Select Committee on Trade and Industry Minutes of Evidence

Examination of witnesses (Questions 280 - 306)



  280. How many kilowatts of power do you need?
  (Mr Daeche) I can submit that to you and I will give you the wattage[2].

  281. It would be helpful to know what the scale is.
  (Mr Daeche) Absolutely. And it does vary, of course, depending on the technology supply that the operator chooses.

  282. And the size of the operation you are seeking to cover. I am just trying to get some feel of what is a typical situation.
  (Mr Daeche) We can certainly submit those figures on the basis of the technology that we utilise.

Ms Perham

  283. I just want to go back to what you said about comparisons with other countries, Mr Daeche, particularly with the timescale within Germany. Is this something that you think Oftel should have been more proactive on with the shorter timescales? It is really batting everything back between Oftel and BT and BT seem to be putting things in your way all along. Is it something that you feel Oftel should have done something on under the Competition Act?
  (Mr Daeche) It certainly would have helped to have a framework in place against which the operators could have worked. That is certainly the case in Germany and it is certainly the case in Holland where we have now started our investment, so yes, that would have helped. To look at this some time ago when we knew it was going to happen would have been most helpful.

  284. Is there anything that can be done now?
  (Mr Markham) We do have revised guidelines in place now which have emerged recently, let us say, to shorten that period of time from placing an order on BT to when that site will be handed over as 80 working days. We have apparently moved that forward and clearly we are in the position of trying to do that for the very first Bow-wave sites, the first 25 of those where BT now are reporting back about how they can shave the extended process they currently have down to something more realistic and certainty to when the operator, from getting provision, "Yes, I am going to get into that exchange" can actually have an offer of how much it is going to cost to get that, and the target for that is 80 days.
  (Ms Hobday) One of the difficulties has been that the process in the United Kingdom has worked in parallel, so you have had industry groups sitting with small groups to discuss processes with BT and BT has said, "Our processes are legacy processes. We have ancient databases that need to be queried for everything and to change this it is going to take at least"—to pluck a figure out of the air—"two months", and by the time the Oftel draft guidelines were coming on in, say, four months, from order to room handover, built into the process is already 60 working days to full survey and 80 working days to hand over the room, which is substantially longer than the four months that Oftel has come up with flowing on from the EU regulation. I think that has been the difficulty in the United Kingdom, that it is this parallel working. We have had the same issue in France where there has been to a certain extent development of the regulatory regime alongside the industry discussions, but I have got the impression that the French have drawn much more strongly on what has happened in other countries and taken advantage of all that knowledge to put in place a much more compacted industry process to get to the real point, which is getting people in the buildings a lot quicker.
  (Mr Markham) As I say, that is from the time an order is placed to when you can actually get into that site, 80 days. So it is a significant shortening from the 60 and 80 we have just talked about, to try to make that happen, but it is somewhat after the event because these are things that should have been planned and sorted in early 2000 in our view.

Mr Baldry

  285. What, if anything, has been agreed within your industry and amongst OLOs and new entrants, and so forth, if demand exceeds supply and there is only room for a small number of operators in a particular exchange? How are you going to deal with that? Are you going to have a lottery, are you going to trade places, are you going to have a ballot?
  (Mr Markham) Thankfully it has taken a bit of time to get the orderly mechanism that is described within the bow-wave process whereby each operator specifies its priority for sites listed on what it is ordering, one through the sequential last site, and, in negotiation with BT, BT will use that relative to apportion the first space, the second space, the third space. When we reach a situation where it is full we have a reserve environment that is created, so if somebody drops out the reserve goes into it. That effectively has been agreed through good negotiation between the operators and BT. Initially we had a lot of problems with BT who refused to actually accept and take that on board and wanted a third party to do the allocation, which was not practical because you do run into the practicalities of this is a clean environment and if it is a square room it is very easy to allocate that space but if you go into another environment that is a square room with a nook and cranny off the side then which two can you squeeze into there? It is only practicable if BT can do that and they have now agreed.

