APPENDIX 1
Memorandum by AOL
1. BACKGROUND
TO AOL IN
THE UK
1.1 AOL is the leading online service and
content provider, with more than 2.3 million members in the UK,
including more than 725,000 on broadband services. Across the
world, more than 29 million households subscribe to AOL.
1.2 AOL offers a range of interactive online
services, as well as in-depth content and community for all the
family. In the UK, AOL members spend on average more than one
hour a day online, enjoying a variety of online content, from
Entertainment and News to Parenting, Shopping and Music, as well
as email and the Internet.
1.3 AOL members also benefit from a range
of features designed to make their Internet experience safer and
more secure. These include Parental Controls, anti-virus email
scanning, Spy ware Protection, free Firewall for broadband members
and extensive online guidance, as well as free online and telephone
advice.
1.4 At AOL UK, we believe the interactive
medium is fundamentally changing the manner in which people communicate,
and how they are educated and entertained, in addition to the
way consumers transact for goods and services.
2. SUMMARY OF
AOL'S CURRENT
OUTLOOK ON
THE UK BROADBAND
AND TELECOMS
MARKET
2.1 AOL UK believes that broadband uptake
in the UK has made good progress, but could have been significantly
more impressive with more effective wholesale competition. The
year ahead offers the promise of regulatory measures by Ofcom
designed to lead to the opening up of BT's network to competition.
If successful, these changes will create greater consumer choice.
2.2 AOL welcomes Ofcom's consultative approach
and Ofcom's objective of to establishing clear regulatory policy
guidance. Ofcom's Strategic Review provides the appropriate means
of achieving that objective. Ofcom's approach to the Strategic
Review contrasts with the approach taken in previous broadband
related reviews where Ofcom have, in our view, been paternalistic.
2.3 Ofcom's Strategic Review is proposing
to put a regulatory framework around issues that have been under
discussion—by industry—for some time, eg "equivalence",
and we welcome Ofcom's work in taking this initiative forward.
2.4 If Local Loop Unbundling is not successful
and BT rolls out its 21st Century Network outside of the necessary
regulatory environment, the prospect for wholesale and infrastructure
competition—and ultimately a competitive retail environment—will
be even more limited than at present.
2.5 AOL UK believes that success or failure
in delivering greater choice and innovation to consumers is in
the regulatory hands of Ofcom, and it will depend on how willing
Ofcom is to get its "hands dirty" or whether it chooses
to opt-out with "light touch" regulation.
3. AOL'S RESPONSE
TO OFCOM'S
STRATEGIC REVIEW
OF TELECOMMUNICATIONS
(PHASE ONE)
3.1 Structural Separation of BT: While there
has been a case made by some that structural separation of BT
would be the best solution to achieve a level playing field for
all retail telecoms providers, at this stage it is unlikely that
there is the time, resource and willpower to make this solution
work. In the current dynamic market, it may be that structural
separation would undermine market progress for a lengthy period
of time. AOL UK believes that it will be possible to achieve an
appropriate level of competition without structural separation,
but with firm regulation by Ofcom.
3.2 Behavioural oriented regulatory policies
will be required to solve the economic imbalance in various key
telecoms markets. For example, AOL UK was pleased to see that
Ofcom recognized the need to keep a tight rein on LLU and has
dedicated resource in the form of the Telecommunications Adjudicator
to ensure closer regulatory involvement in the process.
3.3 Price and availability of wholesale
services are not the only key consideration: A basic underlying
principle and pre-requisite of an efficient and competitive telecommunications
market is interoperability. The interconnection of networks, irrespective
of protocols and type, will have both regulatory and competition
implications.
3.4 A subset of the interoperability issue
is the processes for provisioning and managing subscribers. In
order for AOL UK to be able to offer competitive and consumer-friendly
services, it requires that BT's processes for provisioning and
migrating consumers are efficient, fairly priced and available
simultaneously—on equitable terms—to all retail competitors.
This would include interoperability on "equivalent"
terms to BT's 21st Century Network.
4. AOL'S RESPONSE
TO OFCOM'S
STRATEGIC REVIEW
OF TELECOMMUNICATIONS
(PHASE TWO)
4.1 The risks of "light touch"
regulation: As outlined earlier, this year will see a key turning
point in the development of the broadband market, with the beginning
in earnest of the process of Local Loop Unbundling (LLU).
