Examination of Witnesses (Questions 140-159)
TUESDAY 8 APRIL 2003
MR DAVID
WILLIAMS, MR
PETER JAGGARD
AND MR
ROGER WALKER
Mr Curry
140. Could you talk to me for one minute without
hesitation, deviation or repetition on the subject of BT?
(Mr Williams) I think that BT is doing what it should
do, which is pursuing profits in the interest of its shareholders.
I think it has technology which is well suited to urban areas.
It has caused our business problems. BT, under some pressure from
Government two years ago, announced its intention to launch a
satellite service which competes quite directly with some of my
satellite services. BT has not done that seriously. It has not
invested in infrastructure. It is re-selling somebody else's infrastructure.
It has not subsidised the services in the way it subsidised DSL
services. It does not want to sell satellite services because
they cannibalise its market for DSL. However, the very fact that
BT announced it was launching satellite services led some elements
of the capital markets to doubt my ability to compete with BT.
141. It was a deliberately spoiling tactic?
(Mr Williams) It was a spoiling tactic.
142. It was designed to screw you?
(Mr Williams) Yes, I think it was also designed to
placate some Government demand.
143. I am trying to use parliamentary language
here! I know what you are saying.
(Mr Williams) Whether it was a spoiling tactic or
whether it was a reasonable response to Government demand I do
not know. It certainly had the effect of making life difficult
for us. We have overcome that problem now.
144. How have you overcome it?
(Mr Williams) I think we are more tenacious than BT.
145. You have overcome it by a market solution?
(Mr Williams) We have developed technology which people
want to buy and we are selling it.
146. Is there a regulatory solution as well?
What steps should Oftel or Government take to make sure you are
free to enter the market? What concerns have you got about BT—which
in a sense have been thrust forward by the Government as a national
champion here, and I have some doubts as to whether the shareholders,
at least in the short-term, would find that terribly attractive
but they have got the job to do, but they do not try and preserve
that patch?
(Mr Williams) I think it is very clear that BT's primary
objective is to exploit the value of what it describes as "core
UK network", which is its investment in cable in the ground.
I think BT should be prevented from using alternative technologies
like satellite and wireless because of the risk that this halfhearted
use of alternative technologies spoils the market for companies
who are serious about deploying those technologies in very large
numbers. The capital markets are very difficult for all of us
right now. I am sure my colleagues here are the same—if
we were able to raise a very, very large amount of money we could
enable rural communities with broadband solutions within 12 months,
almost without any exception. At the moment we are taking a more
incremental approach, and spoiling tactics from BT inevitably
make life harder for us. Secondly, there are a number of Government
initiatives to subsidise various broadband technologies. I do
not personally feel that BT as a monopoly provider should be the
beneficiary of government money to instal broadband technologies
in rural or semi-rural areas. It has already used quasi-public
money to roll out its existing network. When the Government makes
resources available they should be targeted towards alternative
technologies and service providers.
147. It is a dilemma for BT itself, is it not?
The Government has asked it to do this particular job. If you
are going to say to it, "You must do the job but we are going
to make sure you are not allowed to get into any of the higher
or new technologies", then in the long-term that looks like
an even less attractive proposition for BT, does it not?
(Mr Williams) BT does not want to offer technologies
that compete with the cannibalised market for its core technology,
which is copper wires DSL. That may change in the future but right
now, while it is endeavouring to roll out DSL on a nationwide
basis, it does not want to offer technologies which cannibalise
that market.
148. How much room is there for other players
to come in? You have come into the market and you have come up
against BT and you have said you have now dealt with that because
you are able to offer product which basically they cannot compete
with in that particular sector. It is entirely possible that in
this sort of field new competitors will come up. How much room
is there in this marketplace?
(Mr Williams) There is plenty of room. There is lots
of demand. The supply side factors are holding back competition
at the moment. The ability of companies to simply sustain themselves
during a costly infrastructure build-out stops companies from
entering the market. It is much easier for us, I suspect, with
satellite technology because we do not have to put masts up, we
do not have to make very large investment in the ground, and we
only spend money when a customer orders a service. For us it is
much easier to roll out services incrementally in very direct
response to demand. Nonetheless, on the supply side the lack of
capital does make life difficult.