  286. So do you feel that you now have at least the potential of access to the exchanges that you want?
  (Mr Markham) From bow-wave two, yes, in terms of actually being able to say "these are the next set of exchanges that are in our sights", for BT to begin the surveys, and indeed they have probably activated and done some of those as a result of the initial pressure that has been put on them in the last two months. It is still very unclear, and I think this point was covered earlier so we may not need to go over it again, when those sites will come on stream. We are currently offered 190 sites by June, physical sites, and the current state of demand is in excess of 500 from bow-wave one and bow-wave two, in fact 600, that are sitting there ready to be ordered, so to speak, when we have the information back to do that.

Mr Chope

  287. You are clustering around the sites where there seem to be a lot of business activity, particularly small business activity, and you are ignoring the exchanges which have a high proportion of residential customers. At an exchange like, for example, Christchurch—we have been there—there is space for at least six operators to come in now but nobody is interested in doing anything about it. Some companies have expressed an interest. Why is it that you are not going for the niche market, perhaps with less competition, at some of the exchanges which are not so popular with businesses?
  (Mr Markham) I think with different exchanges you will get different answers, so I will ask my colleagues. It is dependent on an individual marketing plan, so they might like to comment.
  (Mr Worms) From IOMart's point of view probably we had a very different bidding process I think, as it turns out, from colleagues probably in the industry in that we focused on a particular area, in this case the country of Scotland, when we went into bow-wave one and we followed up with bow-wave two. As it has turned out, we were quite fortunate in bow-wave one in that because we specialised on a geographic area, we have not got the bit of a nightmare situation where we have one exchange here, one exchange here and one exchange here, which was quite commonplace after bow-wave one. We have pockets of exchanges within four major Scottish cities. In bow-wave two we attempted to infill and reach, as you alluded to earlier, the rural type areas. We are looking at the towns of Inverness—the City of Inverness as it were—Stirling, Falkirk, Ayr, we are looking at Highlands and Islands. We are looking at the rural communities, particularly in Scotland. The issue we have with the way that the process currently works is that I may well want Inverness as my number one exchange, for whatever reasons, but if the rest of the industry thinks Inverness is not important to us at this stage of our process, bow-wave one, bow-wave two, nobody is going to convert that exchange for me, ie BT, purely because IOMart wants that exchange. Obviously the biggest problem that all of us face is out of the information we are getting, either from Oftel or BT, how do we construct logical, sensible and sustainable business cases. Obviously for the amount of capital and time and expenditure going into a small rural exchange to start with, where perhaps you have a penetration of 2,000 or 3,000 people that might want your product, that will never, ever pay until two or three years after. So obviously the more popular exchanges by default have been the metropolitan city centre exchanges.
  (Ms Hobday) I would just like to make the point that the process, by definition, is going to be a fairly long one. What we are looking at now is the allocation of scarce resource, although we cannot scale that up precisely. In terms of the resource available, what gets built first, we have basically run just over three months of the process and that is based on a 12 month forward looking binding forecast that the operators put in. There are a large number of exchanges that you may not have allocated highly but that does not mean you do not want them. At the moment what you want to do is concentrate on those exchanges where you can get in and are likely to get revenue in the first instance to flesh out your business case, but going forward you are likely to see a lot more of the exchanges going out from the urban areas being built.

  288. The business case will depend upon how many competitors you have got in any particular exchange. The point I am making is if there is an exchange where you want to go in as a niche player and you are the only person there then you may be competing with BT, but that is all. If you put all your eggs in one basket and say "we wish to go to an exchange where there are going to be six or eight other competitors" then you have got to decide between six or eight the potential market that you could win in developing your business case. Are you not going about this the wrong way?
  (Ms Hobday) It also depends on the type of equipment you are going to use, the type of market segment that you will address, whatever area of the country it is, first or last. Number of competitors is obviously relevant in terms of building your business plan, looking at the likely assumptions of how much revenue and what chunk of that addressable market are you going to get over what period of time. Perhaps it is the triumph of hope over experience but most of us who are going into the market process always think that our service proposition is better than anybody else's, our technology is much more robust, much more sexy, much more attractive to customers, and we will be staying in that exchange over the long-term. Although we are co-operating for the moment in a non-collusive way through the industry process, that is the assumption on which a lot of us are going forward I think.

