Examination of Witnesses (Questions 20-39)|
TUESDAY 5 MARCH 2002
20. A peripheral question: it has recently been
predicted that NTL may well merge with Telewest. If that happens,
do you see that having an impact on running out of broadband?
(Mr Jeffers) I cannot comment on the prediction. Since
time immemorial we have been merging with everybodythat
is the nature of the cable business. Whatever happens, it will
not change the dynamics. We have built a first class network and
have built that over a relatively short space of time with the
latest technologies. That is in the ground, it is in Wales today,
and we can exploit that network. It does not really come down
to the structure of ownership.
21. Briefly, I know you are NTL and not BT,
but what has prompted BT's reduction of prices?
(Mr Jeffers) NTL! I genuinely think both NTL and Telewest
have very much been working towards a joint message of building
broadband Britain. It has been cemented by the good work of people
like yourself to promote even the term "broadband" and
what it is, and at last we are getting broadband on to the retail
or the residential agenda and that has encouraged people like
BT to catch on and start providing competitive pricing.
22. Mr Jeffers, you said you welcomed competition
and embraced that a bit now. On competition rules, you say in
your submission there is an urgent need for reform of the way
competition rules apply to the whole telecom sector as a whole.
Can you please explain that?
(Mr Blowers) I will try and give you a succinct view
of my concerns. There are two points here. Firstly, we are operating
under a legislative framework for telecommunications which goes
back to 1984. Certainly a great deal has happened in my life since
1984 and I am sure the same is true for members of the Committee,
and in the industry, frankly, the world is completely unrecognisable.
In 1984 we were very much focused on privatisation, on ensuring
that BT rolled out voice telephonic services; now we are in the
world of broadband internet, the challenges are quite different.
We need a new legislative framework. The Government has been promising
to reform communications legislation for some timehopefully
we will see legislation this year. It is my job to keep pushing
at every opportunity and to say, frankly, "the sooner the
better". The other observation I would make is that as they
do that there are one or two interesting challenges that they
should have in mind. The first is that we find ourselves in an
interesting position where we have the competition authorities
who do not have detailed knowledge of the sector and then we have
sector regulators who do not have the expertise in applying competition
law. All of this was supposed to be addressed by giving Oftel
concurrent powers under the Competition Act back in 1998. There
are two points which I think it is worth focusing on: firstly,
the failure of the local loop unbundling process which certainly
at an early stage we as a company were very interested in, and
it is clear to us that the reason that process has failed is that
Oftel does not have the ability to set detailed behavioural rules
on BT which act ex ante, so BT does not face a set of obligations
which are absolutely clear. The problem here is that competition
law is very much geared towards picking up offences after the
fact and then punishing them, but what we need here is to have
very detailed rules applied right from the get-go, which stop
BT from saying, "Ah, when you said to us you wanted access
to our local exchange, we did not realise that what you meant
was that you actually wanted a man with a key to open the door
for you. You are now going to have to go back to the start process
and get a specific obligation which says `The man at the key will
turn up at 9 am and unlock the front door'." That is slightly
facetious but the actual level of detail involved in local loop
unbundling is that kind, and unless you write out the rules up
front you are not get going to get anywhere. Secondly, we are
involved in the third calendar year of investigation into BSkyB
under the auspices of the office of fair trading. That is not
an issue for this Committee but it is worth alerting people to
the fact that simply relying on competition law is not enough,
because if it takes three years to get to the bottom of an alleged
abuse which took place over a period of six months, frankly it
is of historic interest to the people participating in the industry
and no more. As we reform competition law and communications legislation,
it seems to us that we need to have that combination of clear
ex ante rules where necessary, and a very clear set of guidelines
about how the competition rules are going to be applied in the
sector, so we do not end up with a three-year investigation at
the end of which nothing has happened. There is a lot more one
could say about that but in outline that is really the nature
of our concerns.
23. Going to your submission, you say Oftel
concentrates too much on consumer and social policy and that should
be handed over to the Government. Do you think that would be healthy?
