Memorandum submitted by NTL (S40)
ABOUT NTL
NTL currently passes eight million homes, to
which we provide three million customers with telephony, TV and
internet services. Over 500,000 customers take our broadband services,
making us the UK's leading broadband provider, and the numbers
are growing rapidly. Our broadband networks currently reach some
7.1 million homes and businesses.
NTL operates the UK's largest cable communications
network, as well as being one of the country's largest internet
service providers. ntl:Home offers an unrivalled value for money
digital TV service, combining a vast TV channel selection, Telephony
and Interactive services including the ability to send and receive
e-mail through the TV, for a single monthly fee.
With a £8.2 billion investment in our pioneering
technology, the company is well placed to provide the bandwidth
necessary to take the UK forward to meet the Government's aims
to deliver electronic services to its citizens. Whilst NTL's cable
infrastructure is predominantly deployed in urban areas NTL is
also trialling broadband wireless technology which could be deployed
in the future in rural areas.
NTL recently emerged from a corporate restructuring
process, which has removed some £8.6 billion of debt from
the business. NTL now has a strong balance sheet to match a strong
underlying business.
DEMAND FOR
BROADBAND
Demand for broadband is growing strongly, albeit
from a very low base. As the Committee will be aware, national
broadband penetration is currently around 6% of households. Amongst
the cable residential customer base, broadband penetration is
much higher—around 20%. This still means, however, that
80% of cable customers who could take broadband are not currently
doing so.
Penetration of broadband services within the
SME sector is also low. Whilst it has been suggested that this
results from lack of availability, NTL's experience is that take-up
amongst SMEs is low even where the service is available, suggesting
a more complex set of factors driving take up than just physical
availability.
For these reasons, NTL agrees with the Broadband
Stakeholders' Group that increasing take-up of broadband requires
a holistic approach that stimulates demand as well as supply.
International comparisons show a very strong correlation between
the rate of adoption of broadband, PC ownership and access to/use
of the internet. High levels of PC ownership and widespread use
of the internet appear to be preconditions to strong broadband
adoption. Evidence suggests that rural and outlying areas of the
UK have significantly lower levels of PC ownership and internet
use than urban areas. These factors need to be considered and
addressed alongside issues relating to the supply of broadband
services themselves.
It is also the case that the issue of how to
accelerate take-up in rural areas is fundamentally intertwined
with the need to accelerate take-up across the UK as a whole.
If broadband becomes a genuinely mass-market product (which we
suggest would mean national take-up in the 15-20% range), there
would be significant scale economies and cost savings. Thus driving
down of broadband costs will in turn make it much easier to justify
increasing the footprint of broadband, because the business case
for providing broadband in a given area will be much stronger
with a lower underlying cost base.
WHY RURAL
BROADBAND MATTERS
In our view, the reason why broadband is attracting
so much political attention is because of its potential to induce
revolutionary rather than incremental changes in customer and
business behaviour. At present, broadband is largely being used
for faster internet access both by residential and business users.
However, the longer-term benefits of broadband will flow from
the adoption of new business models for delivery of entertainment
services and e-commerce.
For rural areas, broadband's potential is to
bring isolated communities closer to each other and (in the case
of businesses) closer to their customers. Thus broadband has the
potential to counteract the isolating effects of physical distance.
One important application of broadband is in relation to the increasing
focus amongst rural communities on high-margin "added value"
production—the internet, powered by broadband, provides
the means for instance for organic farmers to target and sell
to urban customers.
PROVISION OF
BROADBAND IN
RURAL AREAS
The most recent BSG report highlighted the shortfall
in the current provision of broadband in rural areas. The report
divided the UK into four categories: urban, suburban, market town
and rural. The latter two categories include 15% and 10% of the
UK population respectively. At that time, DSL penetration was
21% in the former and only 7% in the latter.
To some extent, BT is addressing this through
its programme of exchange upgrades. The Committee will no doubt
be seeking evidence from BT but our impression is that there is
nonetheless a significant "hardcore" of areas, which
BT is not at present expecting to upgrade and that these will
be predominantly in the areas described by the BSG as "rural",
on the basis that it would be uneconomic to do so without some
form of subsidy.
