competition issue is therefore established by the combination of the product and geographic markets. The Commission interprets the definitions in paragraphs 7 an 8 (which reflect the case-law of the Court of Justice and the Court of First Instance as well as its own decision-making practice) according to the orientations defined in this notice.”
“Thresholds to aggregate geographical areas (128) In order to group geographical units, there is no need for competitive conditions to be perfectly homogeneous across all geographical areas included within one market. (129) Areas should be aggregated so that competitive conditions within a market are sufficiently homogeneous whereas competitive conditions differ between markets with potential effects on either the SMP finding or the identified competition problems. With a large number of small areas, however, there is likely to be a continuum of competitive conditions, so it will usually be difficult to draw a clear line between more and less competitive areas. One approach would be to evaluate competitive conditions in each geographical unit on its own and classify the area accordingly. However, this would cause a huge workload for NRAs and is also likely to be arbitrary to some extent. A more practical and appropriate approach is to define clear and unambiguous criteria according to which the geographical units are grouped. In this regard, it is important for NRAs to bear in mind the purpose of market definition, which is not an end in itself but a means to undertaking an analysis of competitive conditions, for the purposes of determining whether ex-ante regulation is required or not. (130) As mentioned above, in case of significant differences in competitive conditions, the criteria listed before are likely to be closely correlated. However, the correlation is unlikely to be perfect. It is, therefore, likely to be appropriate to base the segmentation on a combination of several of the criteria mentioned above. A segmentation based on a single criterion (e.g. the number of operators) will usually not be appropriate. Which criteria are the most relevant will – as in an SMP analysis – depend on the circumstances and has to be decided by the NRA. The relevant criteria should be applied cumulatively and in such a way that differences in competitive conditions between different markets are large while differences in competitive conditions within a market are small. (131) For each of the criteria applied, the NRA will have to define some threshold according to which a particular area is classified. (132) A related question is whether or not the identity of alternative operators should also play a role for aggregating areas. If, for example, an incumbent DSL operator competes with a cable operator in city A and with another cable operator in city B, should the two cities form a single geographical market or not? BEREC is of the opinion that the homogeneity of competitive conditions should be the decisive criterion and not the identity of the alternative operator. This means that, if the analysis of the criteria mentioned above indicates that competitive conditions are similar, cities A and B should form a single geographical market. If, however, one cable operator behaves differently from the other, this should become apparent in the course of the analysis and may lead to a situation where the two cities form different geographical markets (because competitive conditions are not sufficiently homogeneous). (133) The definition of geographical markets will depend on factors which vary over time, e.g. the number of operators in a particular area or measures of demand. Therefore, the conclusions with regard to the appropriate grouping of the geographical units may change if the analysis is performed at a later point in time. This is, in principle, not different from product market definitions, which may also change in the period from one market review to the next. The task of the NRA is to take into account foreseeable future developments at the time of market definition and make a forward-looking analysis. In the case of geographical market definition, this can mean that, for example, information about future roll-out plans of the incumbent operator and its main competitors has to be collected. (134) Once the (forward-looking) geographical segmentation has been made, it makes sense, from the point of view of legal certainty and practicability, not to change it until the next review, even if future developments are somewhat different from those expected. If future developments are very different from those expected, a new analysis is likely to be needed anyway.”
