Seventy UK ISPs are rebelling against recent rises in the wholesale cost of business broadband claiming they could go bust, unable to compete with large service providers.
United under the umbrella of a new organisation - UKIF (UK Internet Federation) - the ISPs claim that regulatory intervention and recent price hikes by BT are skewed in favour of the big ISPs such as AOL UK, BT, Tiscali and Wanadoo that are able to make use of different ADSL products.
Smaller ISPs - unable to exploit the efficiencies afforded by larger ISPs - are worried that they will see the wholesale cost of their services rise making them uncompetitive. And while BT increased the cost of some of its business-focused broadband packages lately, there are fears that this is just the thin end of the wedge and that the UK's dominant fixed line telco could increase the cost of consumer products too.
One irate industry source told us: "[The changes being made] are potentially hugely more expensive for smaller ISPs. The wholesale cost of broadband is going up except for the very largest of ISPs - including BT. Ofcom [the communications regulator] is trying to increase competition but it is having an opposite effect.It's a move against the entire industry."
In essence, the row brewing in the industry boils down to margins between different wholesale ADSL products. Ofcom wants to ensure that margins between these different products is sufficient to enable rival operators to compete with BT at a wholesale level. UKIF reckons that Ofcom has got its numbers wrong.
To complicate matters, BT has been accused of increasing broadband costs to meet a "margin squeeze test" that has yet to be formally introduced by Ofcom. During a recent telephone conference more than a dozen ISPs spent 90 minutes tearing into BT for what it had done. As one insider put it: "The UK's small ISPs have been shafted."
A spokesman for BT admitted that the prices had been raised in "anticipation" of a formal announcement by the regulator to "ensure that when it is [introduced] BT will be trading compliantly".
Said Stephen Dyer, Chairman of Mailbox Internet: "We cannot blame BT for trying to protect its position and profits. Ofcom has a policy whereby it cannot apply downward pressure on BT Wholesale’s IP prices no matter how exorbitant they are.
"Since BT Wholesale has 90 per cent of the DSL market, Ofcom is at best ineffective and at worst supportive of the monopoly it is charged with regulating.
"Competition, innovation and a diversity of suppliers is vital to driving down the cost of broadband services and promoting choice for consumers, and thus the UK Government must maintain a regulatory framework which encourages rather than stifles this.
"Allowing BT unconstrained control of the wholesale price of Broadband IP will severely hinder the development of the Internet industry as a whole, and can only serve to restrict consumer choice and raise end-user prices," he said.
Commenting on the recent price rises, a spokesman for BT Wholesale said that the company was "meeting its regulatory obligations and margins to promote competition".
"We're doing everything we can to grow the market, as much as we can to bring prices down," he said.
A spokesman for Ofcom added: "Our objective is facilitating competition and we will continue to look at the market as a whole." ®