149. Firstnet, do you share those general views?
(Mr Walker) Yes, I think so. One of the biggest problems
we have with deploying wireless services is bringing the services
from the wireless distribution back to our network so we can traverse
the traffic to the internet. There are two elements that give
us problems with that: one is the cost of that backhaul, and the
availability of the backhaul as well. If we are looking at distributing
a significant number of services to customers within an area the
proportionate amount of bandwidth we require increases. To get
that proportionate bandwidth from that area to our core network
is harder the further away from the core network the transmitter
is. Another element of that is, once you get the traffic back
we still need to deliver it to the rest of the internet. This
is where we take the internet traffic and pass it to other network
providers and ISPs who compromise the "Internet" to
allow it to reach its destination. This is classed as "peering".
Given the amount of Internet traffic that BT carries, it is very
hard to peer with BT to distribute traffic originated on our network
to users that BT also hosts. From a monopolies point of view,
BT still is not classed as in a monopoly position with respect
to internet traffic, although it is for its other services. In
this respect DSL or broadband is classified as a monopoly, but
with respect to internet it is not. These two things go hand-in-hand.
It also gives BT the ability that, if it can provide a digital
or ISDN service to a customer, it can upgrade it to broadband.
There are immediate contradictions in place within the market
and in the perception of the market that do not really facilitate
competition approaching that marketplace as easily as perhaps
it should be able to.[3]
Ms Atherton
150. You mentioned the RDAs earlier. Have either
of you been involved in the broadband fund pilots?
(Mr Williams) We have had some involvement. There
is a project called RABBIT broadband which several of the RDAs
put together to create. It is not a bad project. I think there
are a couple of problems with it. Number one, it gives subsidies
directly to private individuals or private businesses and it requires
us to sell and market our services to individuals or to individual
companies. The cost of addressing a sales and marketing effort
at a very low level to large numbers of private businesses and
private individuals is reasonably high. There are much more efficient
ways for us to sell market services. That has not made a very
large impact on the way we market our services. At the moment
some of the RDAs are taking a slightly more enlightened approach,
which is to say, "Rather than simply giving money to any
private individual or business that asks for it, let's actually
create infrastructure which covers an area and enables potentially
many more people to benefit from it". That happens to suit
us because of our new technology which combines shortwave wireless
with satellite, but also it spreads the benefit of the subsidy
more widely. That kind of approach and an aggressive deployment
of technologies in rural areas is probably a good idea if the
public sector thinks getting broadband to as many people as possible
is important, and that is an "if".
(Mr Walker) We also deal with RABBIT. We talk to the
majority of the Regional Development Agencies with respect to
services they are looking at rolling out. We are in the process
of rolling out with EMDA, to a market town scenario within Sleaford
and hope once that trial is successful to carry on rolling out
into further market towns in that area. I echo the sentiments
with RABBIT. One of the issues we face with bringing users to
DSL technologies through alternative mediums like wireless is
a marketing and awareness issue. With DSL there are two problems
to its uptake: one is the awareness of it in the area in which
it is available; and the second is the incentive or drawing factors
to make use of it. Both of those can be tackled in different ways.
One from working with local groups in the areas that have the
requirement; but the second is to stimulate it from higher powers
or the Regional Development Agencies down, in stimulating the
requirement to use services that can be deployed there as well.
(Mr Jaggard) One of the factors also is that we do
work with a lot of the RDAs in committee form. Invariably BT are
involved in those. They almost hold a stalling operation: "Well,
it'll be coming soon" position. "The exchange will be
enabled or coming with new technology that was announced last
week that will extend into your area". Instead of operating
in an environment where they are looking forward and trying to
get it done quickly—they are saying, "Just round the
corner there maybe something from BT coming along, which in the
short-term is going to be potentially considerably cheaper".
Everybody is concerned about that and holds fire, so the process
is elongated instead of speeded up.
(Mr Walker) To give you a live example of that which
is pertinent to this inquiry: Sleaford. It was a very long process
to actually receiving funding to start the project with Sleaford.
Pretty much as soon as the funding was issued BT announced broadband
rollout in Sleaford which immediately created competition for
the Sleaford area which is where the trial is supposed to be targeted.
BT were involved within the trial process, if you like, but it
is almost like stealing the market once it has been created
Mr Curry
151. Mr Williams complained a little earlier
that BT had made a venture into satellite without any attempt
to exploit it but simply to preempt his company. What you are
saying is, when BT are making announcements about future availability,
in a sense what they are inviting people to do is to hold fire
so that is also a deliberate tactic in a way to deter people from
subscribing to your services?
(Mr Walker) That is one point, but the other one is
when areas of interest are recognised miraculously DSL is available
in those areas of interest. There is a lot of work to generate
the areas of interest that suddenly get capitalised on.
