Examination of Witnesses (Questions 200
- 219)
TUESDAY 5 FEBRUARY 2002
SIR CHRISTOPHER
BLAND, MR
CHRIS EARNSHAW
AND MR
IAN MORFETT
Michael Fabricant
200. That is the point I was going to make.
Immediately after the questions, I am going to have to go out
and go along the corridor to the OFCOM Bill. I am particularly
interested in the spreading out of broadband, ADSL and other methodologies
of broadband, and I read with interest the brief that you gave
us in advance. I think it is worth repeating a couple of points
which you can amplify on. I gather that BT has already equipped
1,010 exchanges with ADSL and that you have the potential of covering
60 per cent of the population, which is good news, although I
gather in rural areas that is not so easy. I wonder, given that
in the past this Committee has talked about the superhighway—and
the superhighway is very, very dependent on the expansion of broadband
communications in the UK—if you can explain what prospects
there are to achieving something like 100 per cent coverage in
the UK.
(Sir Christopher Bland) Chairman, the prospects of
100 per cent coverage are somewhat distant. Although the 1,010
exchanges cover 60 per cent of the homes in the UK, only a proportion
of that, a pretty substantial proportion, 90 per cent of that
60, are actually within sufficient reach today of the exchanges
to get broadband. So you have to multiply the 60 by 90 per cent,
that gives you 54 per cent coverage.
201. I had worked that out!
(Sir Christopher Bland) I need to remind myself. Although
that is the coverage from the exchanges, the actual take up of
broadband from those exchanges so far has been extremely limited,
round about one per cent. So the exchanges are enabled but the
take-up is low. While broadband, as we have pointed out in our
evidence, is not the only measure of e-Britain and the speed at
which our communications modernise, it is an important goal, and
BT has, I think, an increasingly significant role given what is
happening in the telecoms' world—and it has happened in
the last year since you looked at this question—in making
sure that broadband accelerates. What do we have to do within
that universe of the 60 per cent of exchanges that are enabled?
First of all, we have to address the question of prices. We have
to address our own internal organisation and structures; we have
to address with the regulators some regulatory issues; we have
to produce very rapidly a broadband strategy that sets more ambitious
targets for BT than we have had in the past and that takes advantage
of technological change since we last met. We have a new chief
executive who has been three weeks in the job but who comes from
a broadband-literate background, and this is absolutely top of
his agenda. So we are working very hard to address these issues
and in weeks rather than months, I think, we should be able both
to announce a programme and prices and projects that should have
the desired effect fairly speedily.
202. Of course both you and the new Chief Executive
have inherited a position where BT is saddled with a very, very
large debt. Is that going to slow up your project to e-Britain
(if one can make that into a verb).
(Sir Christopher Bland) Chairman, large is relative.
At the half year it was a relatively modest £16,000 million.
(You should try writing that on a piece of paper and see how far
the zeros go to the east! It is an interesting prospect.) We have
reduced our debt very considerably since last year: we have had
the biggest rights' issue in the UK's history, £6 billion;
we have sold our directories' business for £2 billion; we
have sold Japan and Spain; we have raised about £12 billion
through disposals. So our debt has come down but we are still
paying £3 million a day in interest and we would like to
see it come down further. But we are, at least relatively speaking,
soundly financed compared with a year ago and compared with our
other counterparts in Europe: if you look at the balance sheet
of France Telecom, for example, we are in a more enviable position
than they. So I do not think we would wish to shelter behind our
level of debt to say that we cannot do a proper job by broadband.
We can.
203. One of the points you identified in the
lack of take-up of broadband is pricing policy. Given that you
do need to cut back on your debt, you need to make profits, do
you have the flexibility now that you would not have had? Do you
have, shall we say, the lack of flexibility because of the debt
that you currently are suffering from? I mean, if you did not
have the debt would you not have—I am not doing this very
well at all—greater flexibility in your pricing policy?
