APPENDIX 8
Memorandum submitted by Level 3 Communications
Limited
INTRODUCTION
Level 3 Communications Limited ("Level
3") is a public telecommunications operator licensed under
the Telecommunications Act 1984. It has been developing and building,
since 1998, one of the most advanced telecommunications networks
in the UK. Its customers are typically Internet service providers
and other large consumers of bandwidth.
In its short history, Level 3 has completed
or nearly completed the construction of an intercity network in
the United States of 25,000 km, connecting 50 cities, an intercity
network in Europe of 6,000 km, metropolitan networks around many
of these cities, a transatlantic cable with a capacity of up to
1.28 terabits connecting the United Kingdom and the United States
and a transpacific cable with a capacity of up to 2.5 terabits
connecting Japan and the United States. As at the end of September
2000, the company offered communications services in 41 US, five
European and one Asian market. Level 3 pursues a strategy of what
it calls "Silicon Economics", also known as price elasticity,
whereby it believes that lowering the price for its services will
generate greater increases in the volume consumed, to its benefit,
as well as to the benefit of consumers. Level 3 notes that this
has been the case with personal computers, microprocessors and
consumer electronics and should be no different for telecommunications
services. For this reason, it has often been the leader in initiating
price decreases for telecommunications services.
Since March 1999, Level 3 has offered to ISPs
a product called Managed Modem. This provides ISPs with both the
facilities to house their servers and the connections into incumbent
local exchange carrier networks to give access to end-customers.
Prices at well below the levels offered by other operators providing
a similar service, this product has been a big success in the
US: in less than a year Level 3 has installed 200,000 64 Kb/s
ports, is now processing more than three billion minutes of Internet
traffic a month, and is already one of the top three providers
of this kind of product in the United States. Level 3 considers
that its managed services for ISPs have made a major contribution
to the development of cheaper Internet access and to the increase
in Internet penetration in the US.
Level 3 is at present rolling this product out
for ISPs in the UK. The customers of these ISPs will frequently
be residential or small business users whose sole means of access
is the conventional telephone line.
A recent determination by OFTEL has for the
first time in the UK held out the possibility of the competitive
provision of unmetered (flat-rate) calling to the Internet. This
could significantly reduce the costs of accessing the Internet
for the smaller user. However, Level 3 has some serious questions
about OFTEL's approach to flat-rate Internet access and these
questions are the subject of this memorandum.
BACKGROUND TO
FLAT RATE
INTERNET ACCESS
The Committee will no doubt have had many representations
relating to Local Loop Unbundling and in particular DSL which
is seen as one of the key ways of expanding the reach of high
speed Internet access. While DSL shows promise, however, it should
be noted that roll out of this technology in the US, where Local
Loop Unbundling has been required for a number of years, has been
slow and problematic. The problems in the US have been very similar
to those that are currently being debated in the UK and have at
their core the problem of reliance on the incumbent owner of the
local access network for every aspect of installation and maintenance.
Furthermore, for most residential users, DSL is, and is likely
to remain, in the medium term a relatively expensive technology
(BT's current offering of a 500 Kb/s residential DSL service as
a £150 installation charge and a £40 monthly fee, whilst
a 2 Mb/s business service costs £260 to install and £480
per month). Thus, until DSL is proven as a workable and inexpensive
technology in practice, dial-up Internet access using existing
(but un-enhanced) telephone lines, will continue for some time
to be the prime means of access to the Internet. One of the key
drawbacks of dial-up access is, of course, the difficulty for
the user in managing the cost of the phone bill.
For some time there has been pressure on BT
to introduce an unmetered (flat-rate) Internet access service.
BT, until recently, has resisted this citing fear of overloading
its network with Internet calls (BT's local network is designed
to deal with three to four minute voice calls rather than calls
to the Internet that, if unmetered, might last for many hours).
In December 1999, however, BT itself launched
a flat-rate Internet access retail product, known as SurfTime.
SurfTime allows BT telephony customers to pay a monthly fee entitling
them to make unlimited calls to Internet service providers on
certain specified number ranges. BT, in conjunction with telecoms
operators and their ISP customers, can therefore provide an unmetered
Internet access using the SurfTime product—that is, the
end-user pays a subscription both to BT for SurfTime and to the
ISP for Internet access.
