Examination of Witnesses (Questions 260
- 279)
TUESDAY 5 FEBRUARY 2002
MR GRAHAM
WALLACE, MR
TOM PHILLIPS
AND MS
EMMA GILTHORPE
260. How are your negotiations with Ministers
in getting these views across proceeding?
(Mr Wallace) We get some hearing but I think they
still believe that you can achieve some of these ends by regulation.
We do not. We have tried the regulatory route and it is a structural
problem. So we are still discussing it, but their view is that
they do not want to rock the boat too much and they think that
regulation can solve all the problems. We do not believe that
because regulation is invariably reactive. So if we have an issue
with BT, and we regularly do on their anti-competitive behaviour,
we put in a complaint to OFTEL. It will often take them six to
nine months to resolve it and they often come out in our favour,
by which time the issue has gone away and BT has moved on. So
you do not solve these problems by fiddling around with the regulation;
you do it by structural change.
(Mr Phillips) Just to pick up on that last point about
OFCOM, that is a major issue that we need to consider because
the burden of regulation is increasing and OFTEL are feeling increasingly
under pressure to make determinations and resolve conflicts with
other operators and BT and they are taking longer and longer to
do it, not because they are inefficient but because they are needing
ever increasing levels of resource to do that. Going forward,
that clearly is a feature of a market that is becoming less and
less competitive. The issue with Ministers and the Government
so far, to my thinking, is one between short and long term. Our
view is that medium to long term there is no solution except to
look at the structure of this industry and work out where we are
becoming less competitive and why the burden of regulation is
going in the wrong way. Ministers that I have spoken to see a
significant risk in the short term roll-out of broadband and the
Government's e-Britain policy in looking at separating the local
loop out structurally. There is concern that it will add delay
to what already is a process potentially behind target and that
BT will, frankly, make it difficult as a process for that to be
undertaken. Cable & Wireless strongly advocate with Ministers
and with OFTEL that this part of the industry is referred to the
Competition Commission such that an independent view is taken
and recommendations are forthcoming on the structure of it. That
may or may not include the separation of the local loop, although
we clearly think it would include that, but that would be for
the Competition Commission. Our position is that we suggest Ministers
refer BT. I sense there is some appetite to do that but I also
sense there is a very large concern as to the way in which BT
would react in the short term and about the added confusion that
that would inject into an already delayed broadband roll-out.
261. The proposition that you have that was
destroyed by the change in wholesale prices, what would that have
done to the broadband market over the next few years? What were
you going to bring to the market in capacity terms?
(Mr Wallace) We would have brought to the market in
something like 200 exchanges around the UK an unbundled local
loop. That is what we would have brought between Energis and Colt.
262. Can you give me some perspective on that?
How many exchanges do we have?
(Mr Wallace) 6,000.
(Mr Phillips) But the population coverage would be
disproportionately high.
(Mr Wallace) Obviously we would do it, again for economic
reasons, in the most populated areas, so 20 per cent of the exchanges
cover far more of the population where there would be genuine
competition in the local loop, genuine unbundling of the local
loop for the first time in the UK, and that now will not happen.
Mr Flook
263. I have to declare an interest in that I
am a direct shareholder in Cable & Wireless. I am a direct
shareholder because I had you down as a pioneering company well
ahead of the curve over the years. Unfortunately share prices
are now 75 per cent lower than when I bought them.
(Mr Wallace) Oh dear.
Mr Bryant: It has just tumbled a bit
further!
Mr Flook
264. In the notes put together by our very able
and effective Clerks you talk about "the light touch regulation
having to give way to the minimum necessary"—these
are quotes from your submission—"which may include
a fair degree of hands-on enforcement of economic regulation."
Just now you were saying to Miss Kirkbride that your medium to
long-term structural plan is to try and get BT to give up the
local loop. I am not convinced that is a possibility or a probability
particularly since in the here and now we have a Communications
Bill which may seek to give regulation. My problem is, could you
not end up, in asking for one thing that is possible, with more
regulation and being bitten by the hand that feeds you?
(Mr Wallace) We have attempted to come up with what
we think is the solution. The regulatory solution, from where
we sit, clearly has failed. There is not an unbundling of the
local loop in the UK. There is the theory and the fact that the
regulations are saying there should be one, which is given EU
support, but as businessmen you separate the theory from the practice
and the practice is not there and no amount of regulation, in
our view, will create that. I do not think this is OFTEL's fault.
