Terms of reference

This paper sets out the terms of reference for the Ofcom Strategic Review of telecommunications, which will begin in early January 2004 and will be completed by the end of 2004.

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Ofcom has decided that one its first key tasks will be to review the UK telecommunications sector. We propose to undertake a comprehensive, wide ranging and evidence based Strategic Review of these important and dynamic markets.

The Review will assess the options for enhancing value and choice in the UK telecommunications sector. It will have a particular focus on assessing the prospects for maintaining and developing effective competition in UK telecommunications markets, while having regard for investment and innovation.

This assessment will in turn shape the strategy through which Ofcom will promote competition or take other regulatory action to further the interests of consumers and citizens in the UK.

The key output of the Review will be an Ofcom statement specifying its approach to telecommunications regulation. This will enable casework and policy development to be located in a clear strategic framework going forward.

Why it matters

Telecommunications is a significant and growing sector in the economy. In 2002 UK telecommunications revenues were £50 billion compared to £18 billion in 1984 (at 2002 prices).

UK telecommunications revenue as a proportion of GDP has grown from 1.7% in 1985 to over 2.3% in 2002. According to the most recent data (1999-2002) net capital expenditure by the UK telecommunications industry was on average over £9 billion per year (at 2002 prices). This represents 8% of all the capital expenditure in the UK economy as a whole over the same period. By contrast, in 1984 net capital expenditure in telecommunications was just £3.7bn (2002 prices) which represented around 4% of all capital expenditure.

The sector has been regulated by Oftel since the privatisation of BT in 1984 and over the last 20 years much has changed in the telecommunications sector. There are now approximately 170 public fixed telecommunications providers, 5 mobile providers, 59 mobile service providers and 700 internet service providers.

There are varying degrees of competition through the sector in the form of different services and at different points in the value chain. By 2002 BT's share of voice calls had fallen to 60% and international calls to 30%. However, in many markets such as residential access (82%) business access (87%) and wholesale call origination (78%), Oftel has found that BT has Significant Market Power (SMP).

Technological innovation has driven changes in the underlying economics of the industry. There is increasing convergence between different sectors. In addition, the growth of the internet and the emergence of different broadband access technologies create new challenges and opportunities for the sector.

In other regulated sectors different models have emerged, with different lessons to learn. In gas and electricity a clear separation of wholesale from retail has created much higher levels of competition in service provision but has embedded regulation in distribution. In rail a similar separation has been adopted but has however failed to deliver the level of consumer benefit envisaged at the point of privatisation.

In other countries different models of regulation have been applied or a different emphasis has been placed within the context of a similar approach.

Oftel has undertaken many detailed reviews of particular parts of the sector over the last ten years. However, the sector as a whole has not been subject to a thorough and open strategic review since 1990/1991 when the Government, together with Oftel, conducted the Duopoly review.

The telecommunications sector has undergone significant change since 1991. It faces major challenges in the future as technology and consumer demand evolve. Within the EU, the policy agenda will move beyond implementation of the most recent directives. These factors, together with the creation of a new sectoral regulator, make 2004 the right time to conduct a review of the UK’s strategy for regulating telecommunications.

Overall Approach

The key building blocks of our proposed approach will be:

1. Analysis

The approach will be evidence based and include a summary of the development of competition in telecommunications. The Review will provide an assessment of the current position in the sector and the prospects for the future. There will be a detailed analysis of the scope for the further development of effective competition and the scope for changes including the possibility of removing regulation.

2. New Research

The Review will carry out a number of new research projects which will underpin the analysis and the recommendations. These will include market research on changing consumer preferences, research on the impact of new technologies and detailed cost and business plan modelling.

3. Expert Advice

Ofcom will use expert external advisers to complement our own internal expertise. These advisers will bring to Ofcom additional detailed understanding of commercial activity, technical economic analysis and other areas.

4. Consultation

The Review will make full use of public consultation to allow all interested parties to submit information and set out their views and opinions on the key issues.

There will be two formal consultation stages to enable companies, groups and individuals to enter submissions and contribute to open discussions.

In addition we expect to hold a number of seminars and workshops during the course of the Review, the output of which will inform the final conclusions.

Scope of the Review

The main focus of this Review is to carry out a strategic assessment of the role of regulation in the telecommunications sector as a whole, with a focus on the role of competition in delivering benefits for citizen-consumers.

Broader strategic questions, including the availability of key services to consumers, will also be addressed. However, the Review will not deal directly with detailed issues of consumer protection. It is therefore anticipated that the Review will not:

  • deal with the detail of Universal Service Obligations (this will be subject to a separate review by Ofcom during 2004);
  • cover in detail technical regulation, consumer protection regulation, numbering regulation and other matters contained in the General Conditions of Entitlement.

The Review will not replicate the detailed individual market reviews which have been completed or which will be completed shortly. However, the conclusions of the Review are likely to have implications for future market reviews.

Annex A sets out some of the key issues the review will address.

The remainder of this document sets out the key aims, objectives and the approach proposed for each stage of the project.

Three Phases

The project will be broken into three phases, with consultation at the end of Phases One and Two and separate reports at the end of Phases One, Two and Three. The phases are:

  • Phase One (to Spring 04) - current position and prospects for the telecommunications sector.
  • Phase Two (to Summer 04) - options for Ofcom's strategic approach to telecommunications regulation.