Mr Morgan

  289. In the last paragraph of your submission you talk about "interesting examples of what BT considers to be reasonable space preparation, eg repainting, floor covering,..." etc. Is the implication there that BT is trying to get new or totally refurbished exchanges at somebody else's expense?
  (Ms Hobday) The caveat I would add there is that this was actually drafted before we had seen any of the full survey results that came in on Friday. This was based on our trialled build offer from Battersea and in Battersea we certainly get the impression that BT is taking the opportunity to have its security system upgraded to a fully card accessed based system for which we are paying over £7,000. We are looking at that cost in a fairly curious way to see whether that is actually as a direct result of us going in there, but that is an example.


  290. £7,000 each or £7,000 in total?
  (Ms Hobday) That is a very good question. It is rather confusing. I think it is actually in total, so it is between four of us, which is not quite so shocking as it would have been for each of us.
  (Mr Markham) The general point being that there are certain guidelines that are set down in terms of what is appropriate to recover from the operators and what is not set down in terms of the engineering specifications in a great level of detail to understand, say, how one would re-cover a floor: do you re-cover it, do you take the old covering off, what quality of product do you put down to suffice? There is certainly an element in this where the operators feel there is a long way to go to understand what is the optimum and right balance which at the moment, because of the lack of transparency, we are only just beginning to get information back on with regard to the very first site for which that is being proposed and the prices associated with that.
  (Mr Daeche) And, of course, all of those things take time.

Mr Morgan

  291. If BT comes back and says there is not enough space in a particular exchange, are you happy now with the mechanisms whereby you can challenge that?
  (Ms Hobday) I think Oftel's draft determination on the contract, assuming that BT puts that in place in the contract in accordance with the spirit with which Oftel included it, will allow us to seek third party verification of any assertion by BT that there is no space. If we and BT cannot agree on the appointment of an arbitrator then Oftel will appoint an arbitrator. If we are right, and there is some space, BT will pay the costs of that arbitration. If we are wrong, and there is not any space, then we will. That seems to us to be a fair mechanism. This is fairly fundamental. If a number of operators really want to get into an exchange, one operator will go and seek verification of that.
  (Mr Markham) It does raise the question of how co-location should take place in terms of the definition of that product. To date it has moved down a route to accommodate the number of operators through what was described as a hostel. We have made requests upon BT to seek what in the industry is known as co-mingling. That basically means if there is a place where I can place one rack of equipment inside a BT room, is that appropriate to use for an alternate operator to locate in BT's exchanges? That does happen in other countries, in the USA, to facilitate exactly the sorts of things you are discussing of a single operator getting in very efficiently and economically. Currently we are not really sure in terms of how and when such product a would be made available to us. The other aspect, to try to be creative about that, is to seek opportunity to place equipment outside of BT's building but within the domain of the BT site. We discussed earlier the context of cabinets and street sites and clearly in some suburban sites where opportunity exists to do that we are seeking to get that available to us as a product option. So when the site physically is full could you place equipment conveniently very close, within 50 or 100 metres of the exchange that is in that domain? Those are the kinds of details we will get into because those things are only now becoming apparent to force that through.

  292. That is not distant location?
  (Mr Markham) It is distant but it is in BT's sight.

  293. In technical terms, what is it? Is it co-location technically?
  (Mr Markham) It is all semantics frankly. It is distant to place equipment outside of BT's building but, say, in their car park and connected via a cable to the BT telephone exchange. It is distant for all other purposes.

  294. So it is a lot cheaper than seeking another location elsewhere?
  (Mr Markham) It is more immediate and cheaper potentially than, say, going through the whole process of acquiring a building, fitting a building, refurbishing it, lease agreements, etc.