“242. Ofcom’s [geographical market definition] analysis had two principal steps, which are described in detail in Curry 1, §§346-400. First , Ofcom identified ‘candidate areas’. This is a necessary first step, as one must necessarily have some way of identifying possible geographic areas in order then to ask whether they are sufficiently homogeneous and distinct to form their own market. In order to identify candidate areas, Ofcom first applied two tests: a. The Boundary Test, which was used to identify “ areas where competition is strongest and appears likely, even at this stage, to be effective”
“(a) Network Reach to large business sites. Average Network Reach for the CBDs was higher than in the RoUK with an average of 2.8 (4.3) OCPs within 100m (200m) compared to equivalent figures of 0.8 (1.1) OCPs within 100m (200m) in the RoUK. These values were similar to average network reach in the LP, where the equivalent figures were 2.5 (4.1) OCPs within 100m (200m) (FS § 4.426) . (b) Network reach at existing VHB sites. In contrast to the LP, Network Reach at existing VHB sites in the CBDs was not appreciably higher than in the RoUK (to the extent which might be relevant to an assessment of SMP and/or remedies). In particular, in the CBDs, 28% (64%) of VHB customer ends were found to be within 100 (200) metres of four or more OCPs, compared to 55% (85%) in the LP and 5% (18%) in the RoUK (FS Table A10.39). (c) Market concentration. The CISBO market in the CBDs is highly concentrated with BT and Virgin Media holding a combined 80% share (and also 80% in the VHB segment). These levels of concentration in the CBDs are close to those seen in the RoUK, where the combined BT and Virgin Media share is 88% for all CISBO segments and 85% in the VHB segment. The HHI index for VHB services in the CBDs is similar to the RoUK (3,937 compared with 3,860). This is in contrast to the LP where, as noted above, market concentration appears appreciably lower on these measures (FS § 4.451) . (d) Scale of local market and prospects for incremental infrastructure expansion. The CBDs are five small and geographically separated districts whose surrounding areas show little demand for leased lines and low Network Reach, suggesting they are less likely to support sustainable competition or attract incremental infrastructure expansion than the LP and to be similar in this respect to the RoUK (FS § 4.452) .”
“Despite the differences highlighted above, competitive conditions in the CBDs are similar in all material respects to those in the RoUK (in the sense that SMP findings and appropriate remedies are likely to be the same in both areas). For example, BT’s share of the CISBO market in the CBDs as a whole is above 40% (ranging from […]% [ " ] in Glasgow to […]% [ " ] in Manchester by volume, and from […]% [ " ] in Glasgow to […]% [ " ] in Manchester by revenue). [49] These shares are similar to BT’s share in the RoUK in the sense of being at levels typically associated with a dominant position. Market concentration too is similar in the CBDs to the RoUK, with an HHI of 3,395 in the CBDs (ranging from 3,040 in Leeds to 4,129 in Manchester) compared with 4,259 in the RoUK.”
“397. A likely explanation for the difference in competitive conditions between the LP and the CBDs, and the reason I would expect this difference to persist, is the difference in local market size. The CBDs are five relatively small and geographically distinct areas, which lack the scale of the LP in terms of potential market size: particularly in relation to the VHB segment, which has historically been a significant driver of infrastructure investment. 398. […] the volume of VHB circuits in the CBDs is very low, ranging from as few as 19 circuits in Bristol to a maximum of still only 79 circuits in Birmingham. Demand for VHB circuits in the LP (whilst still small in relation to the CLA) is an order of magnitude greater than in any of the CBDs at 762 circuits. The number of businesses too is far lower in the CBDs than in the LP: ranging from 691 to 1,146 in the largest CBD compared to 3,378 in the LP. This reflects their physical scale. Whilst the LP comprises 145 contiguous postcode sectors, the CBDs range from 15 to 49 postcode sectors. 399. The fact the LP borders the CLA is also likely to have affected the relative success of rival OCPs in this area compared to the CBDs to date. This is because of the very high levels of rival infrastructure in the CLA, and the fact that CPs are likely to find it more attractive, all else equal, to expand their networks incrementally. Thus even if the CBDs offered the same prospects in terms of the contestable market size (which they do not for the reasons set out above), OCPs would be more likely to expand their networks from the CLA into the LP than they would to invest in a new infrastructure presence in one of the CBDs. 400. As noted above, the only real difference in Ofcom’s assessment of competition in the LP compared to the RoUK was the finding that some high value sites appeared to have a degree of competitive choice. The fact that concentration in the CBDs appears high in all segments (and likely to remain so) means that, in all material respects, these areas are more aligned in competitive conditions to the RoUK than to the LP.”
