BT's decision to reduce the cost of its wholesale broadband offering is great news for British companies, but further policy and regulatory changes are necessary if we are to move towards the top of the broadband league.

BT's wholesale price cut means that the UK's copper telephone network can at last be exploited to the full to deploy broadband at retail price levels that will appeal to a wide market. Retail prices should fall to around £25 per month for broadband connections that consumers can install themselves, which will be extremely attractive to the 4m unmetered dial-up customers currently paying up to £15 for a standard internet connection. Uptake will increase rapidly, probably beyond the 1m new customers BT expects by mid-2003.

BT Group will also be a big winner. Its retail arm, BT Openworld, is now relatively strong compared to its competitors and is likely to gain the largest share of new connections. Larger internet service providers such as AOL and Freeserve, and budding retailers such as Centrica, will also benefit.

However, there will be some possible losers - most notably the cable companies NTL and Telewest, whose financial constraints mean that they may have difficulty keeping up with the Digital Subscriber Line service offered over BT's phone network. The few remaining operators pushing for access to BT's local loop such as Bulldog will find their business cases even more marginal.

The impact on the cable companies is the most worrying aspect. In other countries the most dynamic markets occur where there is strong infrastructure-based competition. Unless the cable companies can overcome their financial constraints quickly, we risk having limited infrastructure-based competition in the UK.

While we should look at the wholesale price reduction as a very big step in the right direction, if we want a truly successful broadband market, regulators must also address local loop unbundling, the wholesale product, and separation strategy for BT's network and retail arms.

Much regulatory intervention to date has been focused on preventing BT's dominance by, for example, preventing it from cross-selling DSL with other products. We should not kid ourselves on this issue: BT is a natural and beneficial dominant force in the current early adopters' DSL market, made up of technology enthusiasts, the wealthy and those who work from home. Rather than constraining BT, we should unleash it to drive the market over the next few years and then tighten controls later, as was done in Germany.

The wholesale price reductions may be seen as the death knell of local loop unbundling which has generally been viewed as a failure in the UK. But it should not yet be consigned to the bin: it was a good idea which came before its time. It will have an important role in two to three years as other operators build the scale to justify the unbundling investment. This would allow them to reduce cost and gain more control over the services they offer.

A wholesale price reduction on the core 512kbps service should be viewed as important, but only one element of what is needed. Although BT's wholesale services are already quite transparent, pressure must be kept up to ensure a fair wholesale market.

For instance, reasonable service level agreements covering delivery times and repairs must be offered, similar price reductions should be applied to higher speed DSL products used for video-on-demand and businesses, and volume discounts should be structured so that they do not unfairly favour BT Openworld.

The reduction in the wholesale price will take the heat out of the push for structural separation of BT. In the current capital market conditions and given the nascent stage of DSL, structural separation could slow DSL development. However, separation should not be discarded as a long-term policy option as the DSL market matures.

The price reduction is great news but we should not take our eye off other issues that need to be resolved if we are to have a successful broadband market in the UK.

andrew.heaney@spectrumstrategy.com

Andrew Heaney is a partner and co-founder of Spectrum Strategy, a telecoms, media and internet consultancy