BT's £12.5bn mobile ambitions hit by new broadband price controls

BT’s mobile ambitions suffered a blow on Thursday, as regulators indicated they are likely to factor in its £12.5bn takeover of EE in new price controls designed to curb its dominance of the superfast broadband market.

The warning came as part of a new Ofcom test of whether BT abuses its ownership of the national telecoms infrastructure to undermine competition on superfast broadband from Sky and TalkTalk.

Both companies buy wholesale access to BT’s fibre-optic network to provide superfast broadband to their own retail subscribers. Currently nearly three quarters of superfast broadband connections on the BT network are retailed by BT itself.

BT’s enemies, including Vodafone, which is poised to enter the broadband market this year, are likely to use Ofcom’s decision on ‘margin squeeze’ as evidence that it should be stripped of control of its network to ensure competition.

The margin squeeze test will look at whether BT’s wholesale rates are too close to its own retail prices for Sky and TalkTalk to make a reasonable profit while remaining competitive. If BT fails the biannual test, to allow rivals to make a better return it will be forced to either by cut wholesale rates or increase its retail prices.

Ofcom’s said its initial assessment, based on out-of-date pricing data, was that BT was not operating a margin squeeze, however.

TalkTalk said it was nevertheless “delighted” by the new rules, partly because the way they account for BT’s heavy investment in sport and plans in the mobile market will make the test harder to pass.

Ofcom said it will include the costs of providing BT Sport free to broadband subscribers when it calculates the cost to BT of providing superfast broadband at retail, effectively reducing the margin. More of the costs will be allocated to superfast broadband customers - who are more likely to take BT Sport than standard broadband households – rather than spread evenly across the entire BT broadband base as previously proposed. BT said the changes would not make a significant difference.

The regulator also indicated it is likely to take the same approach if BT offers broadband subscribers deals on mobile access after its blockbuster takeover of EE is complete. The group is currently in the due diligence phase of the £12.5bn deal, with an announcement on final terms expected this month.

The rules were welcomed by Sky as “recognition of the competition problems that can prevent customers from getting the best choice and value in superfast broadband”.

Sky could also benefit from the inclusion of BT Sport in the margin squeeze test because it may affect BT’s bidding in the ongoing auction of Premier League rights and subsequent ability to give broadband subscribers free access.

BT had fiercely resisted Ofcom over the inclusion of bundled sport and mobile services in the margin squeeze test. On Thursday called the rules “misconceived” and said it could mount a legal challenge.

A spokesman said: “We're not opposed to the principle of a test.

“However, we do not think our sports costs should be part of any assessment - and we reject the notion that Sky and TalkTalk require further regulatory assistance.”

“BT is trying to ensure real competition in pay-TV sports for the first time in 25 years. Yet the UK's lop-sided regulatory regime means Sky remains largely unregulated, while further hurdles are proposed for us, the pay-TV challenger.”

The company argued that Sky and TalkTalk should not get any more help from regulators as they account for more than 40pc of the overall broadband market, compared with its 33pc. BT’s market share figures include standard copper-based broadband and the Virgin Media cable network.

Baroness Harding, the chief executive of TalkTalk, said BT’s characterisation of the market in a debate about superfast broadband competition amounted to “dirty tricks”.

She said: “The very fact that Ofcom are acknowledging BT has an incentive to abuse their monopoly means this is an important moment.”

Analysts said Ofcom’s “robust” stance was likely to intensify calls for Openreach, the BT division that runs its infrastructure and sells access to Sky, TalkTalk and soon Vodafone, to be forcibly spun off.

Nick Delfas of Redburn said: “We expect Vodafone, Sky and others to propose that BT is now split up, as a neater solution to the margin squeeze problem.

“It is absurd for detailed retail regulation of this sort still to be necessary 30 years after privatisation.”

Guy Peddy of Macquarie said the direct financial impact on BT of Ofcom’s margin squeeze decision was, however, “reduced by the potential purchase of EE, which significantly increases the scale of BT”.