“In relation to geographic market definition, Ofcom was clear that it placed most weight on presence and density of rival infrastructure as measured by the large array of network reach measures that it considered. The variations in network reach would drive variations and competitive conditions across different geographic areas.”
“According to established case-law, the relevant geographic market comprises an area in which the undertakings concerned are involved in the supply and demand of the relevant products or services , in which area the conditions of competition are similar or sufficiently homogeneous and which can be distinguished from neighbouring areas in which the prevailing conditions of competition are appreciably different.” (Emphasis added.)
“34. I understand that all the parties to this appeal agree that the market in the CLA is sufficiently competitive. Gamma agrees, although in our response to Ofcom in the BCMR consultation we noted that there were pockets of London known to suffer from prima facie , substantial underinvestment in data services. 35 Where Ofcom erred was in its failure to recognise that competitive conditions varied very significantly in the RoUK. In Manchester, for example, as noted in §66 of the witness evidence of Mr Hart for CityFibre, Gamma competes with CityFibre, Zayo, SSE, EU Networks and BT for higher bandwidth services on our own respective access networks. We believe that Virgin, Vodafone, COLT and Verizon have assets in Manchester capable of competing too (although we would not necessarily place them in the same class as the operators listed in my previous sentence in terms of willingness to participate in the provision of higher bandwidth services at the wholesale level). As a result, one could argue that there are at least BT+8 providers in central Manchester. We often find ourselves in a competitive tender situation and sometimes the result is dual sourcing, whereby a customer secures a solution from Gamma in conjunction with another provider […]. 36 In Gamma’s view, therefore, the market in central Manchester at least is truly competitive and there is a real possibility of further infrastructure investment there. Those conditions are also replicated, or potentially on course to being replicated, in a number of other urban areas in the United Kingdom […].”
“We consider that we should take account of the competitive constraint provided by EFM operators in our market analysis. We have done so by including EFM operators in our CISBO market share calculations and taking them into account in our qualitative assessment of SMP, but not by directly including such operators in the network reach analysis. This is because EFM can only be used to supply bandwidths of up to about 40Mbit/s, and so the competitive constraint provided by an EFM operator is not equivalent to that of an operator with its own fibre infrastructure able to supply all bandwidths. As a result, we do not consider it appropriate to treat infrastructure used to provide EFM circuits as equivalent to infrastructure used to provide CISBO circuits: which is what we would effectively be doing if we were to include EFM directly in our network reach calculations. Instead, when considering whether the rival infrastructure identified in our network reach analysis is sufficient for effective competition in each of the geographic markets defined, we take into account whether EFM services would be available in that area and the constraint they would provide in doing so. As EFM operators do not need their own networks near to customer sites, an assessment of network reach is not needed to identify areas where they are able to supply customers. Instead, we identify the presence of EFM in an area based on BT exchanges that LLU operators have unbundled (i.e. co-located at that exchange).”
“I agree it is nonetheless important that any geographic variations in the constraint from EFM should be taken into account in delineating market boundaries and I recognise that low bandwidth circuits (for which EFM is a closer substitute) comprise a significant proportion of all CISBO circuits. As explained above, Ofcom did look at geographic variations in EFM presence, and concluded that it followed a similar pattern to the geographic markets identified from its analysis of CISBO services (FS A10.15). In particular, it found there were more CPs offering EFM at exchanges in the CLA than in the LP, CBDs and RoUK. Furthermore, the analysis […] shows that EFM only accounts for just over 10% of volumes overall, so will not be an appreciable driver of competitive differences.”
“55. Once the relevant product market is identified, the next step to be undertaken is the definition of the geographical dimension of the market. It is only when the geographical dimension of the product or service market has been defined that a NRA may properly assess the conditions of effective competition therein.”