(Sir Christopher Bland) In theory, yes. But of course
the implication of that is: could we take losses for a year or
two? And the answer is: we are precluded from that, not only by
our balance sheet but also by regulation. OFTEL does not allow
us to sell products at below cost, so both our wholesale and retail
prices have to be cost-based. What has changed in the intervening
12 months has been technology: the price of capital equipment
has come tumbling down. We are also addressing our own cost base
further and we are also addressing the interaction between volume,
because if you postulate a broadband universe of X you have one
set of prices and a broadband universe of four or five X , if
you can roll out—and there is a relation, this is a price
sensitive market—then you can bring the prices down. So
we are working hard on that but those prices require regulatory
approval and the regulator is being sympathetic. He plainly has
the interests of a lower-price broadband product high on his agenda
too.
204. I wonder if I could ask Chris Earnshaw,
who is really the specialist in this subject, is ADSL the only
direction that BT is currently looking at for the delivery of
broadband Britain?
(Mr Earnshaw) No. ADSL is one of the key technologies.
We are using it and other similar operators around the world are
also focused on DSL. Of course the cable industry uses a different
technology with cable modems. We have also been looking at and
are trialing satellite-based solutions, which have the advantage
of being able to reach the very rural parts of Britain, and we
are very aware of the significance of broadband particularly to
business, to small business, hence our initial trials have been
in Northern Ireland and in the Highlands of Scotland. Those trials
have gone very well and we are looking to extend the coverage
of those in due course.
205. Would the costs not be prohibitive? Would
there not be a huge restriction on the number of panels, if you
like, that would be available.
(Mr Earnshaw) It is a more expensive technology. We
have been talking to both the DTI and the RDAs and with Europe
about different funding models to enable us to deploy this technology.
Sir Christopher said that the cost of DSL itself is constantly
improving, it is becoming economic to employ it in smaller quantities
in more rural situations, and we will take full advantage of that.
There are other radio-based technologies, not yet reliable enough
to deploy commercially, but we are trialing those, again with
vendors from around the world.
206. In your submission to us, you said to us—and
it is quite relevant to the Committee I am just running off to—that
the main OFCOM Bill must not be developed in the "closed"
environment of Whitehall, looking good on paper but failing in
practice—and where have we seen that before? Can you give
us an example of the sort of provisions you would like to see
in the OFCOM Bill that you think at the moment Whitehall is ignoring?
(Sir Christopher Bland) I will ask Ian in a moment
to expand on the consultation issues in particular that we think
are current. The particular provisions that we would like to see
are proper appeal provisions which exist under the Competition
Act.
207. I am sorry, I did not hear you.
(Sir Christopher Bland) Proper appeal provisions against
OFCOM's decisions. We think that is particularly important. Ian,
perhaps you would comment on the consultation process.
(Mr Morfett) Perhaps I could comment on both parts.
In terms of the consultation process, I think the arrangements
that parliament have proposed with a joint committee of both the
Lords and Commons after the draft Bill is produced are very good
and we will want to contribute fully to that. We would hope it
is given significant time and significant teeth for amendments
to be made. But I think even in the preparation of the draft we
are seeing something of a closed door from both of the departments
involved and we would like to contribute. I think that is not
only BT; I think the whole industry feels that there are some
strong points that the industry would like to get across before
the draft Bill. In terms of the specific issues, Sir Christopher
has mentioned appeals. I think the other one is that we would
like to see a greater focus on deregulation as markets become
competitive. At the moment, the principle of OFTEL is that it
will look at markets as they become more competitive and will
deregulate, but there is no requirement on them doing that and
to be perfectly honest I spend a lot of time knocking on their
door and finding that they are busy doing other things. I would
like OFCOM to have a statutory obligation to review markets at
regular intervals and withdraw from regulation as competition
takes over. I think those would be the key issues.
Chairman
208. Before I call Mr Keen could I just ask
you the question which derives from your answer to Mr Fabricant.
Do you think that the response of the Government and indeed the
drafting and formulation of the Government are hampered by the
fact that the responsibility for this issue is divided between
two departments?
(Sir Christopher Bland) That plainly is an issue.