(Mr Blowers) Yes. There are different models one can
adopt and, if you look at what has happened in the energy sector
and the Utilities Act, there is a clearer separation of powers
between those aspects of policy where it is right that Government
should take a view. At the end of the day the Government is elected;
it has the will of the people, and it is right that the Government
should take certain decisions which are effectively social policy
decisions. I do not think it is appropriate to say, "Let
us ask our unelected regulators to make social policy for us on
the hoof". That seems to be quite inappropriate. That entanglement
of different objectives is something we detect, particularly in
the work of Oftel over the last couple of years. Oftel feels it
does not have a clear enough mandate to focus on what I regard
as its principle task which is the economic regulation of the
24. Finally, my concern is that you will come
back and say the Government is interfering too much in consumer
issues. How do you see a separation?
(Mr Blowers) It is our job to push back at where we
regard intervention as being inappropriate. It is the Government's
right, and indeed obligation, to roll out its own objectives and
commitments. As far as I am concerned, provided the form of the
intervention is clear and transparentfair enough. What
I have a problem with is where that becomes entangled in decision-making
for other purposes, so you think you are getting a decision from
the regulator which is about economic regulation, but it has several
substrata attached which are about social policy or about something
else which has been in the news recently that might be in the
minds of politicians.
25. You just said that you saw the solution
to the problem of local loop unbundling as better regulation,
effectively. We understand that Cable & Wireless have called
for what they call the natural monopoly in the local loop to be
separated from the rest of BT's activities. Is that an alternative
approach to dealing with the same problem?
(Mr Blowers) We worked with Cable & Wireless in
the early stages of them putting together the research that underpins
that view. When we started on that we were looking at a situation
where BT was said to be considering a voluntary divestment of
its activities so BT itself, essentially for reasons of the shareholder
overhang and its debt problems, might have gone down the path
of voluntarily divesting itself. If that were the case, then we
would be very interested in making sure that the nature of that
divestment was the one that was optimally designed to produce
competitive conditions in the market place. However, if BT are
not going to do that, then our company for pragmatic reasons is
less convinced that forcing them to go down that route is a solution.
The reason is how many years would it take, starting from here,
to force BT down the track of that kind of structural separation?
Frankly, by the time any benefits from that feed through into
the market place, the world will have moved on. So I think there
are some interesting economic arguments for going down that route.
For practical and pragmatic reasons, were BT to do it, we would
be interested in making sure it happened in the right way. If
not, frankly we need to get on with the regulatory tools we have.
26. In what way does the current regulatory
framework encourage or discourage the provision of broadband access
in remote areas?
(Mr Blowers) The positive aspects of the current regulatory
framework are that, by and large, to build out these infrastructures
we require very large sums of money to be invested. The UK still
seems to be an investment friendly environment so when it comes
to, if you like, international capital deciding where it is going
to go, if the choice is between Hungary or Vietnam or wherever,
they look at the UK and they see a market where the framework
is transparent and the basic incentives for investment are in
place. So that is good because it means we can attract the inward
investment we need as a society to build these networks. My view
is that broadband will be rolled out whatever happens. The question
at the moment which is puzzling people is whether we can accelerate
the rate at which it is rolled out? Can we move ourselves up the
adoption curve faster than we would otherwise get there purely
on market mechanisms? If you believe that is a good thing, and
as a company we do, then you have to look at ways and means of
stimulating both supply of and demand for broadband in a way that
does not already exist. So two of the ideas we have been focusing
on specifically are whether it would be appropriate, if we want
customers, particularly residential customers, to adopt broadband
quicker than otherwise, to look at some kind of positive incentive
for customers through perhaps a tax regime to encourage people
to adopt broadband faster. We know from our own experience, and
we have been talking about the BT price announcement, that customers
are very sensitive to the price at which this service is offered,
so if you can knock £5 off the retail price we would see
a lot more people adopt broadband a lot sooner. So that is one
way we are encouraging the Government, which understandably is
reticent about adopting any fiscal incentives in this area, to
look actively at that particular proposal. The other area where
we would like to see more work and, if you like, a greater clarity
is in the area of how the public sector itself uses its purchasing
capability. The public sector has got potentially a pivotal role
in stimulating the supply of broadband and also in creating a
wider network effect which would encourage smaller businesses
and eventually residential users to adopt broadband. If you had
some benefit from using broadband in that you could go to a particular
Government website, perhaps the car licensing authority or somebody
like that, and download all the documents you needed from there,
then you start to create network effects. I think there are barriers
at the moment to the public sector's procurement of broadband;
we are not seeing the full benefits yet because we do not yet
have enough clarity of the way the public sector's broadband activities
function. So that is something central Government is looking at.
