Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum submitted by Video Networks Limited

I am writing in response to the Select Committee inquiry into the unbundling of the local loop. The submission attached presents Video Networks and its interactive television services and sets out the importance of the unbundling of the local loop in relation to our business.

  To the best of our knowledge, we make more use of ADSL technology than any other company in the UK, and have been using ADSL technology longer than anyone else in the UK.

  We have observed recent debates on unbundling the local loop with both interest and concern. Our interest is that of a provider of interactive services through ADSL technology provided over BT's upgraded local loop. Our concern is that over recent months the debate has focused on the interests of different network operators, rather than on the interests of the consumers of the service.

  We are strong believers in competition, but we would like to see more focus on the benefits of competition for consumers such as reduced tariffs. We believe that the best means of ensuring rapid progress is to focus on consumer interests. We have set out our own initial approach for solving some of the problems that currently obstruct progress in providing a ubiquitous low-cost service.


  Video Networks Ltd is the leading video-on-demand (VOD) and interactive television company in the UK. We are able to provide our services over BT's local telephone lines once they have been upgraded to a broadband delivery channel using ADSL technology.

  Our HomeChoice service, the first consumer TV-on-demand service in Europe, is available in London, and uses ADSL technology to pipe content to customers.

  At present we are the biggest users of ADSL technology. Our ability to roll out our own service is dependent both on the upgrading of BT's local exchanges and the introduction of lower tariffs through increased competition. We want to reach as full coverage as possible across the UK but are obviously constrained by the current state of ADSL development.

  We are also one of the most experienced companies in the sector: we have, in fact, been delivering VOD and interactive television services through ADSL technology continuously since 1996. Video Networks piloted its service over BT's ADSL network from July 1998 to September 1999, having previously operated a pilot in Hull from December 1996 to July 1999. HomeChoice was launched in North West London in October 1999.

  Our company will be one of those most likely to benefit from the roll-out of ADSL and from the tariff reductions that should result from increased competition in the operation of the local loop. We are developing new and innovative services, which will help to position the UK as one of the leading countries for e-commerce and t-commerce as well as for interactive television services and video-on-demand (VOD).

  As well as our services in the UK, we are planning three pilot schemes for VOD in Germany with Bertelsmann Broadband Group, using DSL technology to deliver content in Hamburg and several other German cities. We have since signed a memorandum of understanding with Bertelsmann to establish a joint venture in Germany. There are significant opportunities for international exploitation of our proprietary software and systems developed here in the UK through our licensing models. We are in discussion with several other potential partners in Europe and elsewhere.


  The cost today of providing a real VOD service through ADSL technology to a customer is well above the likely revenue that customer will generate. For instance, the price we are paying BT to run VOD over its ADSL is £625 per customer, with a monthly rental charge of £60 per line under a three-year contract for a minimum of 15,000 lines. This is equivalent to £42.85 million to provide the service to just 15,000 homes over three years. That amounts to a cost-per-subscriber of just under £80 per month, against an average revenue that is unlikely to be above the £30 per month level.

  Only unbundling can bring greater network competition and result in a better deal to the consumer. We believe that only greater network competition will result in a reduction of BT's current excessive prices. And lower tariffs will result in lower prices for the end-consumer. We therefore believe that it is very important that meaningful competition is encouraged. Competition provided by substantial network operators in the development of broadband services, in which the local loop will play an important role, will enable these goals to be achieved.


  As you can understand, upgrade and unbundling of the local loop are key to swifter roll-out of our distribution system. National coverage is definitely our primary aim, and we need to provide our services to households across the UK as soon as possible. To date, we have experienced delays with regard to BT's upgrading of its local loop network. We are in continuing discussions with BT, and with Oftel, over a variety of issues, not least to address the apparent technical and operational problems that the company claims to be encountering. If we are unable to increase the rate of installation of our services, our subscribers' growth rate could be constrained.

  Unbundling is key to ensuring competition which can lead to lower tariffs of our services. At present BT has 6,000 local exchanges and is letting alternative suppliers into only 360 exchanges. BT has already stated that it is unable to move faster than the timetable already set by Oftel for July 2001 for allowing alternative suppliers into their exchanges. However, there is concern that BT could not be able to meet even this deadline.

  It should also be pointed out that the terms on which BT will make available unbundled local loop circuits and associated services are not yet finalised.