They have a huge challenge against any incumbent. The same is
happening around the world. I do not think to blame it on OFTEL,
which some have done, is a reflection of reality. If that is the
problem we have got, it seems reasonable in our view, to come
up with a solution and I do not think the solution is regulation.
I really do not. That has been tried. We were behind the unbundling
of the local loop and the regulatory changes that went with it.
We supported it wholeheartedly. The fact is it has not worked.
I see nothing in the environment that will make it work unless
we do something reasonably radical. That is where we are. Whether
that will provide a solution or the forces that be are prepared
to go with that, who knows. I do think it is fair to say that
we believe it will be a positive for BT, as do people like Earth
Lease, because we do believe if you separated out a pure, natural
monopoly you could raise a lot of the regulatory burden on the
rest of BT. To me there is a very sensible and pragmatic solution
that if we separate the natural monopoly the licensing authority
will make life less regulated for BT in what is a very competitive
part of their business. At the moment they are regulated everywhere.
There is a solution that will ultimately benefit the shareholders
of BT, as of course it benefited the shareholders of British Gas,
and the value of those businesses separated has proved to be considerably
more than the value of a vertically integrated British Gas. I
think it is a solution that is beneficial to all parties.
265. Notwithstanding the views of your own advisers
and those perhaps of BT, what is the consensus City opinion amongst
investment analysts?
(Mr Wallace) I think there was quite strong support
amongst investment analysts for the Earth Lease proposition which
would separate the local loop. Those City analysts who understand
this industry realise it will probably release value by doing
that. Earth Lease, with a fairly sketchy proposal, got quite a
lot of City support.
266. Not wishing, like the Chairman, to lead
you or to try to lead you, if it is compelling, do you see that
being a possibility? If the finances are there, why do you need
government to tell you to do it when the financial angle on it
could make it happen?
(Mr Wallace) For a start, of course, BT have said
publicly that they need to restructure, which will require changes
in their licence. I think it is a point in time when the authorities
and the Government do have some leverage over BT and I think this
is a relatively new initiative because we all wanted to give time
to see whether local loop unbundling driven by the Regulator would
work. That is what we all did. We have now come to the conclusion
over the last few months that it will not, so we have to move
on. I think the Regulator does have some real leverage because
BT do want to restructure it in several ways which will require
licence changes.
Chairman
267. As you will know, this inquiry is an inquiry
in preparation for the Communications Bill. I do not know whether
you were here when I asked Christopher whether he believed that
this was the right time to legislate. Do you believe that this
is the right time to legislate or would it be better to wait?
(Mr Wallace) I would reply in the same way as Christopher
did. There is never a perfect time. Having started the initiative
I think it should be completed in order to remove uncertainty.
The way technology and the industry is moving it will always be
against a background of total change so we probably need to get
on with it and at least remove the uncertainty associated with
the new Bill.
268. The other question I put to him was about
the Government structure and I managed to tease out particularly
from Mr Morfett the view that the Government structure was not
satisfactory or adequate, and both Christopher and Mr Morfett
said senior Ministers were not involving themselves sufficiently
and perhaps not informing themselves sufficiently about these
matters. What is your view on that?
(Mr Wallace) I would share that to some degree. The
big issue is that the DTI in particular of course has such a huge
remit that I am sure all businessmen feel their sector is not
given enough attention. We certainly feel that. It is a fundamental
sector to infrastructure and economic development which is lost
in the DTI, quite frankly. That is not their fault; it is just
a fact of life.
269. Mr Alexander is a very bright young man.
There is no doubt whatever about that. Without in any way denigrating
him, is it satisfactory that matters should be decided at that
level? Ought they not really to be at Secretary of State level
in view of the fact that this is such a supremely important economic
issue for the country?
(Mr Wallace) We would say yes, it does need to be
looked at at the highest level because of its importance to Britain.
We are in the sector so we obviously think it is very important.
Yes, I agree with that.
270. If I gave you three wishes as to what should
go into the Bill, what would your wish list be?
(Mr Wallace) I will give you my one wish which is
pre-the Bill and does not depend on the Bill. This whole issue
of the way the natural monopoly in the local loop needs to be
tackled should be referred to the Competition Commission. We have
total confidence that if that happens they will come up with the
same solution as us because to us it is such a logical one. It
is not really a Bill issue but having been given the opportunity,
that is what I would like to see happen because I think that would
be a big step forward for the industry and customers in the UK.
(Mr Phillips) My wish would be to see the burden of
regulation decrease over time and I think the way to do that is
to make it very much clearer which parts of the market require
regulation and which parts do not and to focus the regulation
on the parts that really need it and to free up the players, BT
included, in the market when we do truly have competition.