So we are very interested, not least from our experience on the
ground. Were the public sector to really use its muscle to buy
broadband in a very coherent way, that could potentially be very
powerful from our point of view as service providers.
27. Facts and figures show us that the amount
for broadband has so far been low. For example, you tell us that,
of 142,000 residential customers in Wales, only 6 per cent have
broadband. Why do you think this is so?
(Mr Jeffers) It is like any new product: we have to
understand that broadband is a relatively new product that has
been out there. If you take any high tech productmobile
phones, PCs and so onyou see a curve that effectively starts
with the early adopters, the people who have an interest in technology.
That is where the market is today. We see it shifting, and we
have seen the demand for broadband this year increase quite dramatically
as people say, "There is an interest here, I have to get
into this. I have to find out about it". So those figures
will go forward quite dramatically, without any question.
28. In your submission there is an overview
of your concerns about Wales. You talk about very low economic
activity rates, for example. The problem I have with many small
businesses that I speak to is that the reason they are unable
to expand at the rate they wish to is that they do not have broadband
access. How are you going to break this mould? The demand I say
is there because I speak to business and the Federation of Small
Businesses themselves. I am talking about small units now that
cannot expand because they cannot access the market.
(Mr Jeffers) Really the question is about educating
and stimulating the market. You are right, there is a stimulus
there. Broadband I would say is a misunderstood phrase at times"Everybody
has it, therefore we have to have it". What we have to do
is make sure we can work with everybody, whether it is the SME
sector or the consumer sector, so we can all understand the benefits
and make sure effectively it fits for the demand that is there.
I would argue that, in most cases, if the incumbent supplier is
already there, they can access some form of high speed technology.
What broadband in its broad sense is doing is reducing its price
so it is more akin, and at the moment that is focused on concentrations
of employment and people, but as time moves on and the other technologies
kick in that will be a spread.
(Mr Tse) I accept fully that there are some SME organisations
that want to embrace broadband services and they cannot access
those services, particularly in north Wales and mid and west Wales,
for example, but there are by the same token an enormous amount
of SMEs that do not understand what broadband is and how they
can utilise it within their business, so we see the need for an
education process. "Yes, you want broadband but what are
you going to use it for? What are those business processes? How
are you going to re-engineer your business?". That is the
part that is sadly lacking at the moment, not just within Wales
but in large parts of the UK.
29. You are working with the WDA and the National
Assembly on this very issue. When is this mould going to be broken
because there is this frustration in the small business sector?
Finally, on education, you say that education tends to be lower
than in the rest of the UK. That is not the case. If you look
at `A' level routes, many of the entrepreneurs are trying to set
up in the locality and it is lack of access to broadband that
is one of the factors.
(Mr Tse) There are a number of projects we are working
on with the Agency and the Assembly now. One example would be
the Technium Centre,
which I am not sure if you are familiar with, but it is certainly
something that the Secretary of State and the First Minister have
latched on to which says how do we build these centres of excellence
where an SME that could not afford broadband access on their own
can actually go to a facility such as an incubation unit where
they can have access to technology not just to broadband and not
just 128 or half a Mega bit capacity but 155 Mega bit type services,
and share that service as part of the infrastructure as the heating
and the electricity and the other services of that building, for
example? Now we are working with the Agency on those ideas and
the Agency says, "OK, we have put one in Swansea but how
do we put one in Port Talbot, Neath, mid or west Wales".
Competition says it is not just about us doing it but it is about
other suppliers doing it as well.
30. Who in your opinion should take the lead
then, following on Mr Owen's question? You talk about the WDA
and the National Assembly, but who should take the lead to inform
people in Wales?
(Mr Jeffers) There needs to be a shared responsibility
in this. Clearly we would say we play a role in that through our
advertising and sales messageswe have done that with ourselves
and Telewestand similarly the activity of both the Assembly
and other organisations could be more effective, without a doubt.
There is an opportunity potentially for a wider working group
to take on the education message to stimulate it. I referred earlier
to how we now see a stimulus in the demand for the product. Why?
I would say it is because people are largely talking about it
in the media; organisations such as yourselves are talking about
it; and we are promoting it. If you combine those forces we start
to get something that is there, so I think at the moment we have
a lot of people talking about it, but perhaps slightly fragmented.
