Select Committee on Trade and Industry Minutes of Evidence

Examination of witnesses (Questions 175 - 199)




  175. Good morning, ladies and gentlemen. I believe it has fallen to you, Mr Allan, to introduce yourself and your colleagues.
  (Mr Allan) Good morning. Thank you, Chairman. Bill Allan, Chief Executive of Thus. I am joined by Huw Saunders from Kingston; Emma Gilthorpe, from Cable & Wireless; and Anne Machin, from Energis. We are here representing the alternative operators this morning, and we are grateful to the Committee for the opportunity to speak to you today. We are also grateful for the recent intervention by Oftel and Government to try and improve the process for unbundling.

  176. I think it is fair to say we want to try and avoid today (since this is the pantomime season) the "Oh, no, you did"/"Oh, no, we didn't" approach to this, but of necessity I think we are going to have that, in the sense that you are going to be telling us a slightly different story from the one we heard from Oftel and the one we are going to hear from BT this afternoon. The impression I have is that there seems to have been communications difficulties sometimes because there was a lack of understanding on each side, or on all sides if we take the triangle with Oftel as part of the process. On reflection, do you think there were problems in the approach you had towards the issue that, on reflection, you might have been able to deal with differently? If you could start from that side and clear away some of that aspect of the clutter, as it were.
  (Mr Allan) I think in fairness, Chairman, there were a number of statements made at the beginning of the year, certainly by myself, which were reported in the press about my company's position which we have not changed. We expressed concerns about the process in terms of providing an equitable service with BT and we needed the regulator to intervene. Since then there has been increasing uncertainty in the process. I think there has been confusion in some respects about the hype regarding DSL provisioning and the realities regarding local loop unbundling. Sometimes I feel the issues regarding how you unbundle the local loop has been confused with the technology which can be applied to the web. If you look at the industry position over the year, quite a number of our competitors made old assertions about the opportunity to roll out this type of service. There were bald numbers facing the press. At least five major players have now withdrawn from the market and many others have scaled down their ambitions. Whether or not there was a problem in terms of communication, we would argue that we argued the point clearly and concisely to BT but, sadly, we do not believe that BT responded in kind. We also argued that we felt the regulator should have intervened more quickly than he did: he now has, and many of the steps he has taken recently have been helpful, but it is a question of too little, too late.

  177. For example, the bow-wave process of allocation—are you happy with that? Do you feel you have had a fair crack of the whip? What is the view of the participants? You may all wish to answer this question because you may have different slants on it.
  (Mr Saunders) I think it is fair to say, Chairman, that the industry understands there is bound to be a problem in matching demand with supply. BT obviously has to find space within its buildings. The difficulty I think we have encountered is really best expressed by trying to understand the information flow between BT and industry. At no time, I think prior to BT expressing during the last three months that there have been specific problems at specific exchanges, have we been able to pin down the scale of the problem. The bow-wave process is imperfect. I think everybody understands that. Really it is a question of coping with the positive information we had originally, which has really pinned down the specific problem: that BT never took a proactive stance on trying to indicate what space was available so, as an industry, we could understand how best to fit our demands within that space. That is not something we think is industry's fault, it is down to BT failing to actually grasp the scale of likely demand and reacting accordingly in terms of going out and surveying their own buildings and indicating to industry where there is likely to be a mismatch.

  178. I can see BT being cast in the role of the baddie here, to use the pantomime metaphor. Surely the fact is that, unless they were really required to do so by something more than a vague saying, "It's a good idea that we have local loop unbundling", they are not going to give up one of their assets; they are not going to change their style of management from operating one kind of business to operating another. Do you think, therefore, had you been in BT's position you would have acted differently from them?
  (Mr Allan) Chairman, I am not sure if that is the point. I think the point is that BT have done certain things in the marketplace this year they previously have not been allowed to do. For example, had they offered retail prices at less than cost for certain products and implemented services into the marketplace without having agreed a wholesale profit with the industry then this would give them a head start. It is not a question of allocation; there are other questions here as to how BT behaved. There are certain things which the regulator could have stepped in and taken measures against which did not happen. If you look at internet access in the UK, BT was not a leading provider of internet services. If you look at ADSL, and the position they have been able to take advantage of, BT now has the largest potential market share and the fastest roll-out of service because the industry cannot offer an economic service because BT is currently offering a product which, we would argue, is less than cost. BT have said for certain services there are pull-through revenues from e-commerce with advertising because it is not clear where these revenues are coming from. At this point in time the economic viability of local loop unbundling and ESL(?) provisioning is unclear, because the alternative carriers cannot provide economic services at good rates to their customers.

