UK: Liberalization & Deregulation

Liberalization & Deregulation Overview:

Britain has the most open telecommunications market in the world.  Since the early 1980s, British Government initiatives to liberalize this market have ensured the establishment of a highly sophisticated and rapidly-moving industry.  As a result of liberalization, a process requiring massive investment from major British and international companies has positioned this industry as a world-leader in terms of diversity and speed of uptake of domestic and business services; expertise in transmission and infrastructure development; and strength in equipment manufacture, opto-electronics and software development.  Because of the attractiveness of the British market brought about by liberalization, Britain takes the lead in Europe in attracting foreign investment, worth some £50 billion a year.

Brief History

The British government’s liberalization process started with the decision to privatize Post Office Telecommunication in 1981, creating a new entity called British Telecom (BT).  In 1984, the Office of Telecommunications (OFTEL) was established.  OFTEL is the regulator for the UK telecoms industry.  Although a government department but, it is independent of ministerial control.  The main way OFTEL regulates is through monitoring and enforcing the conditions in all telecommunications licenses in the UK.  OFTEL also initiates modifications to these license conditions.
OFTEL’s funding is provided by Parliament but the cost is offset almost entirely by the license fees paid in by the operators.

All telecommunications operators such as BT, local cable companies, mobile network operators and the increasing number of new operators must have an operating license.  These set out what the operators can-or must-do or not do.  For example, BT’s license contains the formula (currently RPI 4.5%) which controls the prices of its main network services.

Price Controls

The price controls that OFTEL imposes on BT’s retail and network charges expire in 2001.  OFTEL is considering whether new price controls are needed and, if so, the form they should take. The first step in considering whether new controls are needed is to assess the extent of competition that BT faces now and is likely to face over the period of any future price control. The following paragraphs outline likely future developments which may increase competition and so constrain BT’s behavior without the need for price controls.  OFTEL seeks views on both the likelihood of these developments and their implications for the need for future price controls.

The current retail price control covers the residential line rental and the prices of local, national and international calls and is based on the expenditure patterns of the lowest-spending 80% of residential customers. The current cap is set at RPI-4.5%.

Future developments which may affect the need for price controls

Tariff rebalancing
Historically, BT’s line rental has been below cost. Tariff rebalancing is the term used to describe the combination of line rental increases and offsetting reductions in call prices in order to bring both more closely into line with costs within the overall price cap. Although the constraint limiting any increase in BT’s exchange line rental to RPI+2% was removed in February 1996, the residential line rental has still not risen to a level where costs, including the cost of capital, are covered.
One effect of rebalancing is to reduce the attractiveness of operators, known as "indirect access" (IA) operators, who provide call services but not the exchange line (for which the customer retains a BT subscription), relative to direct service from BT or other competing local access providers. If BT does rebalance significantly in future, this will tend to reduce the competitiveness of indirect access operators but could stimulate investment in competing local access networks.

Carrier Pre-Selection
On the other hand, the introduction of carrier pre-selection (CPS) from 2000/1 will increase the ability of indirect access operators to compete with BT by removing the need to dial extra digits when making calls via indirect access.

Cable TV
The development of cable TV in Britain began at the end of 1983, when the Government awarded 11 pilot franchises for operators to deliver cable TV programmers and other telecommunications services over local broadband cable network.
Since then cable companies have invested massive sums in the development of the cable infrastructure.  During the early development period, subscription numbers for TV services from cable companies were disappointing by comparison with the take-up rate of the leading satellite TV operators.  The uptake of cable telephony services occurred at a faster rate.  By January 1997, 150 cable franchise holders, operated by 11 leading companies, had developed a cable network entirely financed through private investment, passing almost eight million homes.

The coverage of cable networks has increased significantly over the current price control period and, at the end of 1998, just under 50% of households had access to cable companies’ networks.  By 2001, when the network is due for completion it will be some 96,000 kilometers long, reaching 17 million homes, schools and businesses.


Radio-fixed access and other direct access operators
A number of operators are continuing to provide a competitive alternative to BT using radio fixed access (RFA). Atlantic, for example, has announced ambitious plans to expand from its current base in Scotland.  RFA operators may therefore emerge as significant competitors to BT during the next price control period. Operators of regional (wireline) networks have also expanded during the current price control period and will continue to do so. However, they have so far concentrated on business customers which of course are already outside the retail price control.

Fixed-mobile substitution and integration
BT’s fixed network could also face additional competition from mobile network operators as mobile penetration increases. There are now about 15.5 million mobile users in the UK. Up to now, the significantly higher price of mobiles and performance and quality differentials have limited the extent to which they can be regarded as a realistic substitute for fixed services. But some substitution has already occurred and recent price reductions, together with the prospect of further improvements in quality, suggest that this could become an increasingly important phenomenon.