  Evaluation of the options for action should be mindful not only of the practicalities of implementation in BT's local exchanges and their implication on the physical local loop, but also of the provision of high-capacity networks required to connect those exchanges to service providers' facilities. These are referred to as back-haul networks.

  In order to take full advantage of the speed offered by DSL technologies, the capacity they offer between local exchanges and the customers' premises needs to be matched by back-haul networks having much greater capacity than BT's current inter-exchange core transport network. The technology to implement such capacity using optical fibres is not only readily available but also continues to be developed, so that BT's existing buried duct infrastructure can be expected to fulfil the capacity requirements with relatively minor further investment in civil infrastructure.

  The development of a policy for competition needs to be mindful of the possibility that the implementation of a comprehensive alternative back-haul network for a new entrant could require a large quantum of investment and take significant time. This could therefore act as a deterrent. In view of the existence of BT's inter-exchange core infrastructure, and of the high capacity potentially available using optical fibres, it could be economically inefficient to require new entrants to build comprehensive alternative civil infrastructure for back-haul. The construction of such alternative infrastructure would also take a long time to reach large numbers of residential customers.

  Even with Local Loop Unbundling, there could therefore still be a competitive bottleneck in the back-haul segment of the network. If regulation encouraged competition in that segment, this could, perversely, keep costs high, reflecting the stand-alone costs of the construction of new back-haul capacity. Efficient and cost-effective exploitation of the opportunities offered by high-speed network access could require resolution of this potential problem. Oftel is probably in the best position to address it by regulating interconnection between alternative carriers' networks on the one hand and segments of BT's fibre optic network terminating in local exchanges on the other.

  In considering this, it should be noted that there is not an intrinsic cost problem here. Fixed costs dominate the total cost of an optical fibre link of any significant distance. The incremental cost to increase the capacity of an existing fibre optic link is relatively small, and continues to fall as optical communications equipment costs fall generally, as technologies such as dense wavelength-division multiplexing are developed and as greater integration of broadband transport and switching equipment progresses. The problem if it occurs, is more likely to result from the manner in which BT could allocate its total costs across all services.

  Economic choices by competitors need to be guided by the greatest possible transparency in costs, and the regulator can encourage this by unbundling not only the local loop but as many of the underlying components in the delivery chain as possible.

  The provision of consumer-grade high-speed networks requires careful planning to produce consistent quality and timeliness of delivery at an affordable cost. It entails investment in a substantial trained workforce, capital and systems to support large-scale operations. A prerequisite for such planning and investment is clarity and stability in the regulatory environment. It is also doubtful whether more than a few large operators can plan and execute such a strategy successfully.

  In Video Networks' view, the process of allocation of space in telephone exchanges should be motivated first and foremost by the need to make high speed network services available to consumers at affordable prices as soon as possible. The process should provide for fairness among all possible applicant operators as secondary to this paramount motivation.

  Video Networks has proposed consideration of a licensing regime for DSL-based higher bandwidth access networks. This could operate by awarding licences by auction to, say four operators on a basis as follows:

    —  licences offered on a national or regional basis with minimum build requirements;

    —  licences to be granted for a period of say, five years during which no further licences would be awarded;

    —  bidders to fulfil pre-determined financial and technical criteria;

    —  bidders to fix a tariff schedule for the period of the licence with guaranteed caps; and

    —  licences to be awarded solely on the basis of the lowest tariffs.

  A regime of this sort was recently adopted in Israel for the provision of a second national cellular telephone license. The competitive bid was won by a company that guaranteed keeping tariffs within pre-specified levels. The result has been a rapid fall in cellular telephone air-time prices, both those of the incumbent and of the new entrant.

  Oftel has said to us that it does not have the powers to conduct such an auction. If this is the case, then we believe that a very simple legislative change is needed to allow this. This should be undertaken as a matter of urgency.


  Slow incremental roll-out of ADSL services will set Britain back against other competing nations, not only in terms of telephone services but also computing, fast internet access, digital broadcasting, e-commerce, t-commerce. The means to address this situation is through focussing on the interests of consumers who wish to receive new and innovative services of the kind that can be developed by ADSL.

  Pricing is key to low-cost widespread availability of these services and this depends on an effective and competitive regime which sets pricing at its heart.

  Current uncertainty is preventing large network players from adopting comprehensive business plans for the large-scale development of national services. The prime reason for this is the uncertainty in the process of allocating co-location space in BT exchanges. Network operators currently do not know in which exchanges they will have space.