“4.456.1 In its comments on the draft Statement, the Commission said that it welcomed our decision to deregulate or impose lighter remedies in areas where infrastructure-based competition has developed in recent years. However, it commented that a more granular differentiation of remedies in areas where there was some actual infrastructure-based competition could reduce the likelihood that CPs would reduce investment or even exit the market. 4.456.2 It considered that our approach could be developed further "in order to more accurately reflect the competitive conditions of a given area". In particular, it considered that we could develop a test, similar in concept to that used to define the boundary of the CLA, but with different parameters, which could then be used to identify other areas where the lighter remedies could be applied. It suggested that, if this were done, it might then show that areas such as the five CBDs were also suitable for lighter remedies. 4.456.3 The Commission therefore asked us to "consider…a lighter set of remedies, not only in the LP area, but also other parts of the UK territory, including the five CBDs, based on a set of clear criteria reflecting all relevant parameters of the state of infrastructure-based competition therein."”
“4.456.8 In applying our assessment of areas where lighter touch remedies may be appropriate, we continue to consider that it is not appropriate to include the CBDs. As we set out in paragraph 4.454, we find that for the CBDs, whilst network reach figures appear similar to the LP and at a level which warrants further analysis … , the available evidence points to the depth of competition being considerably lower than in the LP. For example, in paragraph 4.451, we note that in the LP 55% (85%) of VHB customer ends are within 100 (200) metres of four or more OCPs compared to 28% (64%) of VHB customer ends within CBDs. Evidence on concentration measures also points towards fewer OCPs being successful in providing services in the CBDs. In paragraph 4.451, we set out evidence on the combined share of BT and Virgin, the number of OCPs with a material service share and the HHI index, all of which show that market structures in the CBDs are highly concentrated, and much more closely aligned with the RoUK than the LP. 4.456.9 In paragraph 4.452, we consider the potential for incremental infrastructure investment in the CBDs and conclude that five small and geographically separated districts whose surrounding areas show little demand for leased lines and low network reach are likely to have limited prospects for incremental infrastructure expansion (even in the absence of any remedies). In paragraph 4.452, we also note that, although average business density is higher in the CBDs, the number of businesses and the volume of circuits in each of the individual CBDs, especially at very high bandwidths, are relatively low. In paragraph 4.454, we note that the low volume of VHB services in these areas makes it less likely that a VHB segment, on its own, could support entry of a competitor looking to supply that segment.”
“4.89 Our starting point is that we regard the CLA as an area of especially dense concentration of businesses and competing networks broadly similar to the CELA defined in the 2008 BCMR.”
“4.90 We now need to define the boundary of the CLA more precisely. As noted before, we define the boundaries based on the degree of presence and depth of coverage of rival infrastructure. If we can identify an area where competition is effective and no CP has SMP in the market for CISBO services, we can deregulate it fully. For that reason, we define boundaries of the CLA using a set of appropriate criteria ensuring that the resulting area has sufficient level of competition to protect users of CISBO services against the exercise of market power. This requires most if not all (potential) users of CISBO users to have a number of OCPs with network sufficiently close to their sites for them to be willing and able to compete for supply of CISBO services to these sites. 4.91 First we identify those postcode sectors in which competition is likely to be fully effective across a range of products as a separate market, which we call the Central London Area (CLA) To identify the boundary of this market we have created a “Boundary Test”
“426. Thus in the context of CISBO services, it is appropriate to assume that effective competition in a particular area is likely to require that most users in that area have a sufficient number of OCPs bidding to supply them that there will be effective competition to these sites. 427. However, Ofcom is not able to observe the actual number of OCPs who would bid to supply an individual site (FS §§4.363 – 4.365). Instead, it observes how many OCPs have infrastructure within a given distance of the customer site. This is an important distinction because it means that the criteria set out in the Boundary Test do not reflect Ofcom’s view on the minimum number of competitors needed for effective competition. Instead, they constitute Ofcom’s view on the minimum level of network reach needed to consider (before taking into account other relevant factors and undertaking a full SMP assessment) that competition is likely to be effective in that area. 428. The distinction arises because network reach figures do not measure the number of OCPs who exercise a significant constraint on BT’s pricing at a particular customer site: they measure the number of OCPs with infrastructure within a given buffer distance. This is likely to overstate actual availability for many customers within the area because: (i) Dig distances vary considerably, and not all OCPs will be able to submit a competitive bid if they dig the full buffer distance