Examination of witnesses (Questions 40
TUESDAY 14 NOVEMBER 2000
and MR JIM
40. So it is the Government that is at fault,
rather than the regulator?
(Mr Edmonds) I would not blame the Government. The
Alcatel letter that covers that is interesting because Alcatel,
as you imply, is one of the major providers of this d-slam equipment.
The letter says: "In our view, the UK is ahead of most of
Europe with effected deployment only being marginally ahead in
Germany and perhaps Holland, where the unbundling consultations
were launched earlier than in the UK". I think that confirms
my general hypothesis that we have moved very quickly since we
started; and that, in terms of our European competitors, yes,
Germany is ahead of us, and I have no doubt about that. If you
take the roll out that BT is doing in terms of its own ADSL, we
must not forgetand you and I talked about this, Chairmanthat
a major impulse in terms of unbundling was to get BT to roll out
its own ADSL programme, which it had sat on for years. The threat
from November 1998 of unbundling produced an ADSL programme that
has now got some 600 switches with 40 per cent of the population
covered with BT's ADSL product. We made them produce the wholesale
product which is being used by service providers from the same
date. The UK is not simply dependent on local loop unbundling.
The UK is also dependent on the roll out by the incumbent. BT's
roll out is now equivalent to that of Deutsche Telecom. My own
view is that, if we drive through the next eight months until
the summer of next year, if we get these 600 main distribution
frames unbundled, we then get a steady state where BT are committing
to 100 co-locations and 100 distant locations a month. I believe
that that progress will get us up. Yes, we have fallen behind
Germany, and there is no doubt about that. I think in the UK,
if you take the general picture, we are very competitive. We have
a range of choice for consumers and small businesses that many
countries do not have. We are going to catch up with Germany and
the Netherlands, I hope by the end of next year. We did fall behind.
I accept that, of course.
41. Mr Edmonds, it is interesting that you mention
choice. I think that is important. I must admire your non-stick
approach because it seems that nothing sticks with you and it
is always somebody else. If it is about choice, why the local
loop, which is not just for telephone technology as it can be
used for television? Why has the system that Oftel is proposing
completely ignored television delivery? Is there some sort of
deal between Sky and the cable companies?
(Mr Edmonds) No, I do not think it does totally ignore
television. Kingston Communications, one of the companies that
would like to use the unbundled local loop in effect to convey
television, is one of the companies arguing very strongly that
we should go for this rather larger allocation of equipment, two
racks rather than one rack, in their exchanges. I have a degree
of sympathy for that argument. What I said earlier is that hopefully
later this week or early next week we will produce an allocation
process for the next stage, which will give a view. I should not
say any more because it will be a statutory determination. That
will actually respond to the argument that Kingston have set out.
42. So we may see choice?
(Mr Edmonds) What I want to do in the long run is
to enable unbundling to take place in a way that the competitors
can use. We are going through the same kind of process that every
other country that has unbundled has gone through of the incumbent
digging in and resisting. In Germany the competitors went to law
over the price. We have actually got to the point where, I hope
during next year, many of the issues that we are now facing will
fall away and two racks as against one rack would be one of those.
43. I am confused about this issue of space
for equipment. In the press release on Friday they referred to
the use of nearby buildings. When was the first time that BT acknowledged
that possibly nearby buildings or street cabinets or whatever
could be used? Has that always been on the agenda?
(Mr Edmonds) It has always been on the agenda. What
is interesting is that one company, Redstone, has actually said
that it is going to build out to 1200 main distribution frames
with boxes on the street. It has gone down a totally different
route of coping with local loop unbundling. There is a range of
choices: street boxes, hostels where you put all the operators'
kit; co-location; distant location.
44. That is right. There was a piece in the
FT a fortnight ago saying that a couple of companies were considering
syphoning their equipment into nearby buildings or outside because
they were not prepared to wait and see if they had access to their
preferred exchange. With that kind of information, together with
what seems to me to be evidence that BT says, "sorry, no
space", are you really saying that from the very beginning
of all this using nearby buildings was not considered as a matter
of course? There was no question of dragging feet on the grounds
that, "sorry, our exchange is not big enough"?