  This is damaging not only to those network operators but also to us and others who wish to provide a wide range of exciting new services to consumers, and damaging to the government's objectives of combating the digital divide and ensuring the widest possible access to digital interactive services in the home.



  HomeChoice was launched London-wide on 26 September 2000, offering a broad range of content. There are currently around 6,000 subscribers.

  HomeChoice programming is available to subscribers on-demand through the television set. It enables interactivity and content personalisation and offers:

    —  VCR-like controls, including functionality to stop, pause, fast-forward and skip to any point of film or programme;

    —  timeshifted viewing of a number of programmes, including news, current affairs, sporting events—these can be watched whenever the viewer wants and are available through our service only minutes after the original broadcast has ended;

    —  family friendly viewing: each member of the family has different access codes and therefore children are protected from adult viewing at any time; and

    —  tailored content: each viewer can create his/her own portfolio according to personal requirements and preferences.

  Video Networks' "real" VOD is radically different from what is presently on offer with DTT, digital cable and digital satellite technologies. At present cable operators in the UK offer their customers "near" VOD which, unlike our "real" VOD, allows customers to access films and other content only at scheduled times and without the full VCR functionality we provide. Other digital PAY-TV operators (both terrestrial and satellite) offer interactive services that lag behind our level interactive functionality. However, we expect competition in the market for VOD to intensify and increase in the near future.


  Customers get a free set-top box, and pay a one-off installation fee of £40. Services are made available in a combination of pay-per-view and subscription packages.


  Films are available on a pay-per-view basis to all subscribers. FilmChoice, the largest VOD library of films in the UK, offers more than 1,000 movies, ranging from £1.99 to £3.49 for a 24-hour period. These are available on the service six months after they appear in video shops.


  Television programmes and music videos are available to subscribers in packages.

  We currently offer:

    —  SoundChoice—more than 1,000 music videos and karaoke;

    —  Life&StyleChoice—food, travel, home and garden and performing arts;

    —  SportsChoice—major sporting events past and present, a wide range of sporting events including Wimbledon; we offered coverage on a time-shift basis of every soccer match in the recent Euro 2000 tournament;

    —  ComedyChoice—contemporary and classic comedy;

    —  KidsChoice—drama, cartoon and animation;

    —  History&NatureChoice—historical and wildlife programmes;

    —  DramaChoice—popular, modern, and period drama; and

    —  ClubZebra—interactive lifestyle club covering aerobics, relaxation and healthy eating.

  Subscriptions start at £6 a month for one service, and £12 for three. Additional services cost £1 a month each and £17 for all eight. Subscription is for a minimum of a year.


  Access to NewsChoice and HighStreetChoice are included with subscription. NewsChoice offers daily news on a timeshift basis from the BBC, ITN, ABC, CNBC and Bloomberg. HighStreetChoice is a new home shopping service featuring Shop the popular TV shopping channel. It will allow customers to order products and services from featured retailers.


  Additionally, HomeChoice offers a PC-based "always on" Fast Internet Service running at 115 Kbps. This costs a flat fee of £20 per month—there are no extra call charges and a second line is not required. This allows customers to access the Internet through telephone lines and their PC much faster than through a traditional modem and without incurring call charges.


  We have a wide range of agreements in place with key rights-owners including film studios such as Warner Bros, Buena Vista International (including Disney pictures) and Sony Columbia Tristar, broadcasters such as the BBC and Channel Four, and independent TV producers, and independent distributors such as Kenwray, Carlton International and specialised "Bollywood" distributors and music producers like Video Performance Ltd and BMG. We also have rights to a number of films fro the pre-1956 RKO library.


  We expect to offer an e-mail to television service in due course. We also plan to introduce a competitive virtual shopping mall, interactive advertising, television e-mail, multiplayer games, voice telephony and video conferencing. We have agreements in place or signed letters of intent with Invest TV, Travel Channel, Shop! Home shopping (Littlewoods), Gameplay and Domino Pizzas. We trialled similar services during our pilot in Kingston-upon-Thames, with partners such as Lloyds TSB, Boots, and Kingfisher plc chains including B&Q, MVC and Comet.

  We will also add to other innovative products and services, such as our ClubZebra interactive virtual fitness club, a joint venture with LA Fitness plc and BUPA.

8 November 2000

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