271. You may perhaps know that when we looked
at this early in the last Parliament we recommended a bifocated
OFCOM—we did not call it OFCOM—with one segment for
content and the other for technology. Do you believe that that
is the right way to go?
(Mr Phillips) I think we share a concern that with
OFCOM there will be a general mixing of the regulatory responsibilities
of the broadcast content media side with what in many cases are
very very technical requirements and understandings that are necessary
to manage effectively the network and infrastructure side of telecoms.
Yes, that is a concern that we have and it is a concern that is
being made somewhat worse by the experience of the local loop
unbundling. Yes, we would strongly advocate that we have a very
focused and well-resourced element within OFCOM to focus on the
technology.
272. And I did remind the BT people that when
Government first started getting actively interested in these
issues under Mrs Thatcher the view was that the cabling of the
country would be the way in which this technology would advance.
Have you got a view as to why it is that the country is not predominantly
cabled in the way at one time it was anticipated it would be?
(Mr Wallace) I think one of the important reasons
is the dynamic nature in the UK of satellite competition. I think
BSkyB have stolen a march on the cable companies, both in terms
of control of content, sport and films, and now with digital satellite
they have the technology to deliver that content, which is as
good but far more cost effective than cabling. We have got a particular
position in the UK whereby BSkyB cornered the very content that
people will pay for, which is on the whole unique sporting events
and Hollywood movies, and that displaced the capability of cable
companies to expand in the way it was originally thought.
(Mr Phillips) It pushed them into the telecoms sector
where they face the issues.
(Mr Wallace) I think people will pay for entertainment
but, on the whole, they are paying BSkyB for it, not the cable
companies.
273. The view was held that you were the best
possible vehicle for inter-activity but we have moved beyond that
now, have we not?
(Mr Wallace) I think there are a variety of ways to
gain inter-activity into the home and satellite is one of them
but the ultimate access to the home for inter-activity will be
the local loop.
274. There has also been a certain amount of
deriding of the concept of convergence as the way forward. I happen
to believe myself that convergence is the way forward. What is
your view on that?
(Mr Wallace) We believe absolutely that convergence
is a fact of life already. Ultimately, voice data and video will
be delivered to both homes and businesses over one network. We
are doing that already for several of our major corporate customers
and the capital and cost savings are huge. All this information
is, after all, only a series of bits and bytes. It will all come
ultimately through one network to a variety of devices at the
end of the day, television, PCs, mobile phones, but the networks
themselves will be converged networks.
275. Would you agree that we are already getting
convergence through digital TV? If people want to avail themselves
of it there are many, many ways, including e-mail and direct shopping,
etcetera, in which you can do it now. Is it yet again the fact
that we cannot always anticipate what is going to happen within
the next few months let alone the next five years that presumably
this Act, when it is an Act, will cover?
(Mr Wallace) I do think that is right. There is strong
evidence (because we see it) that you get an extra step up in
usage if you go broadband. If you genuinely have a broadband connection
in the home the quality of the video and the data and the speed
normally doubles or triples the amount of time people use it.
I think you are right, narrowband does supply interactively quite
a lot of UK areas with services but the next step will await broadband
in terms of truly rich content via the internet.
276. In our last inquiry but one when we went
to the West Coast of the United States we were introduced to the
concept of "herky-jerky" vision. I take it you agree
the only way we can get rid of herky-jerky vision is through broadband?
(Mr Wallace) Ultimately.
Mr Bryant
277. You just said something which is quite
important, in terms of convergence, that it is going to mean that
the route into every home and every business is going to be essentially
one route. That puts an enormous onus on the person who is in
charge of the route.
(Mr Wallace) Absolutely.
278. In many ways if Sky have become the organisation
through which you decide how your e-mail arrives into your television,
how you go shopping, and whether it is a walled garden or a genuinely
open internet experience, all of these things, if all controlled
by one organisation, there would still be a need for very robust
regulation?
(Mr Wallace) There is, but just to reiterate the point,
digital satellite is a very powerful one-way medium. You can do
some interaction but because it is asynchronous in terms of band
width you can do a lot of very high-quality downloading of content
but for true inter-activity it will be over a fixed line. You
can do e-mail but you cannot do a lot of the truly interactive
experiences that a fixed line network will give.
279. The electronic programme grid or whatever
it is that is the front thing that you see on that screen is going
to be very, very powerful.
(Mr Wallace) That is absolutely right.
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