Perhaps there is an opportunity at the more local level to come
together and promote the broadband message, as long as all our
objectives are realistic and as long as we all have a shared common
goalwhich I think we do. We want to see broadband out there
as widely as possible.
31. This is the same question put in a different
way, in the context I suppose of corporate social responsibility.
To what extent is the role of the service provider to stimulate
that demand, for example, by providing high band broadband width
content, devising new applications, or by more active selling?
(Mr Jeffers) I think there is a mixture of answers
to that. Clearly we have a product we would like to sell; therefore
we promote it. It has been interestingclassical of any
high tech productthat people who buy it initially have
been those who understood it, the computer literate folk, the
people who have an interest in gaming, the SME market that have
a technology base, but we see that shifting to a more general
use and we have a role in that, and local Government does, and
the education system. That is where we could probably, by a combination
of powers, get a stronger message out there.
32. So do you think there ought to be a greater
effort to build these private/public partnerships in those areas
such as rural and valley areas where there is a need for a greater
(Mr Jeffers) Yes, I think there is. If we exist to
educate and stimulate the broadband market, it would be far better
two or three players doing that than one.
33. You said that the cost of tax incentives
to encourage early take-up of broadband would be repaid by the
increase in economic activity from "moving the UK faster
up the broadband adoption curve". Would you like to say a
little bit more about that? To whom might the tax incentives be
available? Domestic or business users?
(Mr Blowers) It is a proposition which, as I am sure
you will appreciate, is hellishly difficult to prove because you
are only going to be able to prove it at the far end of the process.
What the Government is saying is that instinctively, intellectually,
it accepts that broadband delivers all sorts of externalities
and benefits and those can be difficult to measure. However, if
you believe they exist, then it stands to reason that you are
making an assumption that, in 3-4 years' time, having broadband
now will have led to an increase in economic activity. Actually
proving that to the satisfaction of Her Majesty's Treasury is
a different issue. There is a level of detail and granularity
which one needs to go into. We along with a number of other providers
are currently trying to provide that detail and granularity. We
accept that the Government is not going to go down this route
without there being good evidence that it makes sound fiscal sense
to do so, so we are working on that. As to how and to whom, we
believe that essentially one might target the small business community:
we would like to see residential consumers targeted as well. I
was trying to describe the network effects and externalities and
was not doing it very well but, if you have two broadband users
at each end of the pipe, then it is a great deal more powerful
than if it is simply a means of businesses and Government institutions
talking to each other. We would like to see, therefore, a mechanism
either around the VAT rules or potentially in the form of some
kind of targeted tax break, and it would be a tax break for the
consumer not for the suppliers. We are not arguing for a large
slug of money to be directed into our back pocketsthough
it would be very nicebut for the consumer to use as they
will, and that would allow them to take our services or BT services
or anybody else's. It would be a technology neutral approach;
you would be giving the customer the money; and the condition
attached to the money would simply be that they used it for purchasing
34. Is this being done anywhere else?
(Mr Blowers) Not as far as I am aware. We are looking
at this at the moment. The focus in other countries really has
been to stimulate the supply side, if you like, to give money
to providers in the form of tax breaks or concessions on infrastructure
and investment. Now, that is not an inherently bad idea: it is
one that in this country we tend to be somewhat wary of in comparison
perhaps with continental European countries where there has been
more of a tradition in recent years of intervention from the centre
in that way. The idea of focusing on the consumer rather than
the supplier is very much to get around the idea that this is
simply a means of providing handouts to impoverished or improvident
service providers. That is not why we are arguing for this. We
are arguing for something that will stimulate the consumer side
which we think is a more politically acceptable approach.
35. To some extent there is a danger that tax
incentives would subsidise those for whom boardband was ready
available without making any impact on areas where it is not or
where access is difficult, such as remote areas?
(Mr Blowers) This is the challenge but the broadband
stakeholders' group came to the conclusion that in many ways you
needed to pumpprime the mass market application of broadband before
you create the conditions to roll it out into the areas which
may be, on current numbers, uneconomic anyway. There is a political
challenge there associated with the timing of those events but
the underlying logic is very strong. What we need to do, firstly,
is to get mass market broadband out there; that will reduce prices
across the board, it will reduce the price of the infrastructure
and the price of the consumer equipment. That then makes a much
larger part of the country potentially economic for broadband
36. That takes me nicely to NTL's membership
of the Government's broadband stakeholders' group. I have a question:
what is your general view of their first report?
