1. ©Ofcom Voice – the need to take a long term view on sector evolution Chris Rowsell 18 October 2007

2. ©Ofcom1 TSR strategy for deregulation Historically, fixed voice has been the most heavily regulated area in telecoms – increasingly at odds with the world where voice is a ‘commodity service’, ubiquitously delivered over different platforms and devices. In TSR, Ofcom proposed a staged withdrawal from voice-specific regulation: 1) Removal of retail regulation once sufficient wholesale competition was in place. Retail price controls were abandoned in July 2006, with only safeguard measures on BT remaining. 2) Withdrawal of wholesale regulation as and when generic access competition could take over. Most wholesale controls remain in place, although some deregulation took place in the 2005 review of network charge controls. Several other ongoing Ofcom policy activities are of direct relevance for future competition in voice, most notably the Openreach financial framework review and work on NGN interconnect and charging models. Key technology and regulatory milestones with implications for fixed voice

3. ©Ofcom2 Current regulation of fixed voice Market failureRemedyCurrent status BT SMP in retail voicePrice controls allowed to lapse in July 2006 as retail competition deemed sufficient. BT assurances to limit rental increases until end 2007. A retail narrowband review will consider further. BT SMP exchange lines BT to provide Wholesale Line Rental (WLR)A wholesale review will consider need for existing remedies and regulation in 21CN BT SMP in call origination Limit on what BT can charge other operators for wholesale call origination (Indirect Access, CPS and Friaco, call origination charge control) A wholesale review to consider need for existing remedies and regulation in 21CN. In particular, the potential for origination and access markets to converge in the NGN environment. BT SMP in termination and transit Limit on BT charges for termination and transit services (Network Charge Control) Review by 2009, examined by NGN project Service availabilityUniversal service obligations on BT and KingstonReview currently not planned, SoS sets USO Consumer protection, network efficiency General conditionsNeed to review currently considered There are two broad types of remedies in fixed voice, used to: Constrain BT’s market power by facilitating alternative entry and/or limiting what BT’s retail and wholesale charges. Could potentially be removed if sufficient competition to BT emerges. Address consumer protection issues (E.g. USO, emergency access) and facilitate network interoperability. The need for these remedies will evolve alongside market and technology changes.

4. ©Ofcom3 What current regime has delivered Source: Ofcom Increase in competition from CPS and WLR… BT’s share of lines down from 83% in 2001 to 71% in Q3 2006. Over 100 providers using CPS often in combination with WLR. One in five lines are CPS-enabled and 12% are WLR lines. …leading to a reduction in call charges… Average call cost excluding line rental down by 25% between 2001 and Q3 2006 (to 4ppm). Including line rental the decline in average call cost was only 4% (to 6.7ppm) …and decline in revenues Retail fixed revenues dropped by 19% between 2001 and 2005 (to £10.1bn). The decline accelerated in 2006; revenues in the first three quarters (£7.3bn) were 6% below the same period in 2005. Fixed voice still accounts for the bulk of telecoms revenues (at 26% in 2005) but its share is falling fast. Share of exchange lines Fixed calls: revenue per minute Retail revenue from telecoms services Source: Ofcom

5. ©Ofcom4 Fixed voice competition and 21CN A more efficient IP-based core network… 21CN roll-out started in 2007, BT plans were to migrate 50% of customers by 2009 and complete migration by 2012. 21CN consolidates BT’s legacy core networks into one IP-based core, which should result in A more efficient operation, with estimated cost savings of £1bn annually from 2008/2009. Potential for IP-based innovation and quicker time to market for new services. There are many open issues currently in relation to cost charging models, the points of interconnection for alternative providers and migration process which could all have implications for competitive landscape in fixed voice...which could assist or delay withdrawal 21CN should result in a simpler, flatter network which may offer opportunities for simplifying wholesale remedies. However, it also has the potential to increase complexity and delay withdrawal from wholesale regulation. Co-existence of current and new NGN-based remedies could lead to further fragmentation of the voice market with business models built around a variety of products. Proposals for new remedies therefore need to be carefully assessed in terms of their potential to accelerate wholesale deregulation going forward. 21CN - basic architecture

6. ©Ofcom5 Wholesale voice products in 21CN Existing remedies: CPS, WLR, Indirect Access and FRIACO CPS and WLR may need to be kept in 21CN if no other viable alternative for competition emerges. Both need to be examined for their feasibility in the context of other proposed remedies – currently VLA is the main candidate (see below). There is less argument for keeping Indirect Access (used for pre-fix dialled call provision) and FRIACO (used for unmetered narrowband internet) as their use is in continuing decline – options for withdrawal need to be considered. Another consideration for CPS, I/A and FRIACO is the potential for access and origination markets to converge due to more streamlined structure of NGN. If this happens, WLR and Indirect Access cannot be used in their current form. New remedies Voice Line Access (VLA) is the 21CN wholesale voice product currently designed by Openreach in consultation with industry groups. VLA offers similar functionality to combined CPS (for calls) and WLR (for line rental) plus full control over service characteristics using alternative operators’ call servers and session controllers. This could allow service innovation and embed service-based competition deeper in the network. Wholesale Broadband Connect Converged (WBC C) is a product proposed by BT Wholesale, combining broadband and voice functionalities. WBC C could be used by competing providers instead of a combination of WLR and IPStream products, at a cost marginally below combined WLR and IPStream.

7. ©Ofcom6 The Undertakings Where we are now… Ofcom considers the Undertakings are still the most effective remedy for issues raised by the TSR A number of the Undertakings milestones have now been passed, e.g. BTR is consuming WLR3 for new customers, EAB is active, etc. Last two years have raised some issues, which Ofcom is now looking at In the future… In addition to the specific requirements, the Undertakings set out an approach for regulation, i.e. functional separation, equivalence of inputs, etc. However, it will be necessary to keep the Undertakings under review as technology develops and new services are introduced