152. BT were saying they have 90% coverage within
X number of years, and I asked them, "Which is the 10%?",
which is the crucial bit. It may be that is not an answerable
question. I guess that if I felt I did not have an urgent immediate
need but I was going to have a need and that was going to be accessible
at a relatively low cost I might be tempted to say, "Hang
on a bit longer", especially in the rather difficult financial
circumstances at the moment.
(Mr Walker) I think it is also the areas that ask
for it last, which is perhaps the wrong way round.
153. Let us look at another subject. Radio spectrum
licences—you heard NTL say they cost a bob or two. Firstnet
itself has told us in its evidence that, 850,000 a year was also
a rather expensive item and they ought to be set at a more realistic
level. The Broadband Stakeholder Group have also said that the
cost "does not allow for commercially sustainable low cost
[wireless broadband] in areas of low population density".
As far as Firstnet are concerned, how are your plans to extend
your network affected by the cost of the licence; and if that
is too high a price, how do you set a more realistic price?
(Mr Walker) A very similar answer to my colleague
here. We have deployed 38 points of presence around the UK. We
strategically provide additional points of presence to maximise
the coverage we have got within the most economic means we have
available, but that is in terms of strategic growth with investment
and everything else. We target areas where we can maximise the
revenues from the services we deploy. Given the technology we
have available and the spectrum we have available, that has distinct
advantages for deploying broadband services to rural areas; but
the cost of deployment from both backhaul to our core network
as well as the licence fee for providing services does not particularly
stimulate us to provide services to purely a rural area where
it is maybe for only residential purposes. To maximise deployment
in that type of area you are looking at as broad an area of coverage
as possible. Using the spectrum we have available that means from
a single point we could broadcast to 11-15 kilometres from that
point, depending on the geography. If we use some of the more
public frequencies that are available, the 2.4G and so on, then
what we are doing is reducing the area of coverage down to potentially
two kilometres. There are pros and cons to both, but the licence
fee we are currently faced with equates to about £28-29 per
user per month for purely the licence fee. In terms of a suitable
tariff to the user for broadband then we are looking at about
£29-30 per user per month for the "service". If
we exclude any network, backhaul and anything else for the services
we provide, the licence itself is prohibitive for us to take into
rural areas.
154. But you had no choice but to pay it?
(Mr Walker) Indeed.
155. When you paid it you swallowed hard and
thought, "If we want to get into this marketplace we have
no option"?
(Mr Walker) It gives us the ability take first mile/last
mile services to provide those in our own right and to compete
at that level in our own right. It also gives us the ability to
take Firstnet Services into areas where we can leverage more revenues
on more services from the wireless type of deployment. Equally,
with the licence it gives us the ability to provide additional
services to users as well which we do not traditionally have access
to. For example, voice over IP and traditional voice services
to users. If you want to broaden network reach and get to users
so that you can deliver services tailorable and deliverable to
a customer that are completely your own then that is the choice
that you have to face.
156. If the price is high one way of dealing
with that is to provide more supply. Would it be helpful if the
Government released more blocks?
(Mr Walker) I think we have sufficient within the
blocks we have available to service pretty much anywhere and everywhere
we need to cover. In that sense an honest answer is, no, because
it would stimulate competition. We have sufficient balance within
the blocks we have available to cover the services we need to
provide.
(Mr Williams) The RDA is currently looking at the
licence fee in respect of 5.8G, which is spectrum that we want
to use by putting very high powered two-way satellite systems
in and connecting them with wireless transmitters we operate at
that frequency. We can provide the very, very low cost services
I have referred to previously. If that spectrum were to become
available very, very cheaply then it enables us to roll out services
at low cost at very high speed. I think the Government needs to
learn its lesson from the UNTS auctions. It dealt one of a number
of killer blows to the telecoms industry a couple of years ago
by extracting fairly silly amounts of money from the industry,
and I think it needs to learn that lesson.
(Mr Walker) I think the industry has also learnt that
lesson as well, in that the current auctions for 3.4G are perhaps
under-subscribed for the potential of what they could be leveraged
for. The cost of the licence, going into the auction and then
the ability to deliver services from it, is going to be very expensive.
It is going to be a very long time period in actually getting
from a point from now to delivery in select areas.
(Mr Jaggard) To look at it from the other side, we
have to stimulate demand rather than the usage. We have to stimulate
demand and let people know exactly what can be done, especially
in remote areas, without travel, without going to work and without
using transport. To stimulate that level rather than supply.