Ms Perham

  295. I just want to pick up on what you were saying and something you say in your submission that "currently BT is not offering space other than in separate and potentially costlier rooms". Is that still the case?
  (Ms Hobday) There has been a difficulty in the negotiations, say, for five to six months where BT has said that operator equipment should be separated for security reasons from BT's equipment and that has, in effect, meant stud walling in the buildings. The operators have argued against that with BT and with Oftel. Oftel's recent statements have indicated that they are not fully persuaded that in all cases separate walls will be necessary to protect BT's equipment. It will be done on a case by case basis. If BT come back with an engineering solution which has two inch thick walls and the operators think that is over-engineered and unnecessary they can then challenge that and it will be up to BT to prove that those walls are necessary. Where we have got to at the moment is the standard hostel product is based on walls separating operator equipment from BT equipment.

Mr Hoyle

  296. You mentioned about having the cabinets and I think there is a great danger to a lot of us as politicians because these cabinets seem to litter everybody and are never appropriately placed. Obviously I understand that you have got to run a business, but what negotiations will take place if you have got to be 50 metres or 100 metres away from the exchange littering the footpath with cabinets? Will you actually negotiate with the local authorities or with the neighbourhoods or will you just have the right to plant them where you think fit?
  (Mr Markham) Done in the appropriate way is to have pre-discussions with the local authority about the locations of such cabinets, absolutely. It will be correctly done through pre-negotiation before they are sited. There are all sorts of aspects that need to be done both from the aesthetic and environmental points of view as well as the traffic regulation as well as the disturbance created in connecting that cabinet. That is exactly the correct process that we will be going through.

Helen Southworth

  297. Can you give us some ideas about some of the practical considerations about distant siting for your cabinets or whatever? What are some of the practical things in terms of service delivery? Do you have technical issues that you need to address?
  (Mr Markham) I think to some extent they were touched upon earlier. It is really solely down to the distance of such a distant location facility from the BT telephone main distribution frame, which is where the connection of the cable coming from the consumer or the business connects to our cable. That is an additional length that is placed upon the length of the cable that, because of the technical nature of sending signals up and down a copper wire, can degrade, reduce, the amount of footprint you would have if you drew a circle around where that is from. We are seeking ways with BT to mitigate that problem by designing a cable in a manner which limits in a sense the loss of signal capability. That is the first practical consideration. The second one clearly has been mentioned with regard to the fact that there is a process to go through of agreeing with the local authority and understanding physically how and where this should be done in the best interests of the community as well. The third aspect, if you are looking at a property strategy, is associated with finding and seeking properties which may not exist or be furbished in a manner which currently BT exchanges are available to site equipment in as opposed to there is not necessarily always going to be two, three or four computer rooms knocking around within a couple of hundred metres of a BT exchange to site two or three operators in. There are some activities going on in the industry by third parties to facilitate such a process as a result of the difficulties we have had in getting access to what is space that today is defined under the provision of the planning rules as a telephone exchange. All of those are comparable problems which the industry has to face if we cannot get space, which I think several of us understand and will move into as an adjunct to physical co-location, but not necessarily as a straight alternative because of other issues that probably we should resolve through a more proactive stance from the industry and BT and Oftel.

  298. Have you given any consideration to, or have you calculated, the kind of impact that is having on your competitiveness to have to make these other arrangements to solve these technical difficulties?
  (Mr Markham) In both time and cost there are aspects to that, yes. Some of us who are pursuing that kind of strategy are looking at those in detail. Also there is a sense clearly that the whole issue is about the rate at which you can provision exchanges to be available so that one can begin to offer a clustered service in an appropriate town, or rural area, or geography from which you can begin to market the service. Currently the offer on the table is 190 sites by next June and we have made a submission in our paper that is compared to BT's public stance of 839 exchanges they will have available and enabled by March next year. Remember the 190 are shared, therefore, between operators who can get into that and there are straight mathematics in competitiveness between ourselves and BT at that point in time.

  299. In terms of distant located boxes or whatever, are you going to be sharing those with other operators?
  (Mr Markham) The potential exists to do that at various different levels, yes. Not necessarily for the siting of equipment but the ability to wholesale service between operators. One operator takes the lead on building that and some other operator can buy a service from that operator in a competitive way for BT to get access to that exchange.