  179. There are various remedies for issues such as this. For example, you could approach the Office of Fair Trading. You could go to the Competition Commission. There are remedies you could have sought, but you have not done so?
  (Mr Allan) I think in fairness we worked with Oftel. Oftel have taken certain steps and investigated these questions and there has been a recent announcement by Oftel on this. There have been certain steps taken, but we have tried to operate within the framework, and there is the Competition Act as well so there are certain protections there without having to go to the Office of Fair Trading.
  (Ms Machin) We have raised various issues with Oftel and made representations and put complaints into Oftel. I think as an industry we prefer to go through the route trying to bring these issues up with Oftel and get Oftel to resolve them for us, rather than take it on to the OFT.

  180. We have come back to the Oftel one, but perhaps we could stick with this whole question of exchanges and the choices you have made. How many of your first choices were listed in the first wave?
  (Ms Machin) If you mean by "first choices" within, say, the first 250 sites, probably round about ten.
  (Mr Allan) The same. We are looking at similar exchanges.
  (Ms Gilthorpe) We had less than 30 out of 381 in the first bow-wave.
  (Mr Saunders) We had 19. Chairman, I think there is an issue we ought to try and clarify, which is this first 381 were accepted by the industry as a compromise. They were not the first priorities that any operator had; simply those were the only sites we thought we could address in the short-term in the absence of an agreed method of allocating scarce space. As far as most operators were concerned, they were way down our priority list; that was a compromise agreed by industry in order to move the process forward and not waste resources and leave BT sitting on its hands while we sorted out the hard nut of the allocation process.

  181. What about the very popular stations, where a number of people wanted a bit of the action? I think anything in excess of nine it was deemed nobody would get in; there was not even going to be some kind of raffle-type arrangement.
  (Mr Saunders) It is not that nobody would get in, it was a question that if there was a mismatch between demand and supply how would that be managed. That has now been the subject of determination and, as a result, the latest bow-wave process that was run seven days ago has actually identified the top 360 sites by priority by all of the operators. We received the initial results, on an individual operator basis, as to how many of our priority sites are in that tranche of 360, and those are now going to initial survey. I can say on the record, we have actually got 248 sites that we wanted within that first 360. Whether or not we get space is a different issue which will become clear as those surveys are processed.
  (Ms Machin) I think that is part of the problem we have with this, because of the time it takes to go from initial survey through full survey and then the offers made by BT. There is no certainty until you have actually agreed the offer from BT that you are actually going to get space in that particular exchange. We have only just received some of the offers back from BT from the first part of the bow-wave process; so we are only today looking at about 15 offers through from BT on the sites, and it is only now we actually know which sites we will be able to roll out to. This makes it very, very difficult for an operator to actually construct a viable business case or to work out operationally how you want to roll out, because you do not know when you are going to get sites, which sites you are going to get and whether they will be geographically close. In fact, we have got 10-15 sites and they are spread throughout the UK which makes a roll-out extremely difficult.

  182. Can I just get a handle on the significance of nine: was this a figure you all agreed? Was it plucked out of the air? Is there any reason for it?
  (Mr Saunders) Basically it is an estimation by Oftel, rather than the industry, of where the space problem was likely to hit. In other words, at what level was there likely to be a mismatch between supply and demand. I will not say it was entirely arbitrary but it is of an arbitrary nature. It may or may not be right in retrospect. In practice there have been sites within that 381 where supply does indeed not match demand.