(Mr Edmonds) To an extent it is the choice of the
other operator. Most operators clearly find it easier to locate
within the BT building; you run a cable from one bit of kit to
another bit of kit. The further away you are from the BT main
distribution frame, and I am not a technologist, the more attenuation
there is in terms of the capacity to deliver to your customers.
There is probably more expense. What I would argue is that there
is a range of opportunity open to other suppliers or other potential
suppliers, and at least one company, Redstone, has decided to
go down another route. Another company coming in to the UK market
called Bulldog announced an investment of £250 million where
it says it is going to produce a service so that unbundlers can
take the service. There will be a whole range of offerings.
(Ms Lambert) I have not much to add but I would just
say that in November 1999, nearly a year ago, we actually made
the decision that we would require unbundling and in that we set
out the range of options, including distant location, nearby buildings
and physical inside. So a range of options has been on the table
from the start.
45. There is really no reason to feel that BT
has been dragging its feet and therefore you had to take the initiative?
(Mr Edmonds) No. BT has been dragging its feet. BT
on a range of issues has not responded as quickly as I would have
wanted. BT I think has had a significant split from top management,
which was apparently committed, or said it was committed, to local
loop unbundling and actually conveying that to the management
on the ground. Throughout this process, I have made very clear
to BT, and indeed to the operators, that there has been unsatisfactory
and unacceptable behaviour. The operators, and the Chairman referred
to three operators but I think it was six operators that came
to see me, in the group that Anne Lambert now chairs have complained
forcefully about the delay and recalcitrance. I have considerable
sympathy for all of those complaints and have said so on a number
of occasions. I am not defending BT's behaviour. I think some
of this has certainly lacked at the basic level the commitment
of the unbundling of the local loop that at the top level the
company had been expressing.
46. Mr Edmonds, surely it should not come as
a surprise to you that BT were delaying the whole process because
it was to their economic advantage to do so? Is not the situation
now that, as a result of dragging their feet, they are going to
be able to make a substantial financial benefit out of this whole
process because by June or July of next year they will have deployed
their own ADSL technology and they have managed to succeed in
accelerating that process for themselves? That will be available
at about 1,000 sites and will have about 50 per cent UK coverage.
They will then be able to pick off their competitors by offering
one-year deals as the only incumbent basically and thereby undermining
the market and exploiting their own monopoly position. What are
you going to do to deal with that situation? It seems as though
what has already happened up to now has enabled BT on the one
hand to be delaying the unbundling process at the same time as
accelerating the introduction of its own ADSL technology.
(Mr Edmonds) That is a fair question because it goes
right back to the answer I gave to the Chairman a little while
ago about what the initial motivation for introducing local loop
unbundling was. It was to get BT to roll out its own equipment.
There is a dilemma for any regulator who wants to see the incumbent
actually invest to produce new services on a rapid scale because
the incumbent is best able to do it, to be fair. What we have
got to do is to make sure that the incumbent does not do that
in a way that is anti-competitive, which is why in the first place
we ensured that BT produced a wholesale product that was available
and is being used by some competitors, and why we are saying now
that BT must not discriminate in favour of itself in the process
that goes through from now on. Since the licence amendment was
implemented, BT should not discriminate in its own advantage.
If it does, we investigate that and if it is found to be discriminating,
it is acting anti-competitively.
47. Surely it has already achieved that, has
it not? By June next year it will be able to offer its own ADSL
technology to about 50 per cent of the UK and its rivals will
hardly be able to cover more than 20 or 30 per cent, even if all
these obstructions are removed before then. BT's retail arm is
then going to be offering very attractive packages which potential
competitors are not going to be able to compete with. Would it,
for example, be reasonable for you as the regulator to say: BT
should not be allowed to insist upon a one-year lock-in on the
new retail deals that it is offering because that might give an
opportunity to the late arrivals at this show who have been delayed
as a result of BT's own actions?