  300. Is that co-operation beginning to evolve?
  (Mr Markham) It is fair to say there is a lot of frustration at this point in time diverting down the distant route because we have got major problems to do with getting access to co-location which is not necessarily at the top of everybody's agenda. There is a difference of opinion, rightly so, between the industry on the very issues we have just talked about—price, time frame, ability to get there—whereas the focus of what we are trying to do is to organise in a manner that gets fair and open and reasonable access to BT's exchanges as quickly as possible, not just to say "that is all too difficult, let us back off for a moment".

Mr Laxton

  301. Those of your companies that are solely internet service providers, apart from those, what other range of services are you looking to provide, if any?
  (Mr Daeche) We are certainly looking at and are in trials at the moment on voice over DSL. It becomes a lot cheaper to provide services to our customers if we can provide a digital service over DSL rather than having to take multiple lines from the incumbent, or in fact installing our own multiple lines. To give you an example, you can take one copper pair right now over which one telephone line is running and it is theoretically possible to provide 30 digital lines over that one copper pair and, of course, we only have to pay for the unbundling of one loop and one monthly rental. Obviously there is a knock-on effect there in terms of the services that we offer and the costs of those services to the customer. That is one of the main services that we are looking to provide and, as I say, we are actually in trials on that right now.

  302. Telephony over and above broadband high speed internet?
  (Mr Daeche) Absolutely.
  (Mr Worms) IOMart is primarily famous for being an ISP, that is how we started life. We are looking very much at DSL as just being the delivery mechanism, it is just a pipe to be honest. The services we are actively looking to put down that pipe are the video stream, video on demand type services but, more important, things along the lines of distance learning—we see a great future for distance learning—and telemedicine is another application. We are also delivering in the new year very early on managing mail services and VPN type private networks. We are literally using DSL as the delivery mechanism for these services.
  (Mr Markham) There is a large amount of business clearly integrated in a way which might be disparate sites or locations they have around the country, and that does include homes of workers. If you can replicate the facilities that you have in the office in terms of security, speed and access to data and manage time—that is known as virtual private networking in the industry, it is a huge demand in the industry—you can now be liberated and that clearly pushes us towards a significant increase in productivity and e-commerce between businesses, their partners and suppliers in trading communities.
  (Mr Worms) I was going to add, I do not think we should overlook the importance of getting something like DSL rolled-out properly so that everyone can benefit. You were saying earlier that the excluded, as it were, teleworking is an absolute prime candidate for DSL. Things like the call centre industry were seen to have problems, but the beauty of DSL and using pulse analogy and using virtual private networking as verification is you really truly can get to the private driven future that we are talking about, people actually physically working from home, logged on for two hours, then doing the shopping and then coming back. You can start controlling people's working lives in a way which benefits the community as a whole. That is the one of the saddest things. I am surprised the question has not been asked, how do five competing operators get to the stage where we are sitting at this table? The one word I would use is "frustration".

Mr Butterfill

  303. On page 4 of your submission you make a lot of very unfavourable comparisons between the situation here and in France, Germany and the Netherlands. You say that for the present mode of progress with allocation it would take the operators 30 years with BT's roll-outs. You say, "We do not have transparency and non-discriminatory access. We do not yet have reasonable provision". Can you tell us what the main problems are with transparency?
  (Ms Hobday) We are still trying to nail down these resource constraints that BT has. We have written to OFTEL on this. We have asked BT numerous times. It came up originally in the bow-wave. We have not been able to scope the co-location bow-wave properly because we do not really understand what the BT constraints are. We do not understand what their existing internal and external resources are. We have said to BT, "We want you to increase from 190 co-locations mid next year to 250. How much resource would that involve and why is it such a problem for BT to do that when it is basically, `let us hire a few more surveyors and the external building contractors'?" Projecting out from that in terms of the resource issue were the resource constraints and other complaints around loop provisioning. We had a huge battle with the co-location and whether or not we have won the war remains to be seen. There are certainly battles to come with loop provisioning, with the manual automated procedure, with the automated ordering procedure and precisely how outmoded is BT's current ordering process and what is the adjustment and what are the actual physical problems. The transparency issue, in particular, comes up in resource, but it also comes up in other areas when you are negotiating or discussing key matters with BT. There is a huge information asymmetry. We know nothing and BT knows everything. BT assert they cannot do X because of Y, and we have no visibility of Y, so we dance around it for two months and then go to OFTEL. It is a very inefficient way of working for all of us. We have much greater transparency. We can hopefully stop an issue becoming a major issue and deal with it in a mutually beneficial way before it gets to the Regulator. That is our fundamental concern about transparency in relation to those models.