This arrangement, however, gave rise to competition
concerns. Another operator of ISP who wanted to offer a flat-rate
Internet access service in competition with SurfTime would be
faced with the following problem. To provide the service to an
end-user connected to the BT network, the operator needs to arrange
for BT to convey the calls initially to the point of interconnection
with the operator who then terminates the call either with its
own ISP, or with an ISP connected to its network. This service
(known as call origination) has for a long time been available
from BT and is used by indirect access providers offering typically
low price national and international voice calls. BT's call origination
service is, however, metered (ie on a pence per minute basis).
An operator wishing to offer an unmetered service to its customers
would have to bear the risk that the BT's charges for conveying
metered traffic to the point of interconnection would exceed the
flat-rate revenue it obtained from its customers. That is, there
might come a point where the end user's usage would lead to an
operator having to pay out more to BT than the flat fee it receives.
Therefore, following a request by MCIWorldCom
in December 1999, the Director General made a determination on
26 May 2000 that, with effect from 1 June 2000, BT would be obliged
to provide other operators with a flat rate Internet access call
origination service to allow them to compete with BT's SurfTime
product in the manner described above. This service is known by
the acronym FRIACO.
At the same time the Director General determined
that the charge for the FRIACO service should be £424.25[13]
per 64 Kb/s point of connection per year, that is to say £424.25
pr voice channel (or ordinary telephone line) per year.
THE ISSUE
Whilst Level 3 applauds the actions of the Director
General in making the determination that BT should be obliged
to provide FRIACO to other operators, it has serious concerns
about the development of competition at the wholesale level. Level
3 has been considering whether to take the FRIACO service from
BT in order to offer flat-rate access to ISPs. However, it is
concerned that the length of time that OFTEL has taken to finalise
the details of FRIACO has meant that FRIACO is likely to be attractive
only to very few network operators. At the same time, however,
BT is proposing to introduce a new service for ISPs, referred
to by Level 3 as SurfPort24, which used FRIACO together with individual
network elements that BT is not making available to other operators
on an element by element basis. Thus, the goal of competition
in the provision of flat-rate access risks being jeopardised.
In more details, Level 3's concerns are:
(i) OFTEL indicated in its 26 May determination
that it planned to review the charges for FRIACO by 1 December
2000. Whilst the charge of £424.25 per 64 Kb/s port is not
in itself fatal to making a business case for the provision of
flat-rate Internet access, they are high by comparison with the
rates that, for example, are available in the US. Level 3, for
instance, is able currently to charge its Managed Modem customers
in the US US$30 per 64 Kb/s port per year. Taken together with
the concerns outlined in points (ii) and (iii) below, the charges
amount to a significant disincentive to the competitive provision
of flat-rate Internet access by competing wholesale providers
such as Level 3. However, OFTEL has only in the last few days
begun consulting on the methodology for calculating the charges.
That consultation is due to end on 11 December and the results
are unlikely to be announced before January 2001, over one year
from when MCIWorldCom made its original request for determination.
(ii) The determination only required BT to
offer FRIACO to operators interconnected at the local exchange
level in the network. In practice, however, operators have always
interconnected with BT at switches at the trunk level in the network.
Thus, in order to take a FRIACO service most operators, including
Level 3, need to acquire and pay for interconnect extension circuits
from BT to carry traffic from the trunk to the local level. The
cost of these circuits is in addition to the cost of FRIACO. OFTEL
announced that it would take expert advice on whether it would
be reasonable to require BT to offer FRIACO at the trunk level.
This advice was due to be delivered on 1 June but nothing has
yet been published. Again, this is now expected soon but the delay
has had the effect of limiting the roll-out of competitive flat-rate
access.