As you know, we shared the view of your Committee a year ago that
from a telecom standpoint there would be some benefit, considerable
benefit, in having a unified departmental approach to these issues.
Obviously there are wider issues than simply telecom's involvement,
but we share that view.
209. From your experience—which obviously
is intense during this period—do you find that you are discussing
these matters with the Secretaries of State in the Departments,
with junior Ministers or with officials?
(Sir Christopher Bland) I do not think we would claim
that Secretaries of State have closed doors to us, no. We have
access. They are busy men and women, but nevertheless we would
not claim that. Ian, if you would like to expand on your experience
in the last 12 months—rather more recent.
(Mr Morfett) Yes, my experience would be more with
officials of the Department. Whilst there is a generality, a readiness
to talk in general terms, in terms of specific drafting of the
Bill and talking about specific issues I think there is a closed
door amongst officials at the moment. They are in purdah.
210. From your point of view—and obviously
you are a key player, a major player in this, and we have, if
I may say so, underestimated your importance—do you think
it would be more helpful if the two Secretaries of State, since
we have to have two, apprised themselves in greater detail and
intensity with these issues and discussed them with you?
(Sir Christopher Bland) Yes.
211. Do I draw from that—you are the last
person in the world I am able to lead, let alone would try to
do so—that the Secretaries of State are not doing that at
the moment?
(Sir Christopher Bland) I think I am too new to come
to that conclusion. I think it would be unfair of me to say that.
I think it is more that the purdah appears to have been imposed
or agreed by officials and that tends . . . first of all, it is
unnecessary. These matters need not be kept confidential. I think
that the process should be opened up, and we will get a better
Bill and a better Act in due course if the doors are open rather
than closed. There is a natural tendency within Whitehall departments
to shut up shop when they start drafting and actually you could
argue that that is the moment that the doors should be opened,
if anything, wider.
212. From your experience—and, as you
say, your two associates have been there longer and have had more
experience of discussing these matters with Ministers—are
the officials with whom you discuss these matters of sufficient
seniority and are they, in your view, sufficiently appraised of
the cutting edge of technology?
(Mr Morfett) I think they are neither senior enough
nor certainly appraised of the technology or the developments
in the industry. One of our frustrations is that some of the features
of the White Paper and potential features of the draft Bill will
be set in the past rather than in the future. We would like OFCOM
on a more general point to be rather more forward looking in some
of its provision.
213. I am interested to hear you say that, Mr
Morfett, because when the 1996 Bill was going through I said in
the House that the 1996 Bill was out of date before it reached
the statute books. That, Mrs Bottomley, a good friend of mine
in many ways, nevertheless resented. Would you say we are in danger
of reaching that position on this Bill too?
(Mr Morfett) You said earlier that you would be the
last person to lead anyone, and I am not sure that I want to be
led quite that far. I have not seen enough of the draft Bill to
know, but when I see the draft Bill I will look at it very closely
for that fear.
Alan Keen
214. On one point Michael Fabricant raised about
the debt. It is wonderful to be a member of the Government party
when national debt was reduced so generously by the various companies.
Did they really bid too much?
(Sir Christopher Bland) Oh, yes. Along with everybody
else—everybody else in Europe, come to that. You see it
was a very difficult decision because it was: "Either we
are in this business or we are not" and there was in those
days a heady atmosphere in the telecoms' sector, with endless
merchant banks queuing up to lend telecoms' people money and encourage
you to bid. But, yes, far too much. The French have recognised
it by lowering the prices. I doubt whether our Chancellor is likely
to be as generous.
215. I agree. Was it skill by the Government
that managed to get the prices so high? They could have done it
in a different way, could they not?
(Sir Christopher Bland) Yes. It certainly was an extremely
skilful process if the objective was to maximise the take from
the auction. But somebody in the end winds up paying for that.
I mean, it is not a free shot. It has extracted money from the
telecom sector that the mobile business, which we are only really
partially in now, will have to extract from somewhere. That "somewhere"
is only one place and that is the consumer. So I think the long-term
impact of what in the short-term was a triumph is rather more
complicated. But that is where we are.