  304. OFTEL said that BT's terms were not reasonable in a number of cases, are you satisfied that the latest OFTEL proposals address those problems?
  (Ms Hobday) I have to confess that I am a lawyer and I am a particularly pedantic lawyer. There are aspects of the draft determination that cause me concern as a pedantic lawyer, one of which is there is insufficient detail in some of the really crucial areas. There is a slight, perhaps, lack of communication between the operator's concerns and the potential impact with what OFTEL have done and their desire to come to a reasonable compromise and to take into account our concerns and BT's concern. As all the lawyers will say, and I have seen it said in many different fora, the devil is in the detail. We have a high level draft determination which requires BT to amend its terms in very complex areas, just two or three lines, or maybe a paragraph or two. That is a substantial amount of drafting. The real concern is, have they been sufficiently clear for BT to go off, draft and come back. Unfortunately BT will be coming back with a draft to the industry on 2nd January[3]3, which is the date by which they have to implement the determination, if there is a problem it is highly likely we will be back to OFTEL on 3rd or 4th. I cannot bind my own company to that, we would like to see the offer BT comes up with. We have some concerns as to how it will be implemented.
  (Mr Markham) From our viewpoint it is the very headlines thing, the agreement on the types of service BT will provide and the obligations on them, which are very weak, and are still to be sorted through and made meaningful. How can we enter into an agreement with a customer if we do not have back-up from BT for that? The experience coming through currently from the resold DSL product is, despite several operators pumping in a market level to build up their market base, this year from January 2nd we face the rationing of lines because only 7 months into that process, from building it up, we now run into issues with BT and we have all been re-rationed. From increasing activity in the market place, to building-up customers, to try to connect-up customers, we now have to go back and disappoint. We face the same issue potentially, so we are trying to be proactive with regard to them on unbundled loops as opposed to wholesale loops. We are very concerned with the degree to which confidential information is supplied to BT wholesale. Information that may provide provisions under the contract to keep that confidential from BT's own customers is rather vague. Thirdly, in a sense it relates back to the service level agreements and the type of penalties between two parties, and the significant penalties placed upon the operators for not progressing and going ahead with their site roll-out programmes, even when we do not know we can get them with any certainty, yet the degree to which there are penalties on BT for not connecting the customer in that time period is "reasonable endeavours". That is the kind of imbalance that sits on some of those issues.

  305. Lets hope it all works.
  (Mr Markham) As businessmen what we have to do is take a responsible attitude, you actually go ahead and step your toe into the water. That is the unfortunate consequence we have of being late to this in terms of getting the sets of things sorted out, which goes back to the comparison we made earlier on with Germany, which is a position that was represented last time.


  306. There is nothing else to ask you at this stage. Thank you very much for your evidence this morning. We wish you a Merry Christmas.
  (Mr Markham) Thank you.

2   Atlantic Telecom use a single "rack" of equipment, which is installed at chosen Deutsche Telekom AG local exchanges. The rack includes DSL equipment, which is used to provide services using SDSL technology. The maximum power required is 292 Watts, which is used where the rack is fully configured. Back

3   BT placed on its website on 29 December 2000 an Access Network Facilities Reference Offer. With regard to the final OFTEL determination on the existing Access Network Facilities Agreement, both the operators and BT have submitted comments on the draft determination to OFTEL. The operator's legal representatives attended a meeting at OFTEL on 5 January 2001 to discuss their views on the draft determination. OFTEL will be issuing a final determination in due course. Back

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