(Mr Blowers) I have to say NTL helped
to write quite large parts of it so we think it is a fine piece
of work, particularly the bits that we wrote! I should say the
stakeholders' group is intended to be broad church and inclusive
of all of those people who are, to a greater or lesser extent,
responsible for the delivery of broadband - not just ourselves,
BT and Telewest but also the major equipment suppliers, the service
providers, consumer groups, development authorities, et cetera.
The report probably reflects that in that there are some things
in there which I am, if you like, indifferent to but they represent
the views of particular groups. The overall message that comes
out of the reports is very clear and one to which we commend the
Government's attention, and that is there is no magic bullet solution
to broadband; there are, however, a series of robust practical
steps which could be taken which, if they were adopted, would
help us in that process that I was describing of moving us higher
up the adoption curve much faster.
37. That is really what I was going to ask about
in response to the report because it has been successful and the
Government is undertaking research into the pump-priming of the
market to extend services to rural areas. Do you think that such
a programme could be successful? Obviously you do but, if so,
how will it work in practice?
(Mr Blowers) I think that is the 64,000
dollar question. The challenge is it is possible to get a quick
and dirty approach out of the door very quickly which seems to
produce immediate benefits but which has some long term disbenefits.
There needs to be some care taken. It is important not to foreclose
competition for contracts and for delivery of services, and one
of the ways in which you can do that is by making either the geographical
area or the spread of the services covered by procurement activities
in the public sector too broad. If you do, potentially what happens
is there is only ever one supplier that can step up to the plate
and that is BT, and we would argue that that is not in their long
term interests. If BT are the only people who are ever capable
of fulfilling a contract, that does not really do it for us because
we know from previous experience that when BT is good it is very
good: when it is subject to no competitive pressures it can be
pretty appalling. So it is very important to keep this contestable
in the way that the frameworks for procurement and for local initiatives
allow the purchaser a range of suppliers to fulfil the contract.
38. On November 1 last year the Assembly announced
the programme for a broadband lifelong learning network in Wales.
What are the possible benefits of such a programme, and are you
going to be involved?
(Mr Tse) There are significant benefits to be gained
by connecting comprehensive schools and primary schools to a network
that delivers broadband facilities. The truth is that as an organisation
the time constraints were against us completely on that particular
tender scenario. We received the paperwork on the 12th December
and the time constraints that were set as regards (a) the return
of that tender and (b) the implementation of itI think
it needed to be completed by the end of Maywere totally
against us as an organisation considering the geographical spread
of those secondary schools and primary schools. So we were limited
by our response.
(Mr Jeffers) That said, however, the initiative has
to be applauded. One of the core points on the education side
has to be to involve the official education system; it has to
be broadband connectivity into schools and tertiary locations
and so forth, because that is going to be one of the key drivers
of demand, so the overall initiative must be applauded for that.
39. Are you involved in any projects to exploit
broadband in health?
(Mr Jeffers) A number of them. Interestingly, a lot
of the projects we get involved with are almost restricted to
the lab environment, and what we want to try and do is look at
the mass projects that are possible out there. We can all talk
about connecting the doctor's surgery to the hospital to look
at things and so forth. There the service has been available and
what we need to do is look at how we could extend that further
and take it into a much more wholesale use of the broadband service.
(Mr Tse) Effectively, it is how we use
that broadband infrastructure for things like telemedicine type
projects where, at the moment, we are providing the physical connections
as opposed to the equipment that sits at the end, but there are
lots of advantages to be gained by using it in the health sector.
(Mr Blowers) If I might just make one
observation on this, my colleagues tell me that having already
said that there is a problem with being too generic in the way
that public sector procurement is done. If it is too broadbrush
then potentially you lose some of the capacity benefits. In other
areas, we find that purchasing is too fragmented, and that is
a criticism that has been levelled by a number of suppliers. In
the health area, we have particular problems with purchasing decisions
being fragmented across a number of different layers of management,
and that makes it very difficult to provide the kinds of economies
of scale which would bring real benefits in terms of reduced cost.
5 Technium Centre is an Innovation Centre at Singleton
Park, Swansea. These are Incubation Units for "growing' and
small businesses. It gives them access to the technology such
as broadband, for which they are billed as they would be for rent,
rates, electricity etc. The second one is planned for Baglan near
Port Talbot. Back