216. Obviously you have been spending the whole
of your waking hours and probably some of your sleep hours concentrating
on BT, but it would be a shame, when you are in front of us, if
we could not get an overview from you with your vast experience
in this sector. Would you like to give us an overview of the whole
situation, including the BBC, and looking forward to the new Communications
Bill.
(Sir Christopher Bland) I would be pretty cautious
about giving an overview. That is what this Committee does better,
I think, than I do. The overview I would share with the Committee
is that there has been extraordinary commercial turbulence in
the telecom sector in the last 12 months. Both in the United States
and here companies have gone into Chapter 11, have gone into liquidation,
have announced profit warnings in succession, have announced that
they have breached or are in danger of breaching their banking
covenants and the landscape is very, very different to that which
it was 12 months ago. Partly because BT got its act together early,
partly because it has a strong core business that generates cash,
it is, I think, in a good position to continue both to do well
for its shareholders and do well for UK plc. I think the advantage
of having a strong incumbent—not a dominant incumbent but
a strong incumbent—is greater now than it was 12 months
ago because I think the alternative networks, the new companies,
are by and large in danger in many cases of becoming or already
have become busted flushes. In particular, broadband will only
roll out rapidly not only through BT but very substantially through
BT. It will be BT I think that gives real impetus to this new
technology now. You cannot look to other people, to cable companies
or to the wholesale unbundlers, to do as much of it as you might
have expected a year or even two years ago. The landscape has
changed. It will change back. They will not disappear for ever,
but right now BT is in a different position, a more important
position.
217. BT will, if not lead the way, involve itself
in delivering content, we understand.
(Sir Christopher Bland) Chairman, my remarks about
content were much misinterpreted. It was assumed that because
I had a background at the BBC and London Weekend that meant that
BT would inevitably become a broadcaster. My last proper job was
Chairman of National Freight Corporation, but BT is not about
to become a freight forwarder or a major supplier of logistic
services. It was a simplistic analysis. BT's involvement in content
is along a spectrum. At one end of the spectrum there is simply
being a distributor of content; at the other end of the spectrum
there is the theoretical possibility that it could be actively
involved in making or purchasing content. I think that end of
the spectrum is highly unlikely. I do not think that BT has the
skills or the background or the desire to enter that highly competitive
market. Its contents activities are much more likely to be through
partnerships, and we have partnerships already. We were involved
with both BSkyB and ITV Digital in distributing as a special offer
to our customers their digital services in the autumn of last
year, so that sort of partnership will continue, but BT as a broadcaster
is, I think, in simplistic terms not very likely.
Chairman
218. In one of your replies to Mr Keen you said
that the situation today is very different from what it was a
year ago. Insofar as you are able to look forward, would you say
equally that the situation a year from now would be very different
from what it is today? If so, in what way?
(Sir Christopher Bland) In a moment I will ask Chris
to comment on the technological changes that he sees as most likely
in the shortish time-span that might affect the landscape. I think
in a year's time the commercial landscape will have changed. A
great deal of refinancing is needed and that will take place.
In quite what form that will happen is unclear, whether it is
in certain cable companies, equity holders being diluted and bond
holders winding up owning the company, or through refinancing,
or through takeovers, or, as we have seen in the case of Global
Crossing and Chapter 11, being bought out of Chapter 11, partially
by, in their case, I think, Hutchinson. Those sorts of things
in a year's time will have happened and they will, one would expect,
produce a different and a greater financial stability within the
telecoms' markets.
219. To be blunt, do you think that it really
does make sense for the Government to be about to legislate? Do
you think it would make better sense for the Government to propose,
itself, more of the kind of potential developments you have just
been saying and wait to legislate? Or do you think from that point
of view, in view of the fact that change is constant on this,
that there will never be a good time to legislate or never be
a better time to legislate?
(Sir Christopher Bland) I think the latter. There
is never an ideal time to legislate. But, equally, in a fast-changing
market you might as well get on with it once you have decided
to legislate. Otherwise you would simply wind up waiting for ever.
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