Internet
 One of the main developments which is likely to occur over the rest of this price control period and the next is the rapid growth in demand for data services known as the "datawave". The growth in Internet use may be the most obvious example. Most Internet traffic so far seems to have been incremental and has not substituted for other types of traffic. This can benefit price-capped services by contributing to the common costs of providing the network. The Internet can also be used for telephony in direct competition with BT. Congestion and quality problems may limit use of the Internet itself for voice, but it provides greater competition for fax and other delay-tolerant traffic.

International liberalization
  Many international telephony markets have undergone significant liberalization during the current price control period and this has been reflected in falls in prices. This process is likely to continue, with more countries allowing access by competing operators under the aegis of the EU and WTO. Routes to these countries are likely to become increasingly competitive.
Phone
Phone services for residential and small business customers are getting cheaper. Partly this is due to regulation of the retail prices charged by BT, who serve over four fifths of customers, requiring it to reduce prices each year for basic fixed line services. It is also partly due to competition from other telecoms companies seeking to attract customers away from BT.

Number portability
Until 1996, customers switching from BT to another operator needed to change their telephone number. This meant that businesses needed to change their stationery and signage, and inform their customers, and residential customers needed to inform friends and update address books etc. This was a significant deterrent to customers to switch from BT to a competitor. The introduction in 1996 of "number portability", which enables a customer to keep his telephone number when changing operator, should enhance the competitiveness of cable companies and other connect-to-home operators in this price control period and into the next.


Mobile
There are now over 15 million mobile phones in use in the UK. Prices are falling but are still above those for fixed lines, especially for calls in peak hours. The basic quality of service for mobiles – in terms of being able to make successful calls – is lower than for fixed line phones. A significant proportion, believed to be about 20%, of the total are paid for by businesses, though they may also be used for personal calls. This may affect the sensitivity of usage to price changes.
Technological developments, including a "third generation" of mobile phones will enable the transfer of higher speed data and ultimately video conferencing – probably in 2002 or 2003. These developments will significantly increase the overall traffic capacity of the mobile networks, particularly for voice services, which will be able to match the
fixed networks for quality.[1]

Removing all remaining regulatory and legal barriers to electronic ways of working

In May 2000, the Electronic Communications Act was given the position to provide for electronic signatures to be admissible as evidence in legal proceedings.  This move will be particularly welcome to business.  It allows Minister, by statutory instrument, to modernize the statute book and allow electronic alternatives to paper-based requirements.


Tables:
The regulation of communication infrastructure, including the public switched telecommunication network (PSTN).
 
Infrastructures Regulatory Status Number of licensed Operators (1998)
Local PSTN Fully open 134
National PSTN Fully open 20+
International PSTN Fully open 7
Analogue Cellular Mobile Fully open 2
Digital Cellular Mobile Fully open 4
Other Mobile Communication (e.g. PCS, PCN, CT-2 etc.) Fully open Approx.    20
Payphones Fully open 4

The major public telecommunication operator (PTO) of public switched telecommunication services.
 
 
Name of PTO PTO Ownership Status (1998)
British Telecom Privately owned
Cable and Wireless Communications Privately owned
Kingston Telecom Privately owned
Cable telephony and others Privately owned

Broadcasting market
 
 

Infrastructures Number of licensed
operators (1998)		 Number of Privately 
owned companies		 Number of public
service organizations
National Terrestrial TV  17 8 2
Local Terrestrial TV  2 2 1
National Terrestrial radio 3 3 1
Local Terrestrial radio  205 64 1
Cable TV service 130 5 --
Analogue direct broadcast 173 (TV only) 105 --
satellite(DBS) service -- -- --
Digital DBS service -- -- --

The major public/private terrestrial TV broadcasting companies
 
 
Name of public/privateTerrestrial TV broadcasting companies Ownership Status(1998) Comments
BBC Public corporation Castle Transmission Services provides transmission infrastructures
Channel 4 Public corporation Castle Transmission Services provides transmission infrastructures
S4C Statutory authority Castle Transmission Services provides transmission infrastructures
ITV Privately owned Castle Transmission Services provides transmission infrastructures
Channel 5 Privately owned Castle Transmission Services provides transmission infrastructures

[2]
 


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UK Home Executive Summary Telecommunication infrastructure  Liberalization and deregulation Internet diffusion Electronic Commerce Hardware manufacturing Software Development Who uses IT? IT Labor Market
IT Geographics IT Financing Government policies Legal environment Transborder Data Flows Analysis: IT strengths and weaknesses Analysis: impacts on the business. Sources and links About the authors

This report was completed in December 2000 for the class Impacts of National Information Technology Environments on Business given by Prof. Carmel  in the program of Management Of Global Information Technology at the Kogod School of Business at American University in Washington D.C.