BT pressured to extend interconnect price-cuts - Company Business and Marketing

CommunicationsWeek International, May 8, 2000 by Ian Scales

BT's flat-rate Surftime package for dial-up Internet access has provoked a storm of demand for capacity-based interconnect in the U.K. telecoms market.

The U.K. regulator, Oftel, has told BT to offer all its competitors flat-rate leased circuits between its local exchanges and its main switching centers where traffic is passed to interconnected carriers.

Observers said the proposed interconnect product, flat-rate Internet access origination (FRIACO), would be the first of its type in the world and would create a more level playing field in the fast growing dial-up access market.

"This [determination] is a significant precedent," said Phil Reynolds, director of regulatory affairs in the United Kingdom for Clinton, Missouri-based MCI WorldCom Inc., whose complaint resulted in the Oftel proposals.

At present all switched capacity is charged at per minute wholesale rates and competitors say this leaves them exposed to losses if they were to offer flat-rate services to their customers.

"This is part of the way the market is developing," said an official at the European Commission, in Brussels. "A move towards capacity-based charging, which allows the competitors to offer the same services as the incumbent, is to be welcomed."

From the Commission's perspective, member state moves to capacity charging for interconnect is deemed to be an inevitable, and desirable, development and has already been anticipated in its unbundling white paper.

Last month, the EC published its own study on network unbundling. This anticipates new forms of interconnect, although not the scheme being proposed in the United Kingdom.

But the proposals are nevertheless expected to meet fierce resistance from BT.

"[BT] believes that there is no model for a wholesale flat-top interconnection anywhere in the world--even in the U.S.," said a source close to BT who asked to remain anonymous. "And it thinks the prices proposed [for the individual circuits, set at [pounds]236.51 per 64-kilobit-per-second circuit per annum] are absolutely ludicrous."

Having invested in technology that decodes data calls in its local exchanges, in part to head off switched infrastructure congestion as data calling grows, FRIACO means BT would have to support its competitors' heavy use of the very infrastructure it is trying to relieve.

"This takes us to the position where we can launch a flat rate offering too," said MCI WorldCom's Reynolds. "It's a paradigm shift for Internet access generally."

Reynolds claimed that FRIACO will enable competitors to offer a Surftime equivalent to their ISP affiliates' dial customers when BT begins introducing the new product in June.

"There are already all the components within the existing arrangements that would enable players to compete with their own [flat-rate] offerings," said the BT source.

Special case

Competitors argue that sustainable competition requires that flat-rate Internet access should be treated as a special case, however.

They say that BT must not be allowed to gain an unfair advantage by changing the architecture of its network. BT's new infrastructure effectively moves dial access out of competitors' reach by putting all the value-added decoding and IP conversion in its local exchanges.

"The [BT] argument would be valid if the network and services parts of BT were already properly split," said Graham Louth, principal consultant at Cambridge-based Analysys Ltd. "As things stand it is possible for BT to attribute costs to its advantage and it is months before competitors can get the figures from which to complain."

So far the U.K. regulator appears to agree.

But other observers, while cautiously welcoming the promotion of more access competition, wonder why the principle cannot be extended beyond fiat-rate Internet access to other services.

"These arrangements should be application independent," said John Hunter, of consultants Hunter Associates in London. "I don't think anyone is saying we have to replace what we have, but this would provide more opportunity for greater competition."

Capacity-based interconnect has been raised previously in the United Kingdom as an alternative to call-by-call interconnect, with some operators arguing that such arrangements would raise the competitive pulse by enabling them greater flexibility to offer different tariff structures.

Call-by-call interconnect tends to result in a wholesale call origination or termination cost, which shadows the incumbent's own retail pricing structure.

But according to Analysys' Louth, while there are no technical reasons preventing a FRIACO-style capacity arrangement for voice as well as data, from a regulatory point of view it would be difficult to run capacity-based and call-by-call together.

"Interconnecting operators would naturally buy optimum FRIACO-style capacity and then use the per minute arrangement to top up during busy periods. You'd need to review the entire framework to make sure BT could recover its costs," he claimed.

For its part though, MCI World-Com is happy for FRIACO to be confined to the Internet access sphere.