Examination of Witnesses (Questions 92-99)
TUESDAY 8 APRIL 2003
MR PAUL
REYNOLDS, MR
BRUCE STANFORD
AND MS
TRISH JONES
92. Good morning. Before we start the questioning,
would you like to introduce your team?
(Mr Reynolds) First of all, I am the chief executive
of BT Wholesale which is the part of BT that is firstly responsible
for the role of broadband services infrastructure on behalf of
BT, and we provide broadband and other telecommunications services
to virtually every service provider, mobile operator and fixed
network operator in the United Kingdom. I have with me today Trish
Jones, who is responsible for our regional partnerships.
(Ms Jones) Good morning. I am the general manager
in BT responsible for partnership approach to extending the broadband
footprint in areas where it is currently not economic or commercially
viable, and for accelerating take-up.
(Mr Stanford) I am director of products in BT Wholesale
and I am responsible for the wholesale products we put out to
the customers, and specifically I look after the broadband product
which includes its roll-out of coverage in the United Kingdom.
93. I would like to kick off with a few words
about why broadband is important to households and whether you
think there is any difference in demand between urban and rural
areas?
(Mr Reynolds) First of all, broadband is important
because it brings fast, always-on internet obviously. But why
that? It is becoming increasingly important for households in
terms of access to information, educational information, access
to information across the world, if you like, and access to all
sorts of services from trading to health services and so forth.
There is an ever increasing set of services that are becoming
available and will be more easily consumed, more enjoyable, to
take through a broadband service so that is why it is important.
Is broadband take-up greater in urban areas or rural areas? It
is about the same. The key issue we find is exchange enablement,
obviously. When an exchange has been enabled, broadly speaking
the take-up is about the same and quite low, although we have
found that in rural areas where there has been a strong partnership
approach with regional bodies or with government, and where that
partnership approach has led to a lot of demand stimulation work
through small businesses or consumers, the take-up is significantly
higher. For example with the ACTNOW partnerships that we worked
on in Cornwall, the take-up is significantly greater than, for
example, some of the early enabled exchanges in Wales, where there
was some direct funding but little demand stimulation.
94. I noticed you made an announcement last
week on a number of new trigger thresholds for enabling exchanges,
and one of my four rural exchanges has been enabled this month
and there are three more down the line so I was quite interested
in that. When are we likely to get a situation where 90% of households
have access to broadband?
(Mr Reynolds) Specifically we see our whole programme
being brought forward at least a year with this announcement and
90% in two or three years' time.
(Mr Stanford) The opportunity we provided to potential
customers in the United Kingdom from last week's announcement
is, if the 600 triggers which we are going to announce over the
coming months coupled with the some 6-700 triggers that are already
public actually activate, that will cover 90%, so there will be
complete transparency to how we could get to 90% under that particular
design. There are other mechanisms to get further coverage but
it will be fully public as to what the trigger levels are, how
the demand could trigger it, and if ever an exchange triggers
we will immediately go into build and then stimulate further demand.
(Mr Reynolds) BT plans to get to 80 and 90%. We also
in that same announcement made a strong message that working with
government or whichever way we could in partnerships, you could
both accelerate that path to 80 and 90% and potentially go beyond
it in some areas.
(Ms Jones) The whole point of the partnership agenda
is that we work with local stakeholders who have a very specific
understanding around their regional economic agendas, areas for
regeneration, areas in which they want to create economic growth
through small businesses, etc, or even a learning and skills agenda,
so by working with those local stakeholders we create partnerships
that create a real step change in new users, so it is a create
market approach, extending what BT would normally do with people
within the regions, so beyond what we would perhaps normally engage
with, and through that approach that allows us to consider the
way in which we might take or might share risk in areas which
are currently not commercially viable. With ACTNOW in Cornwall
we looked at this about two years ago, and at that time we only
had about 500 exchanges enabled, as to how we could bring an area
like Cornwall, which is probably one of the last places we would
look in a commercial way at the programme, up to speed. That is
the reality. I think what you will find there is it has provided
a template for us to match this demand-led approach to supply,
to deployment. It is an Objective 1 programme: we worked with
the local Regional Development Agency, the County Council, Cornwall
Enterprise which is a subsidiary of the County Council and acts
as an enterprise agency; we also worked with the Business Link
and we worked with Cornwall College, and we brought together a
programme where we all invested money, we created a seamless set
of services for SMEs to tap into which allowed them, first of
all, to understand what the benefits of broadband were, they could
share their experiences with other SMEs, at appropriate times
we could do a needs assessment of their ICT requirements totally
appropriate to their own businesses, and how they could individually
benefit from introducing broadband e-commerce type applications
and, through that, nurture them through the adoption and improved
usage of ICT within their business; also, linking in with the
College in terms of the skills refreshment they might need, so
there is BT working with other agencies locally to provide an
experience, if you like, for small businesses that they would
not normally have the privilege and benefit of. The result is
an absolutely incredible take-up and I am proud to announce that
we will probably get to 5,000 connections within the first year,
and four of those last exchanges only went live last month. You
will find that typically, if you look at the exchange type and
the kind of GDP position of the people in this particular economy,
they are 67 more times likely to adopt broadband than anywhere
else in the country, and that is phenomenal. We have already hit
10% of the SME community, and when I tell you that even in London
we have only hit 50% after two and a half years that will show
you the power of us working with other people on a local, specifically
tailored agenda.
