United Kingdom: A Model for Functional Separation

As of 2009, the United Kingdom (UK) is ranked 4th out of 21 OECD countries for average monthly subscription for very high-speed Internet (speeds of over 35,000 kbit/s).202 As well, of the larger European countries, the UK is the steadiest performer on broadband penetration.203 Increasing access and speed and decreasing price have characterized broadband development in the UK over the past few years. The current situation in the UK can be seen as increasingly market-based, yet their strategy continues to provide strong competition and quality broadband services, likely the result of a series of strategic steps taken throughout the decade.

Most notably, since the privatization of telecommunications sectors worldwide, the UK was the first country in the world to implement functional separation. This represented a major shift in terms of government regulation. While unbundling was widely adopted by the European Union (EU) in 2001, British Telecom (BT), the incumbent carrier in the UK, had not been fully cooperating with this move to increase competition. By late 2005, unbundling still had not had much of an impact on the market. As a result, Britain’s regulator, Ofcom, forced BT to undertake functional separation. This meant that an independent arms-length organization, Openreach, would manage the wholesale204 operations of BT and provide competing ISPs access to BT’s infrastructure at regulated rates.

The introduction of functional separation had major impacts on competitive entry, penetration, Internet pricing, and speed.205 Regulated access to BT’s infrastructure led to a huge influx of service-based competition. In late 2005, there were only 200,000 unbundled loops, but by the end of 2008, there were 5.5 million unbundled loops,206 indicating massive growth in the market. Ofcom’s decision to create Openreach spurred widespread broadband use across the country, lowered broadband prices, and offered a much wider range of choices for Internet service. Certainly, the public benefitted from this move.

Competition has also had positive effects on investment in infrastructure. BT has recently announced that it will be removing current caps on usage due to increased investment in their networks and network bandwidth.207 As a result, BT claims that there is no need to cap usage and aims to optimize their user experience. However, a “traffic management” policy will still remain, and in extreme cases where heavy users are degrading service for others, BT may still reduce Internet speeds.208

As such, the EU holds that there is insufficient evidence to justify formal regulation that would prohibit certain forms of traffic management. In general, the role of the EU is to enact guiding policies of liberalization and harmonization, which aim to create one large market that transcends national boundaries and embodies open competition. Harmonization is key here as EU regulators tend to enact policies that adopt the lowest common dominator of regulatory practices. Thus, it can be expected that any EU policy will promote free market competition and shy away from any regulating policies or processes, despite the fact that they may actually secure higher levels of competition like Ofcom’s forced functional separation.

Problems surrounding net neutrality have been relatively absent due to strong competition, however, conversations about the issue have recently gained momentum in the UK. According to an article on TechEye.net, BT has “openly welcomed the prospect of giving commercial partners preferential bandwidth on their networks, effectively creating a two-tier Internet”.209 Thus, it appears as though problems surrounding net neutrality may potentially materialize in another form. Although this news has yet to unfold, the EU is set to release its new telecoms package in May 2011, which will likely take a pro-competition approach to the issue, diverting from any type of actual net neutrality legislation for reasons previously discussed.

In addition, while the UK is reluctant to impose net neutrality legislation, they are mandating transparency as a way to safeguard competition. Much like Japan, the issue of transparency is being promoted as a key component to minimizing the risk of anti-competitive behaviour. As long as ISPs are clear about traffic management practices, the public should, in theory, have choice in which provider they wish to purchase Internet access from. It is important to note here that even when sufficient competition exists and ISPs are open about their practices, the process by which users are able to switch ISPs must be as simple and straightforward as possible in order for this to serve as a viable solution.

While the positive impacts of functional separation may have only spurred a relatively short, but intense period of competition, the main point is that promoting and maintaining competition remains at the forefront of the EU’s strategy. Ofcom took the necessary steps to foster more competition and create a level playing field for competing ISPs when unbundling policies were shown to be ineffective in the UK. The effects of functional separation were much more profound than the introduction of formal unbundling, since unbundling was not effectively enforced or adopted by the incumbent — one of the risks of settling for open access policies like unbundling over functional separation. Furthermore, the UK’s approach has now shown to have positive affects on investment in infrastructure.

Similarly, in Canada, unbundling was formally adopted in 1993, but weakly implemented by the government. As a result, competition was limited to facilities-based entrants, with much weaker results.210 If Canada aims to take a market-based approach, then it must be committed to actively pursuing and maintaining competition within the telecommunications sector through regulatory measures like functional separation when necessary. As long as the EU continues to instill mechanisms to ensure competition, and Ofcom is able to maintain its regulatory power despite the overarching free market ethos of the EU, the UK model remains a useful point of analysis for Canada.

Endnotes

202. OECD. (2009, October). “Average Monthly Subscription Price for Very High-Speed Connections”. OECD Broadband Portal. Retrieved from http://www.oecd.org/document/54/0,3343,en_2649_34225_38690102_1_1_1_1,00...

203. Supra note 192.

204. Wholesale arms lease infrastructure and bandwidth to competing ISPs, while retail arms provide regular Internet access for homes, businesses, etc.

205. Supra text accompanying note 192, p. 84

206. Ibid.

207. Lasar, M. (2011, March 14). BT to UK Infinity subscribers: no more usage caps! Ars Technica. Retrieved from http://arstechnica.com/telecom/news/2011/03/bt-to-uk-fiber-subscribers-n...

208. Ibid.

209. Petrou, A. “Ofcom should wait before it pushes net neutrality rules”. Techeye. net, Retrieved from February 2011 http://www.techeye.net/internet/ofcom-should-wait-before-it-pushes-net-n...

210. Supra text accompanying note 192, p. 84