Diana Organ
157. You have just talked about stimulating
demand in the more remote areas, so that we can get broadband
into those areas. You have talked about the £30 million pilot
that the RDAs have got, and about not wanting any more licence
blocks. I wonder if I could ask you one or two questions about
the fact that we have here a new kind of infrastructure that needs
to be rolled out to virtually every community but of course, at
the moment, it is the market that is delivering that overwhelmingly.
Could I ask you one or two questions about the role of the public
sector and the role of Government in this. What could the Government
do for you that would allow you to be able to penetrate those
remoter areas more easily?
(Mr Walker) I think we have had two or three key problems.
One is the backhaul ability. If there is an ability to access
bandwidth in areas for reduced cost, or more bandwidth available
to those areas that we can take advantage of, then that would
ease our deployment. Secondly, the licence fee, as already discussed,
is too expensive for us to go to a rural areas specifically and
deploy our service.
158. Would you expect to see a two-tier licence,
so there were areas where you could easily generate your income
from it because there was greater take-up and use, but if you
were going into more remote areas you would expect a lower rate
of licence?
(Mr Walker) Potentially, at the most basic level,
it would be the cost per user or the cost per deployed area. It
would be sensible to have a cost per user because that is applicable
across the board. To get into a cost per area means you start
having to look at the economic means and the populous to try and
work out an economic mean for that area, which is probably going
to take longer than it would to actually deploy services in the
first place.
(Mr Williams) I have got some services now I can provide
anywhere to anyone. The thing that is holding me back is that
I do not have a huge budget to spend on sales and marketing. I
am picking up reasonable numbers of customers in rural areas but
they are quite difficult to market. One thing that the Government
could help us with is in public procurement when the Government
is buying services for its own use. We came across an example
very recently where we bid to provide services through a fairly
strong personal contact, which is one of the reasons why we had
success. We bid to provide services to a schools project. We came
to this project very late in the day and we discovered that before
we came into the project the budget for telecom services had been
set at a million pounds sterling for a group of five schools.
The proposal we put into that project delivered more or less the
same level of service for a tiny fraction of that amount of money.
The driver that led them to think it was a good idea to commit
a million pounds to that project was that there remains a prejudice
in favour of fixed line services in the public sector, which we
have run up against many times before. In fact we stopped marketing
the schools sector last year because every time we went and spoke
to the broadband consortia that were handling procurement for
schools we were told, "No, no, the Government says we must
have fixed line services, and BT will provide them soon. We don't
like satellite. We've been told that satellite is the wrong technology.
Go away". In the end we went away. It just so happened we
found one project that was run by someone who knew what he was
talking about and we were able to deliver that service at a fraction
of the cost. Government could help us by setting in place guidelines
for its procurement officers that say, "Be reasonable about
what demands are. Do you really need 2Mb symmetrical lease lines
for video conferencing in primary schools, where FTSE 100 businesses
don't use those kinds of services? Do you really need them? What
services do you actually need? What is the most cost effective
way of delivering them"?
(Mr Walker) There is another side to that which goes
back to another point NTL raised which is associations of projects.
One of the projects we have been working on is connecting schools
together. Allied with that project could have been to distribute
broadband services to the communities that those schools represented.
The two projects are completely coincidental in existence, but
not allied in any way or form in terms of the way that projects
receive funding. Therefore, even though it is a distinct advantage
to offer that type of service to provide community network through
internet services, through broadband, to the community of the
school, it is not in the school's interest to actually deploy,
because it does not get its funding for that. It only has specific
funding for one element. There is a whole host of things in terms
of project association—the more realistic level for community
benefit that can be taken as more of an overview in terms of services
or project delivery.
159.That is very helpful. Those two questions
were about piggy-backing on the back of public provision, the
other one was, is the Government too focused on the fixed lines
solution? I think that is a question for us to ask the ministers
when they come to see us. To follow up on that, have either of
your companies had discussions with the Government about a sort
of public/private partnership round institutions like educational
institutions and then piggy-backing your business to the local
community?
(Mr Walker) Only through the RDA groups.
(Mr Williams) We have. We only recently started with
the new technology that we are deploying. We are working with
one quasi-governmental organisation to help us along. It is something
that I am keen to do more of.
3 Note by Witness: Despite the changing framework
being driven by the EU Directives for traffic convergence, the
focus is still very much on the way the traffic is carried, rather
than on the traffic itself. Moving Internet traffic between operators
should be viewed the same as moving voice traffic between operators-the
principles are exactly the same. Back
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