Ms Atherton
95. Obviously I am very supportive of ACTNOW
but I would perhaps put a caveat in that when we say "rural"
we are talking about the towns in Cornwall and not the more bed
and breakfast down the lane, down the lane, down the lane, and
I think that is the challenge—as to how we enable someone
in Germany to look on their broadband server and come up and see
the bed and breakfast four miles down the lane at the end of the
lane. That is the challenge we need to think about tackling. When
we have met and discussed it in the past there was some reticence
and anxiety in BT that there would not be the take-up, and I am
delighted from a business perspective that has happened. In retrospect,
is there anything you would have done differently? Should government
have done anything differently, or any of the stakeholder partners?
(Ms Jones) This is why my remit has been established
across BT. I sit across all parts of BT and what it has allowed
us to do is, using the Cornwall template, we have categorised
the country in terms of five templates. We have just completed
this work, by the way, and what we have done is we have looked
at the country from template 1 which is where you already have
it but there is still low demand, less than 4%—and I am
sure Paul will talk about the issues around that and why we need
to make that higher still—right the way through to what
I call template 5 which is the areas you are particularly talking
about, and what you will find is that I have developed, if you
like, templates of intervention through those five categories.
Typically, because of the costs and the demographics of Cornwall—they
might be towns to Cornwall but in the scheme of the United Kingdom
they are falling into the top end of economic viability—through
these templates we can map where we are still taking risks through
the pre registration scheme through the bottom end where we believe
that we can take that risk and commercially bring services right
the way through to the top end where quite frankly, in terms of
the technologies that are available to us, we need much higher
intervention support. It is only the top three million of our
total population but it represents something like that extra last
5/10% of coverage which geographically may be a much higher coverage
in terms of area. So we have performed this template set, and
using this we are now taking this out to various parts of the
country. I have ten other partnerships which I am happy to talk
about separately, but to answer your specific question, now that
we think we understand the dynamics and what we need to do and
how to make that successful, what I would like to do—and
we are already having discussions in Cornwall—is see how
we tackle that last template, that high intervention level, and
the very difficult piece. There are other technology solutions
available to us which is Exchange Activate, which is a tactical
solution for low volume users. The costs are higher than we would
currently be able to price our services at, higher at the wholesale
level, but I am trusting that through the intervention approach
we have had with ACTNOW there may be a way of contributing to
that such that everybody can enjoy those services at the same
end-user price, so there are ways of being innovative about this
where we still take a lot of risk but where we seek to share that
in an open way, so that the intervention is just enough to emerge
with a sustainable project at the end of it where we take all
the risk, and that is the key to our approach.
(Mr Reynolds) For sure we do not know all the answers,
and clearly going into ACTNOW the whole issue is a willingness
to turn every stone and see what we can make work together. Exchange
Activate is something that is coming out of it. It is a technical/commercial
issue that might be helpful in a rural context.
(Ms Atherton) Can we talk about the regional broadband
fund—
Mr Curry
96. May I ask a question? While we are on the
subject of templates, whatever they are, where is the Yorkshire
Dales in your template sequence? This is all chicken and egg stuff
because you are saying, "We can do it once there is a certain
economic mass and a certain market place there". If you go
to Settle in my constituency, my problem is not that there are
lots of people who do not realise what the benefits of broadband
will be but that they cannot get it, and they are saying, "Until
we have it you are not going to get the economic mass". People
are not going to set up businesses there because the fundamental
tool is not there. Is the government asking you to perform an
economic or a social function?
(Mr Reynolds) What we have found is when we have set
the exchange trigger level communities have got together and really
got enthusiastically behind it, worked out the potential benefits
in that community and that of itself has generated publicity,
we have helped, and through that process we will help generate
pre registered demand and then we trigger and build exchanges.