  183. It has been put to you that Oftel are pretty strong on the legal side—they know what they should or should not be doing—but they are not very strong on the technical side in the sense that maybe they have not been able to recruit enough of your well paid engineers and consultants. It has been put to me they fall down sometimes on the technical side. Is that a view you would share?
  (Ms Gilthorpe) I think the operators and the industry generally would be sympathetic to the general resource problem that Oftel faces in competing for good quality individuals; but the reality is that the industry do provide a lot of information and expertise to the regulator and have done throughout this process in order to keep them informed. Whilst things have improved significantly in the last few months, in the early stages of the process I think there was a question as to whether the right people at the regulator were involved. I guess both the industry and the regulator are guilty of not raising that to the fore early on. It does still come back to the fact that BT is obliged to unbundle its local loop. If Oftel is sure of its legal ground then I am somewhat surprised they have not sought to use their powers.
  (Mr Saunders) As an industry the resource issue is predominantly one which lies with Oftel, but mostly lies with BT. A lot of the problem is to do with unbundling the local loop, otherwise it could be solved at a stroke and certainly could be alleviated by BT putting more resource into the planning process to enable us to actually shorten the period between ordering sites and making them available to deploy our services. I think there is considerable concern in the industry that BT has consistently under-estimated the resource requirements.

  184. Even now?
  (Mr Saunders) Even now.

Mr Laxton

  185. Do you now have access to the exchanges that you would desire to have access to? Is that the situation following on from Oftel's decision on the second bow-wave to bring in another 360 exchanges?
  (Ms Machin) No, those exchanges are the exchanges that will be initially surveyed. We have an indication of each of the ones that we selected we potentially can get into; but until the surveys are completed and we go on to full surveys we will not know whether there are any specific restrictions on space within those exchanges.

  186. With respect, that was not quite the question. My question was: are you now satisfied with the exchanges you want access to, as a result of Oftel's announcement for a further 360 exchanges, in theory, never mind about the issue of whether you can get into them in a practical sense—do you now have the exchanges you require access to?
  (Ms Machin) Those are the ones, yes.
  (Ms Gilthorpe) It varies from company to company.
  (Ms Machin) Predominantly, yes.
  (Mr Allan) It is helpful, yes.
  (Ms Gilthorpe) It is progress, but there are probably another 300 or so we would like to get access to going forward as the process continues.
  (Mr Saunders) The key issue then is, access is possible in some of those exchanges, as Anne pointed out, but the big problem is when will we get it? At the moment the current process indicates that we will not get physical access to deploy our equipment and services in most exchanges until probably May or June, and that is unacceptable.

  187. The Chairman is making reference to the decision by Oftel to take out of the frame those exchanges where there is a lot of competition for space for nine or more. Do you think there is going to be a possibility of an arrangement, or would you be prepared to participate in an arrangement, where, say, ten licence holders wanted to get involved in a particular exchange to do some trading of space if there was a problem? Is that something you would be able to come to some agreement with amongst yourselves?
  (Mr Allan) It is something we suggested going back to the beginning of the year. At one point there were indications that 30 carriers wished access to exchanges and physically that is very difficult to manage and there are different ways to get there. This would also need to include BT companies. BT would have to be a service provider in the same way as companies here. With some of the issues we have wrestled with there were two trials: there was an option four trial, which is a wholesale arrangement whereby we take BT's service and offer it to our customers. We are doing that, as we speak, but we do not have service level agreements in place to the quality I need and the guarantees I need to give my customers. It is rather difficult to manage if BT does not deliver their promise because it is my brand and my reputation that gets harmed. The second issue was going to be congregation trials. We were given Edinburgh to begin in December and the idea there was that carriers were working with BT trying to work out the practicalities to make this happen: how many different operators you can accommodate and how physically to make the equipment work. Our trial has been pushed back to February, so this has been a moving target in respect of: the whole dynamics as to how the process will work is changed today from what it was in terms of how we understood it was going to work at the beginning of this year. That makes it very difficult for us to plan in terms of businesses; and it makes it difficult to advertise and market the services when we do not know how we can do it and when we can do it.

  188. It may perhaps be commercially confidential in that there are four of you here and you are in essence competing with each are: but are you able to tell us how many survey requests each of you have put into BT, or is that something you want to shy clear of?
  (Ms Gilthorpe) 100 per cent. for Cable & Wireless
  (Ms Machin) 100 per cent. of first base.
  (Mr Allan) 420 exchanges.
  (Mr Saunders) The way the process works at the moment is that each bow-wave is now taken in isolation. On this phase we have asked for around 360; but previously we indicated we wanted a lot more sites than that. The actual number is still volatile which partly depending upon what sites we get over what period.