for all customers. The variability in dig distances set out above suggests that not all CPs will be able to submit a competitive bid if they dig as far as 100m for every contract. The buffer distances Ofcom chose reflected the evidence it had seen on average and median dig distances, and are consistent with the range of the submissions it received from infrastructure providers. However, the distance a CP is willing to dig in practice will vary considerably from site to site, reflecting factors such as contract value and length, the number of other potential users on the site and differences in dig costs (e.g. due to the presence of roads or other obstacles) and where in practice a CP is able to dig from its own network. The greater the number of CPs within the specified buffer distance, the more likely that some will be significantly closer to customers and hence more willing and able to compete to supply a customer (FS §4.369). (ii) OCPs have different business models and aren’t always prepared to supply all customers’ needs. CPs have different business models and customers have different needs. As a result, not all CPs, other than BT, will be well-placed to supply all customers and may not bid for a given contract as a result. (FS §4.370) (iii) Network Reach figures are averaged over all business sites in the area, so will include some sites with fewer than the average number of OCPs within the buffer distance. The average network reach statistics for a given area may mask differences in network reach at different individual sites, or for different customers, within that area. The larger the area, the more likely it is that the average degree of choice available to customers within it will not be representative of the actual choice available to customers in parts of that area where network coverage is less dense and there are more gaps in coverage (FS §4.368). (iv) Some customers require multiple suppliers for resilience . An additional consideration is the fact that, as a material proportion of users contract with multiple suppliers for resilience reasons (see Senensieb 1 §§65 - 66), this increases the number of CPs needed to ensure that the majority of users in a given area have effective competition to BT. Customers may want multiple providers for resilience reasons (e.g. the 2015 BDRC survey found 25% of businesses surveyed use more than one supplier, and that resilience was the second most important feature when choosing a service provider (after availability)). These users will require a greater number of bidders in addition to BT to be able to exercise choice between providers effectively and, given the variability in dig distances and business models mentioned above, a user may need significantly more providers with network within 100m in order to receive this minimum number of bids (FS §4.371). 429. Taking these factors in the round, Ofcom considered the Boundary Test criteria were likely to ensure that most customers in an area would have a sufficient choice of provider.”
“430. Ofcom’s assessment of the level of network reach required for an area to be considered likely to be effectively competitive, on the basis of that measure alone, was a qualitative assessment of a very complex relationship that necessarily involved a degree of judgment. However, I consider the Boundary Test to be a reasonable and proportionate basis for identifying candidate areas that were likely to be effectively competitive.”
“4.327 Having identified these four geographic areas to focus on, we considered four indicators of competitive conditions: - The presence of rival infrastructure; - The distribution of service shares; - Pricing and profits; and - Other structural indicators of competition, including the scale and density of demand, the types of business present, and the extent of links to more competitive areas elsewhere. 4.328 We placed most weight on the presence of rival infrastructure. Our assessment of this ‘presence’ indicator considered differences in the proximity of infrastructure to businesses in each area; the number of rival networks; and their coverage. We considered that areas where the average business had two or more OCPs’ networks within 200m had greater potential for competition than other areas. We used this metric as a way of identifying areas where competitive conditions appear to differ from the RoUK, at least to an extent that merits further analysis. However, we considered that areas were unlikely to be effectively competitive unless they satisfied the more stringent criteria used to define the CLA boundary. ” (Emphasis added.)
“4.401 We have nevertheless placed significant weight on CP presence, and think that our Boundary Test is appropriate to identify the areas likely to be the most competitive. BT and IIG suggest that the number of competitors needed for effective competition is lower, with the implication that the Boundary Test is not needed to identify an area as effectively competitive. To support their views on the number of competitors needed for effective competition, BT and IIG referred to various studies. The main inference that BT and IIG draw from these studies is that three competitors (including BT) is enough. 4.402 We consider that our Boundary Test captures the reality of BCMR markets whereby the proximity of a rival CP with infrastructure to a particular business site does not always mean that the CP will compete for that user. As discussed in paragraphs 4.359 to 4.374 above, for leased lines markets, we think that a given number of OCPs with ‘presence’ will likely translate into a smaller number of competitive retail offers at the customer site. Our Boundary Test, therefore, provides a reasonable basis to capture these uncertainties […].”