(Mr Edmonds) We have been doing a great deal of work
in looking at what the possible anti-competitive potential of
the next nine months is, which again Anne has been leading. May
I ask her to give Mr Chope more detail?
(Ms Lambert) The main first point to make is that
BT's ADSL roll out is an open product and it is a wholesale product
available on the same terms to everybody: BT, retail or other
retail service providers. Other service providers can take this
product and get it on exactly the same terms as BT's own retail
arm. That is very important when we understand that there are
actually already 100 service providers that are taking this BT
ADSL service. You raise the issue about the one-year lock-in.
I have to say that to the best of my knowledge we have not had
any complaint about that, but if we had a complaint, we would
certainly investigate it. If we concluded that it was anti-competitive,
then we would not hesitate to take action.
48. How would you deal with the issue of pricing
for the wholesale product? There are those that suggest that the
wholesale route is the way it ought to go and BT ought to do the
wholesale side and other people compete on the retail end as a
general scenario. That would involve pricing issues for you, would
it not? How would you approach that?
(Mr Edmonds) The pricing would initially be commercially
negotiated. If we were then faced with a complaint, and in fact
we do have a complaint in front of us at the moment which we are
investigating, it is our job to make sure that BT in those cases
is not setting a price that is anti-competitive or that is squeezing
the margins of its competitors.
49. Would it not be possible, for example, to
insist that BT's retail arm should only be able to get wholesale
products from BT's wholesale competitors rather than from BT itself?
Would not something radical like that actually demonstrate that
you are concerned about BT's exploitation of its wholesale position
to the benefit of its own retail arm?
(Mr Edmonds) It would be a dramatic intervention but
I am not sure that it would benefit consumers. The basic point
I make about wanting to see the widespread availability of services
to consumers is posited on BT being in the marketplace and rolling
out ADSL. I am not sure that I would have the powers to mandate
what you are proposing. I am pretty sure I would not have the
powers to mandate.
50. Are you sure that BT is not providing information
facilities and access to its own retail arm on advantageous terms
compared with what is available to others?
(Mr Edmonds) It should not be discriminating in favour
of itself. If there was a complaint that it was discriminating
in favour of itself, we would clearly investigate.
51. Are you satisfied that there are in place
appropriate checks to prevent cross-subsidy of the kind that my
colleague has just been referring to, in the sense that you have
clear, different sets of books, Chinese walls, glass ceilings,
et cetera? Are you confident that these mechanisms are in place
to prevent something like that happening?
(Mr Edmonds) There is accounting separation which
gives us a very large degree of confidence that this would not
happen in the way that you describe. You perhaps will want to
talk later in this session about BT's current proposals for restructuring
itself. I think part of the answer to both Mr Chope's question
and to your question lies in that being carried through.
52. Staying on prices and costs, US operators
have been reported as being able to offer broadband services for
around $30 to $40 a month. Your press release I think quotes £118
for the annual rental with £95 connection charge. What sort
of prices are you expecting UK operators to charge consumers for
the broadband services?
(Mr Edmonds) Currently there are broadband services
in the marketplace which are priced at about £39 per month.
I do not know where the price will end up. My obvious hope is
that with competition local loop unbundling prices will decrease.
With the competition that cable brings, and I come back to this
fundamental point, we have an advantage in the UK with 52-53 per
cent of homes in the UK are now passed by cable. Two major cable
companies are rolling out their own cable modem products which
are in direct competition with both BT and the unbundled loop.
The answer to your question is that I do not know at what point
prices will end. I do know that since we have had competition
in the internet market in the UK, prices have dropped by 50 per
cent. Whether we will get from £40 to £20, I do not
know. I hope to see a very significant reduction.
53. How much disruption do you think there is
likely to be to existing services and to consumers? We obviously
remember the problems with changing gas and electricity supplies.
Have you any estimate of the disruption that might be caused?