Mr Berry

  189. In your written submissions you were pretty critical of both BT and Oftel—phrases like the "parlous state of Oftel", "BT is anti-competitive", "prevarication" etc. etc. That is pretty strong stuff, but these submissions, I know, were mainly written in November. Are things moving on now? Given events this month, do you still feel as strong about the parlous stage of Oftel and BT's anti-competitive practices? Has there been any evidence of change since you drafted these memos?
  (Ms Gilthorpe) I think there has been some progress, in that Oftel and, indeed, the Minister's intervention has meant we have gained commitments from BT which, whilst they have been comments which have been mooted before, we did not have any actual firm commitment, for instance, to the number of sites they were prepared to roll out. The reality, however, is one of the key issues relating to the discrimination that BT is engaging in, in that it is favouring its own business, i.e. it is getting access to in excess of 800 sites by July, whilst we will only have 200 in the buildings and 400 distant sites. There is a case that sits with Oftel at the moment which we put to them in the middle of September which we are asking them to rule on, which is fundamental to all of our businesses. It is very important that BT is brought into this process, otherwise they will continue to roll our services ahead of the rest of the marketplace which is neither beneficial to us from a business perspective, nor indeed to the consumer.

  190. Because of all these problems, delays and so on are any of you reconsidering investment in local loop unbundling?
  (Ms Machin) Energis are certainly considering scaling back on our initial investments, simply because of the uncertainties and the difficulties that we are having on constructing business plans. As I say, you do not have any certainty, for instance, about geographic locations you would be at. It is very difficult to go back on networks that need to actually bring traffic back on to our own networks if sites are geographically dispersed, initially certainly, and we have no visibility of whether we will get critical mass in a particular area; so these investment decisions are hard to make. As a result of the position we are in now, where we actually have to commit to BT to take space in those rooms, yes, we are scaling back. We are not pulling out. We will be going forward with a significant number but we will be going forward with less than originally planned.

  191. I do not want to sound discourteous but is there any risk here of crying wolf?
  (Ms Machin) No.
  (Ms Gilthorpe) I do not think that is justified. There are a number of operators who have already made it clear they are going to pull out. None of us can be sure as to what the motives are of those operators because it remains commercially confidential to them; but I think we see a trend which takes a state of being within the marketplace that is reflected by the level of uncertainty. If there was a certainty of regulatory environment then I personally believe it would be highly unlikely, that there would be so many operators that would have chosen not to take part in this process. No, I do not think there is an issue of crying wolf.

Mr Morgan

  192. Can I pick up Ms Gilthorpe's previous answer. While you are saying that BT had an unfair advantage because, by definition, you mentioned they have access to all their exchanges, and you mentioned 800, and you do not and therefore they can potentially go ahead and roll out service quicker than you can—surely, even with the best will in the world you are never going to be able to get into all 800 exchanges anyway right away, are you not saying BT should be artificially stopped from rolling out services until such time as you have caught up?
  (Ms Gilthorpe) I think the ideal situation would have been that we all started at day one with a process that worked and so we all applied for exchange space contemporaneously. That has not now happened, and certainly Cable & Wireless's position is that BT has managed to already roll out a few hundred sites. What is most important to us is that on a going forward basis they are not allowed to continue to reap benefit from that advantage. I am not sure there will be much value in attempting to turn back the clock on BT; but certainly to bring them into the process now has to be the objective from a competition policy point of view. It is clearly not going to lead to a level playing field. As I mentioned before, it is not at all good for the consumer if there is no competition. BT are only speeding up their roll-out now because of the competitive threat that is presented to them. As I have said before, one of the points we need to get fixed here is that for the exchanges they have not yet got access to, they must be part of the process that operators are part of, so we all have to face the same level of risk in making investment decisions.

  193. How does that work in practice? Are you saying that BT cannot provide broadband services on exchange unless somebody else can do it at the same time, or what? How are you ensuring there is a level playing field?
  (Mr Allan) It really depends how you are in competition. How you want competition to be introduced. At this moment in time it is an historical legacy. BT has a monopoly position over the local loop, so that is the last connection between the consumer's house or business to the exchange. The alternative carriers could try and replicate that network but that would be a huge cost and would also be a huge time constraint involved in doing it. It is unlikely anybody would do it. If you look at the history of telecom where innovation happens and where competition really happens it is at the service level. The question is: how do you get the services and different types of services to consumers so they have choice? The access and the technology is largely neutral. It is a question of how you deploy it. We would be happy to cooperate in different ways of sharing access and sharing different technologies to offer competition at a service level, and that should be where the consumer benefits.