(iii) In the meantime, BT has announced that
it will launch a service for IPSs, provisionally called SurfPort24,
which threatens to make competitive provision of flat-rate services
using FRIACO even more unattractive. SurfPort24 is a combination
of FRIACO and an existing service for ISPs which collects traffic
at the local exchange and transfers it via modem banks to BT's
IP (Internet Protocol) network to the ISP, to allow the ISP to
offer a flat-rate service to its customers. This use of BT's IP
network in conjunction with FRIACO is a far more efficient and
cost-effective way of transferring traffic from the local exchange
to the ISPs than the traditional interconnect circuits that other
operators are obliged to use, yet it is not a service that BT
at this moment is making available to other operators. In Level
3's view, this raises serious concerns that BT is using its monopoly
position in the local access market to prevent a wholesale market
from being established, which would bring competition and efficiency
gains for the public.
Level 3 has drawn these problems to the attention
of officials at OFTEL, but has been told that swift action is
unlikely. Level 3 is, therefore, deeply concerned about the time
that it might take OFTEL to resolve the two key issues (charging
and the provision of FRIACO at the trunk level) that are already
delaying the competitive provision of flat-rate Internet access
in the UK. The need for speedy action to open up competition in
the market for the provision of access to the Internet (whether
broadband or narrowband) is illustrated by the actions of the
EU institutions which, if the regulation requiring Local Loop
Unbundling comes into force as expected in the course of November,
will have gone through the entire legislative process in little
more than four months. Level 3 can see no reason why OFTEL should
not undertake the review of FRIACO with a similar sense of urgency.
Level 3 is concerned furthermore that OFTEL
should be more pro-active in investigating the effect on competition
at the wholesale level of new BT products, such as SurfPort24.
Just as in the market for broadband access where, as the Committee
will no doubt have heard from other operators, BT is entrenching
its dominant position by pressing ahead with its ADSL roll-out
plans whilst the rest of the industry tries to gain access to
its local exchanges, so in the market for flat-rate narrowband
access BT is seeking to gain first-mover advantage by creating
the conditions where it is impossible for other operators to compete.
In both cases BT has been given at least a year's head start on
other operators. But this is a problem that needs swift resolution:
every customer that signs up to BT's SurfTime is a customer that
will have to be won over to an essentially similar although, it
is hoped, cheaper service. But, this is no easy task: customer
inertia has been one of the main reason why market share for telephony
remains high.
A speedy decision by OFTEL facilitating a viable
wholesale offer will, if the US is any example, reduce prices
for ISPs and end consumers for access, will foster competition
in the flat-rate Internet market, allow ISPs to focus more on
their product, and thereby bring about innovation such as shorter
access times, richer quality, greater range of services and so
on. Such a decision would help to eliminate the digital divide,
assure universal service and would help the UK achieve its goal
of being the best environment for e-commerce in the EU.
QUESTIONS FOR
THE DIRECTOR
GENERAL
1. The telecoms industry is now operating
at Internet speed but competition in the provision of flat-rate
Internet access risks being stifled unless the outstanding issues
around FRIACO are resolved, quickly, so, just as the EU institutions
have approved local loop unbundling rapidly, what can OFTEL do
to foster a competitive wholesale environment more quickly than
at present?
2. How does the Director General propose
to take a more pro-active approach to the regulation of new products
offered by BT to prevent BT gaining the first-mover advantage
that it has in the area of flat-rate Internet access? Would he,
for example, consider establishing a rule that BT should not launch
a retail product until the arrangements for a corresponding wholesale
product had been settled?
3. Has the Director General considered whether
an end-to-end product such as BT's SurfPort24 gives rise to any
competition concerns and, if so, what action does he propose to
take and on what timescale (recognising that by introducing such
products BT is able to place the wholesale market in the position
it was in before the introduction of FRIACO)?
7 November 2000
13 NB: this charge contrasts with the charge of £236.51
for the same capacity that OFTEL proposed in the draft determination
that it put out to public consultation before making the final
determination in May. The difference appears to have arisen because
OFTEL accepted representations from BT that to carry the amount
of traffic that FRIACO was expected to generate at the local exchange,
it would have to set aside more circuits (capacity) in the local
portion of the network (ie between the customer and the local
exchange) than was previously thought in order to prevent a degradation
in the service provided to PSTN (telephony) customers. Back
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