Examination of Witnesses (Questions 340-358)
MR STEPHEN
CARTER, MR
ALEX BLOWERS
AND MR
STEPHEN TEMPLE
TUESDAY 12 FEBRUARY 2002
340. That is to use one of the key areas of
regulation because presumably your customers do not go out and
buy the platform. What they buy is the content that arrives on
that platform and therefore you really live or die by the content,
even though that is not your business.
(Mr Carter) Correct. One of the reasons we are retailing
broadband at £14.99 is because in the internet world the
content rules are very different. To a degree, people search for
their own contents and it is a much more fluid market. In the
television world, people do not buy platforms, although they do
to a degree buy platform capabilities, interactivity being a good
example. They buy content. If you have a player who happens to
come in on another platform over-controlling the supply of content
to a point whereby the margin to the alternative platform to provide
it is so low that there is no reason to do it, you have a problem.
Our point is simply speed. Identify the problem, analyse the issue
and come to a conclusion; as opposed to identify the problem,
debate it for a very long time and continue debating it.
Mr Flook
341. Can you give us a breakdown where you have
broadband going into a home in a medium town, United Kingdom,
a breakdown between television, broadband usage and telephone
for the average customer and what you project it to be in two
years' time?
(Mr Carter) We have today 2.3 million television customers
and a slightly higher number of telephone customers. We have just
over 600,000 narrow band internet customers.
Chairman
342. That is not a sum total, is it? Those three
categories include a lot of the same people.
(Mr Carter) Correct. Over 600,000 dial up internet
customers and, as of our last published results, over 100,000
broadband internet customers. Our strategy, going back to the
earlier questions about the cost of our capital infrastructure,
is that we have built a state of the art future proof network.
Why? Because we want to provide all of those services to every
customer. In an ideal world, every single customer would take
all three services.
Mr Flook
343. All 100,000 are taking television and telephone?
(Mr Carter) No, not exactly, but pretty close.
344. The £15 is subsidised?
(Mr Carter) The £15 is solely for the broadband.
345. It is cross-subsidised?
(Mr Carter) We look at the pricing of our products,
both individually and collectively.
346. Would that £15 be in Taunton in Somerset,
where I represent, to a big city? Is it £15 across the country?
(Mr Carter) Standard pricing across the country.
347. How does that compare with Telewest?
(Mr Carter) Telewest do not offer a 128K broadband
product. I cannot comment on the specifics of the rest of their
pricing.
348. There is an element of loss leader. In
your submission to us, you said that the markets are now driven
by quite different priorities and companies must prove they can
generate revenues from the customers they already have. How long
until the £15 becomes a proper, economic crisis? A ballpark
figure will do. Is it months, years, minutes?
(Mr Carter) All new markets, particularly technology
markets—recent evidence would validate this—have been
developed in large part by the relevant players stimulating early
take-up. In the digital television market, that was driven by
three set top boxes, largely driven by BSkyB in the initial stages,
followed by ourselves, ITV Digital and Telewest. The mobile market
was pay as you go. Probably discounted handsets drove that. In
narrow band internet, it was Freeserve, free or unmetered access.
Broadband is no different. Different companies will adopt different
strategies. We have a tiered set of pricing. The £15 is our
lowest entry product. If you want faster speed, half a megabit,
that is £25. Later this year, we will introduce a one megabit
service. That will be a different price. Then you will have a
tier for the mature market. As the market matures, people will
choose their own speeds, in the same way as they choose different
cars or different beers or different anything.
349. Does that pricing strategy differ from
Telewest's?
(Mr Carter) I cannot comment on Telewest.
350. You do not know what your competitors do?
(Mr Carter) I do, although we do not compete as such
with Telewest because we are in geographically discrete areas.
I do not think it is my place in particular to comment on their
marketing strategy.
Chairman
351. Why has the penetration of cable been so
limited? If one looks at what cable has to offer, in many ways,
it is the most attractive service. Interactivity is much more
available. Unlike, say, Sky, which offers a discount service for
people who subscribe to other telephone services, you provide
your own telephone service. It was long ago anticipated that cable
would dominate technological development and yet cable has about
half as many subscribers as BSkyB. Why? I am not offering this
as a criticism either of cable in general—far from it—or
of you in particular, but it perplexes me that this is the way
we have gone. Is it simply because people are entertainment led
to the extent that the large availability of packages on Sky is
what drives them forward or what?
(Mr Carter) It perplexes me likewise. The cable industry
has spent nearly 20 years consolidating to where we are today:
two players that are largely geographically discrete. 20 years
building an alternative infrastructure that still today is wholly
owned and heavily controlled by an incumbent monopoly, British
Telecom. BSkyB has essentially been one company since 1988. They
have had 12 years' clear run at the market. This is a game of
two halves and today it is the case that in the television market
BSkyB have more subscribers than we do. They have over 5.7 million,
I think. We have three million subscribers today but we have 5.0
million products and services provided to those customers. The
world is interested in entertainment, but the world is getting
very interested in the applications of technology. It is getting
very interested in the internet and in interactivity. Our view
is that, having built the infrastructure and done the consolidation,
moving into that phase will mean that the second half of the game
might show a different score line.
Miss Kirkbride
352. For people like me who are not technologically
literate, could you amplify your response about the "must
carry"? Is it a long term threat or when the BBC has five
digital channels is that going to be a threat to the real services
you provide?
(Mr Carter) We would not use the word "threat".
The issue for us is more a philosophical and a economic one. The
philosophical one is to do with public service broadcasting. We
are not averse—neither should we be as a distributor to
carrying public service channels. That is entirely appropriate
but we would just like to know what public service channels are.