So that is the model and people, having gone through that, have
tremendous enthusiasm and communities themselves can help by grasping
the nettle and finding the small businesses, the consumers, the
people who really want it and get the registration and get the
demand registered so we can get ahead and build, which is what
we want to do.
97. But why does it take this profound investigative
prowess to find these people? I have them falling over themselves
saying they want these services. We have talked about stakeholders,
targets, templates—we have used every fashionable piece
of jargon in the book—but I just want my people to get the
dammed thing. What is the mechanism by which it is delivered,
and where are the 10% who will not be there at the end of your
three year period?
(Mr Stanford) The reason we introduced the triggers
was to provide a visibility out to communities as to what would
make a local exchange viable. An example would be that, before
we had triggers, to try and get a three-year payback which is
the way in which we run this part of the business we would need,
say, a 1,000 customers to cost in that exchange and we might not
perceive in a particular town a 1,000 potential customers and
hence would not build. However, if you have a number of customers
starting in the first three months who pre expressed a desire
for it, you will find that the economics come significantly down
and you may only need, say, 600 people to cost in that exchange
because 300 will have volunteered for service right upfront. So
the opportunity the trigger scheme gives us is to build to demand
rather than sell from stock, economically for ourselves to run
a business, and to give a focus target for the local community
to achieve that trigger point. We have found it very successful
and we are now triggering an exchange a day by heightening demand,
because if we build an exchange and people do not use it no one
has benefited. If they are not people using the service, which
is ultimately what we are all after in terms of providing an opportunity
in the market place and an investment for ourselves, an investment
return, then we have not achieved anything, so the trigger point
ensures that we have stimulation of demand at day 1 and we advance
the build that we might normally not have done.
98. And where do you expect your 10% to be?
(Mr Stanford) The last 10%? That will be the most
challenging to provide, and what BT has now done is to try and
find other mechanisms for serving that last 10%. Exchange Activate
is an opportunity for a small community that might only have 30
or 60 potential users, which it would not be economic to provide
for in the way that we wholesaled at the standard price just announced
at £13, where service providers, which is a very competitive
market, could market their services at, say, £25 which is
the normal retail rate. So through Exchange Activate, through
having satellite services for extreme rural communities where
the reach for the DSL will not physically provide the answer,
our different technical solutions and business models help the
local community gain broadband, and those opportunities are there
now.
Mr Drew
99. Can we look at the trigger mechanism? With
the benefit of hindsight, what would you have done differently?
(Mr Reynolds) Firstly, I would like to say that, in
terms of the trigger mechanism, it is a piece of innovation that
we thought long and hard about and which has exceeded our expectations
in the sense that, through the mechanism we were just talking
about, it ends up being grasped by communities and helps stimulate
demand, so it has tended to bring forward the economic viability
rather than anything else. That said, since we only introduced
it about a year ago, I was delighted that that amongst other things
caused the Yankee Group to cite us as the most innovative organisation
in bringing broadband to rural areas because of the triggering
process, but we have learned throughout the triggering process
and perhaps Bruce could talk to you about the improvements.
(Mr Stanford) On triggering let's be clear that it
only started last July so we have not had an anniversary yet.
Firstly, we have acted earlier for fraud because there is potential
for people to register. There is no legal commitment associated
with registering—it is an expression of interest—therefore
BT will be taking an investment risk on that. Earlier on, therefore,
we would have had more advanced fraud techniques for spotting
multiple telephone numbers, consecutive numbers, people called
"Mickey Mouse", etc, which earlier on we did not spot,
and we are investing hard to make sure that the express demand
through trigger is real, because it is of no interest for anybody
to have false demand and to build an exchange where there is none.
Secondly, we have perfect information inside the company so we
understand the costs for every single exchange. There is a granular
level of detail in our surveys so we can understand the cost of
upgrading an exchange and our messaging-out to the community,
because whilst it is nice that we might have another 1,000 triggers
out there there are still several thousand that there are not
triggers for, so it is explaining to the community why we have
not set a trigger when in fact what that is saying is, "We
would need 600 customers and there are only 500 in your town,
therefore it is nonsensical to announce a trigger". We probably
could have got the messaging a bit better.
(Mr Reynolds) Adding to that, we have learned to get
on with building rather earlier in the process than originally,
so that progressively over the last nine months we have taken
even more of the risk upfront and we just get on with it when
we can see the demand coming through, and the trigger level.
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