“Small enough for competitive conditions to be unlikely to vary significantly within the unit but at the same time large enough that the burden on operators and NRAs with regard to data delivery and analysis is reasonable.”
“[…] I do not consider it appropriate to relax multiple assumptions in the manner [Dr Basalisco] suggests (e.g. considering the cumulative impact of a longer buffer distance and fewer OCPs) as the appropriate value for the parameters concerned are linked to values assumed for others. For example, as noted in the FS §4.367, ‘the longer the buffer distance specified the more likely it becomes that measures of the number of OCPs within that distance overstate actual choice for most consumers.’ As a result, relaxing one assumption (e.g. by setting a longer buffer distance) would be likely to call for a stricter requirement on the number of OCPs needed within that distance. It is also not clear what would be gained from changing multiple assumptions simultaneously. The purpose of Ofcom’s sensitivity testing was to see if the CLA boundary was particularly sensitive to any of the assumptions underlying its analysis. The fact that the boundary changed somewhat with a change in assumptions is to be expected, but the key point was that it did not change significantly. Changing more assumptions at once would have likely resulted in a larger change to the CLA boundary but it is not clear what this would have added to Ofcom’s analysis.”
“A15.78 We consider that an exchange will be effectively competitive where there is a sufficient degree of interconnection for CPs not to be reliant on BT for backhaul services. As some CPs will need to contract with multiple providers to obtain a resilient solution, this requires that a minimum of two rival backhaul services should be potentially available for an exchange to be found competitive.”
“[…] given some stakeholders’ comments about potential limitations on PCOs’ ability to provide a rival backhaul service (such as capacity constraints) we think an absence of supply to third-parties may be more of a concern, as it could indicate that the connection in question cannot be used to provide a rival backhaul service to BT.”
“A15.82 In light of both stakeholder comments and our own assessment of the potentially weaker constraint from indirect PCO presence, we consider that the number of rival backhaul services available at a particular exchange may not follow directly from the number of PCOs connected (directly or indirectly) to that exchange. Instead, the number of PCOs present could overstate the number of rival backhaul services available in a material proportion of cases. As a result, we consider that using a threshold of two PCOs to identify effectively competitive exchanges could result in extending the CI core too widely.” (Emphasis added.)
“We found that, typically, there were only two PCOs (in addition to BT) present at OHPs but three at TANs. This contrasts to one PCO, typically, across all exchanges. This analysis suggests that an exchange where three PCOs are present is likely to have competitive conditions which are similar to a typical TAN in the existing CI core and, as the CI core definition is based on TANs is therefore likely to be effectively competitive.”
“A15.97 Overall, we consider the evidence suggests that identifying competitive exchanges based on the presence (direct or indirect) of two PCOs in addition to BT would be likely to result in extending the competitive CI core too widely. This is because there are reasons to believe there would not always be two rival backhaul services in these exchanges, and competitive indicators suggest the exchanges identified by this threshold still have a high degree of reliance on BT and appear markedly different from the existing CI core. A15.98 In contrast, exchanges where there are at least three PCOs present show a lower degree of reliance on BT and appear more similar to the existing competitive core in relation to a number of key indicators. In light of this, we conclude it is not necessary to set the threshold higher still, and consider exchanges identified by applying a criterion of three PCOs (in addition to BT) are likely to be effectively competitive.”
“A15.93 We found that, typically, there were only two PCOs (in addition to BT) present at OHPs but three at TANs. This contrasts to one PCO, typically, across all exchanges. This analysis suggests that an exchange where three PCOs are present is likely to have competitive conditions which are similar to a typical TAN in the existing CI core and, as the CI core definition is based on TANs, is therefore likely to be effectively competitive.”