It is difficult to know what they are because there is no definition
of what is or is not a public service channel other than what
is decided to be provided. Our view is that there is a need, given
the world we are moving into, for there to be a clear, written
definition of what a public service broadcaster's interests are.
Without it, there could be 20, 30, 40 or 50 and that would be
a threat. The economic issue is that, when someone is making a
decision about whether to do a new channel, they do not today
have to consider the full economic consequences of producing a
new channel because we have to carry it. They do not have to carry
the costs of that themselves. If that cost was borne by the provider
of the channel, they might just think again about the economic
equation that they put together when they were saying, "I
will" or, "I will not." We would not today use
the word "threat". We would just say there is a philosophical
need, given the way the world is changing, and given that the
world is moving from being very led by entertainment and television
and being not led by interactivity and internet usage but it being
an equal partner for looking at those debates around television
proliferation in a different way.
353. When we had Cable and Wireless here last
week, they were very keen on dismantling British Telecom in its
present form or separating out its various activities so that
more people could get involved in the local loop. Is that a view
you would share with them?
(Mr Carter) The BT/BBC debate is a parlour game we
could have for a long time. Our view is that the time is probably
not right for that. The capital markets are probably not open
to it. The amount of angst and energy and activity that would
be consumed by that form of complete separation and disaggregation
would get in the way of the other things that need to be done
over the next two to three years. BT Wholesale needs to be completely
operationally separated from BT Retail and needs to market itself
in the market as though it were completely separate.
354. Does that not require there to be two separate
companies?
(Mr Carter) That could be done through corporate governance,
in our view.
Chairman
355. Coming back to the public service issue,
it strikes some observers as odd that the public service channels
should be defined by one provider in what might well be regarded
as an idiosyncratic way. If you take the launching of BBC4, for
example, what you find is that you are getting a channel which
broadcasts all day replaced by a channel that is going to broadcast
for five hours that will be doing the same things as the other
channel but with less availability. It does strike me as odd that
the BBC should define what public service broadcasting is and
then have this ride with people like you. I do not expect you
seriously to disagree with what I have just said.
(Mr Carter) We would seriously agree with you. The
time is definitely right in the current world in which we live
to write a regulatory environment going forward where we look
at these issues in a converged way. It is undoubtedly the case
today, going back to the comments about our own financial position,
that by contrast the BBC is in a strong financial position. We
have a double jeopardy for the commercial sector, whereby there
are limited funds in the commercial sector across the board. Advertising
markets are in decline. Capital markets are in retreat. Equity
markets are in decline and the BBC's own cash position has never
been stronger. There is a kind of double jeopardy here today and
there is the future regulation issue that you referred to.
356. You as individuals have to contribute to
the BBC's finances but our welcome guests Sir Christopher and
Mr Dyke do not have to contribute to yours.
(Mr Carter) Indeed.
Michael Fabricant
357. We were discussing earlier all the reasons
why maybe cable take-up has not been as rapid as we would have
wished in this country. You gave very articulate and possibly
right reasons, including that of British Telecom and various other
factors, but I want to throw another factor at you and I would
like your reaction. If broadband were as good as it ought to be,
it is streets ahead of any other platform. I wonder whether broadband
provided by NTL and the other cable providers in this country
is as good as it could be. Am I right in saying that the system
in this country, which is the way you do it with ADSL, is whereby
you can have up to 50 subscribers and if all 50 in any one group
are using it at the same time it is no quicker than ISDN which
has a much broader spread in the United Kingdom than broadband
has at present. The problem with that is all the advantages of
broadband in theory cannot be enjoyed in practice, so people get
disappointed about it and say, "What was all the hype about?
Broadband is not that fast."
(Mr Carter) Our ratios are geared in a different ways
to deal with internet hogs, as they are called in chat rooms.
If you or any Members of the Committee would like to see it in
action, we have a demonstration suite a stone's throw away from
the House at Dolphin Square where we display broadband in action.
If any of you are interested in seeing its application, we would
be delighted either individually or collectively to show you it,
both in its own operation and by contrast to digital television
or narrow band dial-up.
358. Is not the Dolphin Square thing unique
in that they are delivering fibre optics to each flat and unique
in the whole of the United Kingdom, so it is hardly typical.
(Mr Carter) Dolphin Square is unique in many ways.
(Mr Temple) The key thing in terms of customer experience
with speed is the bit that we govern in the local access network
with our cable modems, and BT for their ADSL. Both technologies
are contended access media. You have more subscriptions per unit
of capacity provided. It is really how well you engineer the "contention"
that governs the speed experience. In the early days in the States,
the cable companies overloaded their cable modem networks and
gained for cable modems the reputation of slowing up in the busy
periods. The Bell companies engineered their ADSL networks with
better (lower) contention. We have completely stood this on its
head in the UK. As far as the NTL network is concerned, we load
20 subscriptions on one unit of capacity. The last time we made
an inquiry, I think British Telecom were loading 50 subscribers
on one unit of capacity with their ADSL residential service. In
terms of local access experience, the customers get a much better
experience with broadband cable than they would in the residential
offering for ADSL. However, this needs to be put into context.
For the most part, particularly in the evening and afternoon periods,
it is not the local access network that is governing the speed
experience; it is the over popular sites in the States that just
are not man enough to take that number of hits they receive in
peak periods. If you dial a site in the morning through ADSL or
cable modems, you tend to get through very quickly. In the afternoon
when the east coast of America wakes up, it starts to slow up
a bit and in the evening when the US west coast wakes up and popular
sites are hit by customers from Europe and the east and west coast
of the US at the same time things become very slow.
Chairman: Gentlemen, thank you very much
indeed. That was very educational and we are most grateful to
you.
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