  • Phase Three (to Autumn 04) - Ofcom's approach to telecommunications regulation.

The following section sets out our current expectations of the work involved in each phase.

Phase One - Current position and prospects for the telecommunications sector


  • To review the importance of telecommunications to the UK economy.
  • To assess the extent to which the UK market has delivered competition at all levels including fixed, mobile, narrowband and broadband sectors.
  • To examine how far competition and/or regulation has delivered the goals of lower prices, higher quality of service and wider choice.To assess how consumers view the market and how they value different product/service outcomes. To review investment and innovation trends in the industry.
  • To establish the prospects for the telecommunications sector in the future, particularly in relation to consumer behaviour, technology and competition.

The main elements of this phase are as follows.

Sector overview

  • An analysis of the sector as a whole summarising the role and importance of telecommunications in the UK economy.

Audit of competition and consumer benefit

  • An analysis of the degree of competition, market by market, building on the work undertaken in the recent market reviews.
  • Research into the relative value consumers place on different product/service attributes for telecommunications services.
  • International benchmarking of prices and other indicators to review the comparative position of UK consumers.
  • A financial analysis of the sector and key elements within it.
  • An analysis of key trends and patterns of investment and innovation as they affect different parts of the telecommunications sector.
  • A brief review of past and current regulatory approaches.

Prospects and scenarios

  • A review of the most likely prospects for the sector, including an examination of the technology trends, changing consumer preferences and industry prospects.
  • The development of alternative scenarios for the future of the telecommunications sector.

Much of the data required for this analysis will need to be collected from the industry. Ofcom looks forward to working with the industry in the collection and assessment of this data.

Report and Consultation

At the end of Phase One (Spring 2004) a report will be published setting out Ofcom's conclusions on the current position in the telecommunications sector and the likely prospects.

There will be a public consultation on these conclusions and submissions from interested parties will be welcomed. A number of seminars and discussions will be held to explore the issues raised in the report.

Ofcom will incorporate the comments it receives in its Phase Two work.

Phase Two - Options for Ofcom's strategic approach to telecommunications regulation


  • To assess the scope for effective competition at relevant levels in the telecommunications markets and the extent to which it is likely to be sustainable in the foreseeable future.
  • In the light of that assessment, identify alternative approaches to regulating telecommunications markets and analyse their strengths and weaknesses.
  • To set out initial options for Ofcom's future approach to telecommunications regulation - including both where regulation may need to continue and opportunities for withdrawing from regulation.

The main elements of this phase are as follows.

An analysis of the underlying economics of competition

  • An evidence-based analysis of the scope for sustainable competition in telecommunications markets, especially at the network level.
  • Detailed cost and business plan modelling to understand better the underlying economics of potential competition in telecommunications.

Review of other relevant sectors and international practice

Both national and international research into alternative models of competition and regulation in telecommunications and other sectors.

Options for different strategic approaches to regulation of telecommunications

  • The development of criteria against which to assess alternative approaches to regulation.
  • The development of a number of options for regulation including a set of initial proposals for consultation.

For some of this analysis, in particular the cost and business plan modelling, Ofcom will require a significant amount of data from the industry.

Ofcom looks forward to working with the industry in the collection and assessment of this data.

Report and Consultation

At the end of Phase Two (Summer 2004) a report will be published for consultation.

This report will include initial policy proposals. Again external submissions will be welcomed and a number of seminars and discussions will be held. The report will also reflect any significant market developments that have taken place during early 2004.

The comments received will be considered in the preparation of the final report in Phase Three.

Phase Three - Proposals


To produce a detailed final report which sets out:

  • A review of the key policy issues and challenges;
  • A set of proposals for tackling these issues and challenges in a coherent regulatory framework. This will form the foundations of Ofcom's strategy for telecommunications regulation.

The main elements of this phase are as follows.

  • Further analysis of the options presented in the Phase 2 report in the light of comments received during the consultation.
  • The development of clear proposals for Ofcom's regulatory approach.
  • The preparation of an implementation plan for the proposals including information on timing of any changes and the process for bringing those about.


There will be a final report at the end of this phase (Autumn 2004) which will include a statement of Ofcom's proposed approach.

Annex A - Some Key Questions

The project remit aims to review the options for enhancing value and choice to UK citizen-consumers in the UK telecommunications sector.

The review will seek to address a number of key questions, including:

  • What is the position of UK consumers across a range of indicators including price, quality of service, range and choice of products and availability of services?
  • How does the position of UK consumers of telecommunications compare with consumers in other countries? How does it compare with other sectors across a range of indicators?
  • What is the extent of competition in main telecommunications markets today? How has that changed over time and how is it likely to develop in the future?
  • How successful have past regulatory policies been in achieving their objectives?
  • What are the likely prospects for the sector? What are the different scenarios for the future? What role do investment and innovation play in alternative future scenarios?
  • How will technological change and consumer behaviour develop in the coming years and how are these likely to affect market structures?
  • What is the scope for effective competition in telecommunications and the extent to which it is sustainable? How does this vary between, for example, infrastructure and service provision?
  • What are the major barriers to effective competition and how they can be lowered?
  • Where is regulation effective and where is it ineffective?
  • Where are there opportunities for regulation to be withdrawn or minimised?
  • What is the relevance of vertical integration in the telecommunications sector?
  • What are the alternative models for regulation? What are the advantages and disadvantages of these?