Mr Laxton

  194. In your comments to Mr Morgan you said that in an ideal set of circumstances you would wish to see the ability for everyone to have access to roll out their services at the same time, including BT. Are you seriously suggesting you would expect BT to be in the business of providing access at every exchange they own (because earlier you said you were looking for 100 per cent. access) the length and breadth of the UK, irrespective of whether they knew there was going to be a demand there or not?
  (Ms Gilthorpe) No, not at all. That is not what I am suggesting, and I apologise if that is the impression I gave. Of course, BT has to provide the information that allows them to tell the industry how much space they have got and where. What I am saying is that the way that BT businesses inter-relate with each other, there should be a part of the business that does that—goes around the exchanges and does the auditing of space—and then the part of BT business which is separate which rolls out its own DSL service should be treated the same way as the rest of the industry. They have space for eight operators and, whatever process applies to that, BT should be in the lottery process, if you like, to see if it is going to be one of those eight operators with the other side of business responsible for looking after that facility. That is the problem we have. The assumption seems to have been within BT that because it is all really part of the BT organisation they get first advantage; they own the exchange space and, therefore, they put all their kit in there; yet BT is a dominant player in the local loop. If competition policy is applied appropriately here they should be obliged to provide that on non-discriminatory terms, not only to other operators but as between their own business and other operators.
  (Mr Allan) BT is divisionalised and have a structure to do it.

Mr Berry

  195. As you say, a lot of people hope local loop unbundling will improve the service to the consumer. How do you see demand for those products going? How do you see the market developing? You have made some key assumptions about what the effect is going to be of this whole process on the services that are available and that consumers want?
  (Mr Saunders) I think there is a fair variation in individual companys' business plans is the bottom line. There is a significant range of potential service offerings that DSL access technology can actually support. We are already deploying mass market residential orientated services, and are similarly deploying services addressing small and medium enterprises in the business environment. I guess individual operators seeking to make use of local loop unbundling capabilities and DSL technologies will have a variety of different aims and objectives, indeed business cases, they are seeking to fulfil. I do not think it is the case that there is a single set of applications that will be delivered by most operators to the same market sector.

Mr Morgan

  196. When the great day comes and you actually get into a BT exchange, can you tell us what exactly happens? What do you need in there? How long does it all take, or do you not know yet?
  (Ms Machin) Once we get the site handed over we then have to instal our equipment, our electronics equipment, a piece of equipment called DSLAMS. We think that will take somewhere up to around four months for the first set of exchanges. There are various processes for the metallic path facilities through from BT. There is various engineering work that needs to be carried out. We think from the actual date the room is handed over to us, the first exchanges will take about four months before we can deliver service to our customers.

  197. When you say a room being handed over to you, if two or more of you are in the same exchange, how do you physically separate your work from each other, or does that present additional problems?
  (Mr Saunders) There are standard lay-outs—the so-called "hostel" developed by BT and industry to have standard rack spaces with delineation between different operators' equipment that ensures that is not a problem. Whether or not that hostel(?) design is the most appropriate use of space is a matter of some dispute between BT and industry. Certainly going forward, we would hope that more effective and efficient means of using space are developed. Just to pick up on a point, I think it is probably true that in the first instance there will be some significant time lag between the so-called hostel hand-over and the actual service delivery. However, as time goes on that time frame will reduce. I would certainly anticipate it would be a matter of weeks rather than months. By the time we get to the hundredth hostel or two hundredth hostel from our own perspective we believe, providing we have got sufficient visibility when hostel hand-over will take place, we should be in a position to actually start delivering service to customers within the matter of two to four weeks.

  198. Is that as you gain experience from the process?
  (Mr Saunders) I think that is probably true, and also a better understanding of the physical reality of the BT network. I think there are some uncertainties still about what service can be delivered over what lines etc.—a lack of information again from BT, perhaps, but that is something during the trials phase we will be starting in the next few weeks we would hope to better understand.

  199. What sort of investment are we talking about in terms of a typical exchange in terms of cash?
  (Mr Saunders) It depends how many customers you are seeking to address really.

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