(Mr Edmonds) My hope would be that there would be
no disruption whatsoever. What we are talking about is the installation
of these boxes into BT exchanges, linking that box to a BT box
and then the installation of a modem in the consumer's home. It
is a process that is now very familiar to companies in America
where there are about 1.5 million users of ADSL, of which about
75 per cent is provided by the incumbent. We have seen what is
happening in Germany. I hope there will be no disruption at all.
54. On the pricing structure, will you be regulating
in any way the various types of offer that will be made to consumers?
We will come on to mobile in a moment. You have got a situation
where the pricing structures in the mobile industry are virtually
impenetrable now. We are in danger, are we not, of having similarly
impenetrable pricing structures which are very complex in this
area. Is it not an opportunity at this early stage for you to
regulate on the form of pricing structures, so that they are going
to become rather more transparent for consumers?
(Mr Edmonds) I think this will be much easier, to
be honest, because we are looking probably at a much smaller range
of basic products. We are looking at an offer to the home and
an offer to small business and the services that will be run over
the unbundled loops. I would not have thought that confusion in
pricing should happen in this particular area. As for your basic
premise, should Oftel control the publication of pricing, I think
that is a very difficult issue to ask any regulator to take on.
55. I am suggesting that you should ensure through
Regulation that pricing is transparent.
(Mr Edmonds) I think ensuring that pricing is transparent
is something that I would like to work towards, indeed I am working
towards in terms of some of the initiatives that we have launched,
including the phone bills.org initiative. I would much prefer
that to emerge from co-Regulation with the industry, whereby,
working with them, we actually manage to produce a way of publishing
prices that is much more transparent and makes it much more easy
for the consumer to understand what is happening.
56. With the evidence of mobile, it is quite
clear that they do not regard transparency as being in their commercial
interest at all. They have become byzantine in their pricing.
It is impossible for anybody to understand which offers them the
better deal. So why should you think that they are going to behave
any differently in this area?
(Mr Edmonds) Mainly because the range of products
is much less. I agree with you that in the mobile area it is incredibly
complex for the consumer to find his or her way through. It has
not stopped consumers switching in massive numbers and it has
not stopped very large price reductions occurring in the area
57. Huge profits being made by the mobile phone
(Mr Edmonds) Significant profits by some of them.
Two of them, I do not think, unless I am out of date, have yet
made a profit in the UK.
58. Mr Edmonds, can I take you to the problems
of Worldcom, NTL, RSL. They have all pulled out of the process.
These are big companies which were going to spend millions in
investment in the broad band in Britain. Home grown giants, such
as Cable & Wireless, are now on the record that they are reassessing
whether to invest in the local loop unbundling. Have you ever
thought of stopping the current mess and the process that is going
on to actually stop such important players from walking away because
this is the danger, that there will be absolutely no competition
if we are not careful?
(Mr Edmonds) I do not think it is a mess, Sir. We
are going through a very difficult implementation phase. We are
going through an implementation phase that has been as difficult
as I anticipated, but not more difficult than I anticipated. I
think the commercial judgments of some of the companies that you
have just touched on are for them to make. The point remains that
the problem I have faced, personally, and the problem that Oftel
has faced from September through October this year, primarily
flows from a surplus of competition rather than a lack of competition.
I think at least one of the companies you have referred to said
this was a decision it had taken and it was waiting to see how
things developed in the market place. If I can look at other countries,
there has been a fairly dramatic reduction in numbers of players
through market forces, I think, rather than through the complexity
of the process.
59. You must admit, it would be a little worrying
if our home grown giants, such as Cable & Wireless, were not
to go ahead. I think there is a worry out there that there will
be no real competition.
(Mr Edmonds) All I can say in answer to that question
is that it is my determination, Oftel's determination, to have
a process for unbundling the local loop which by the middle part
of next year will have got established to the point at which 100
exchanges will be opened every month through co-location and 100
exchanges will be opened every month through distant or other
methods. I think that potentially gives UK companies the potential
to be involved in a very significant way in this particular market
place. This is all about producing competition. If competition
falls away clearly we will have failed, but I think it is much,
much too early to reach a judgment that it will fail.