Theoretically, universal service obligations
could be imposed in respect of these remaining areas. However,
we think it is unlikely that the Government would wish to go down
that route whilst the level of penetration of broadband nationally
remains at the current level. The reason is that the taxation
base would be small relative to the size of the subsidy—to
the point where the cost of funding USO, added to the bills of
existing broadband users, would actually deter those users from
the service. This would clearly be a self-defeating strategy given
that—as already described—the more users there are,
the more economic it becomes to extend the footprint of services.
(This assumes that a broadband USO would be paid for by other
broadband users. This seems more likely than funding broadband
via a subsidy from voice telephony revenues—which would
be a highly regressive tax at present given the demographic profile
of broadband users—or indeed funding from general taxation).
We would in any case caution against a broadband
policy for rural areas based solely on the provision of DSL, as
this will de facto create a BT monopoly. A healthy broadband
market necessitates product innovation. If the market is left
solely to BT, BT will deploy new technology at a time solely of
its choosing and only when it has fully exhausted its existing
network assets. Indeed, we believe that this accounts for the
current pattern of DSL availability—BT's initial deployment
of DSL matched almost exactly the footprint of the cable networks
because cable's aggressively priced broadband offering was hurting
BT. On the other hand, it is only now moving to implement DSL
outside of cabled areas because without any competitive pressure
in these areas BT's preference at least initially was to recoup
its existing investment in ISDN.
One source of potential competition to BT in
rural areas is through wireless-based broadband. NTL is currently
trialling wireless broadband services in the 10GHz band and is
in discussion with a number of Development Agencies about the
use of this technology in rural areas. However, this could only
be justified if the current licence fees for the spectrum were
set at a much more realistic level, something that we are discussing
with the Government at present. In general, we would urge the
committee to explore the Government's policy on broadband wireless
and ensure there are no avoidable barriers to its deployment.
GOVERNMENT AND
AGENCY INVOLVEMENT
There are currently a plethora of initiatives
in relation to accelerating broadband availability. We fully understand
the desire on the part of the public sector to drive broadband
rollout. However, our concern is that (a) the mosaic of agencies
are currently in danger of getting in each others' way, and that
(b) certain initiatives have been launched with imperfect understanding
of market dynamics or confused expectations.
For that reason, we support the Government's
attempts not to dictate to RDAs and local authorities but at least
to provide a common framework and best practice guidelines in
the field of public procurement, through the mechanism of the
Broadband Taskforce. This should provide a much more coherent
approach and ensure that public money spent on broadband is spent
wisely.
An important consideration for NTL relates to
the earlier point about market contestability. It is not in anyone's
interest to drive the market to a monopoly position. Public procurement
is a powerful tool for accelerating broadband deployment but equally
care needs to be taken that it does not simply involve large amounts
of public money being handed to BT to do things which BT ought
to be doing anyway if it was fully subject to competitive pressures.
We accept that this is not the Government's
intention, but some schemes already launched (for instance the
Scottish Executive's announcement of funding for BT to upgrade
its exchanges) will undoubtedly have this effect. As far as public
procurement is concerned, the key is to parcel up public sector
business in such a way that the range of companies who can realistically
bid for that business is not restricted to a field of one. This
is best achieved by undertaking procurement on a regional rather
than a national basis, given that BT is the only operator with
a universal footprint.
It is also important to ensure that services
are not defined in a way, which rules out all broadband solutions
other than DSL. DSL is a "Heath Robinson" attempt to
deliver high bandwidth down a copper wire infrastructure designed
for narrowband voice telephony. It is inherently less efficient
as a solution than Cable, and potentially less efficient than
wireless. Agencies need to avoid being sucked into DSL solutions,
which may be no more than a transitional phase of broadband market
development.
A final complication from an industry perspective
is the uneasy relationship between Whitehall and the devolved
administrations. It is clear that the Scottish Executive in particular
has taken the view that it will plough its own furrow in relation
to broadband. But it is not clear to us, for instance, to what
extent agencies in Scotland (or for that matter Wales & Northern
Ireland) will pay heed to the guidance coming out of the Broadband
Taskforce when it comes to public procurement.
NTL
February 2003
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