4.2 AOL is currently considering a multi-million
pound investment in the UK in LLU and is prepared to take on the
"normal market risk and uncertainty" such an investment
requires, which of course cannot be wholly underwritten by regulation.
4.3 However, Ofcom appears minded to implement
a "light touch" regulatory strategy designed more to
support BT's infrastructure investments than the LLU process.
This would leave AOL and other ISPs open to a much higher level
of risk based on the unpredictability of BT's actions, and the
lack of certainty around the regulatory framework of LLU. This
can only significantly hinder or even derail the LLU process.
4.4 Ofcom's proposal on "equivalence":
There has been a question mark over the equality of treatment
by BT of its retail arm versus that give to other ISPs. AOL supports
the development and implementation of effective remedies to the
continuing problems of inequality under the banner of "equivalence".
4.5 In order for Ofcom's policy on equivalence
to be successful it must mimic the theoretical and logical outcome
of structural separation, where all retail competitors—including
all of BT's retail operations—are treated in identical fashion
with respect to commercial, interconnect and process terms of
business.
4.6 Behavioural remedies: We are encouraged
that Ofcom also considers behavioural remedies appropriate, but
remain concerned that Ofcom does not consider it appropriate to
set out proposals as to how this might be achieved.
4.7 The framework governing the behavioural
changes required of BT must be accompanied by a compliance program,
operational transparency and an independent audit process. It
should be a matter for Ofcom, rather than for BT, to determine
the correct incentives and the best means of achieving equivalence.
Ofcom must be willing and able to get its hands dirty in ensuring
the practice of compliance with the regulatory framework and equivalence,
not just ensuring the perception of compliance.
4.8 Unregulated wholesale broadband undermines
all future initiatives: BT's recent price changes to IPStream
services at the 570 most popular local exchanges was a reminder
to Ofcom that as long as BT can change the dynamics of the whole
broadband market at will, the process of opening up its local
telephone network to competition remains fragile.
4.9 At a time when Communications Providers
are set to invest significant resources in deploying national
services by means of regulated BT Wholesale access solutions (LLU),
the identification and delineation of separate geographic markets
poses serious commercial risks.
5. AOL'S RESPONSE
TO OFCOM'S
CONSULTATION ON
NEXT GENERATION
NETWORKS (BT'S
21 CN)
5.1 BT's 21st Century Network (21CN) proposals:
The roll-out of BT's 21CN is clearly an issue of considerable
importance for the communications industry, for the progress of
broadband and more broadly, the UK economy.
5.2 While we wish to support BT's investment
(and will do so by paying for access to the network, as will every
other service provider), the investment needs to be considered
in the context of investments being made by other players in the
value chain—for example the substantial investment required
to enter the LLU process, or the substantial marketing expenditure
used to promote products which ultimately help build BT's wholesale
business.
5.3 Ofcom cannot opt-out of the 21CN: AOL
does not subscribe to the proposition that Ofcom take a facilitative
role and maintain a watching brief; the issues raised by BT's
deployment of 21 CN are fundamental, and are closely correlated
with Ofcom's statutory "brief". Ofcom must take more
than a competition authority approach to this issue.
5.4 There is no such thing as partial equivalence:
It is not clear how the Ofcom proposal to take a facilitative
role to 21CN marries with the work being done under the Strategic
Telecoms Review on equivalence. For equivalence to work, BT cannot
be able to "ring fence" some parts of its business,
with equivalence only on its choice of network elements.
5.5 Two-speed network: The potential financial
and economic risk to AOL—and others—cannot be overstated,
and Ofcom must seek to ensure that BT's 21 CN program does not
lead to a two-speed network and market environment, with BT alone
deciding how it meets its regulatory obligations, only after considering
its own commercial objectives. BT's regulatory obligations must
be given primacy.
6. CONCLUSION—"HANDS
ON " NOT
"LIGHT TOUCH"
6.1 Absent of a "hands on" approach
by Ofcom to all of these issues, regulatory uncertainty will undermine
ISP's business planning and investment, particularly in respect
of key access solutions like LLU, which are central to the development
of effective broadband competition in the UK.
6.2 For "equivalence" to be successful
Ofcom must be prepared to get its hands dirty; Ofcom's work in
this area is as much about execution as it is about designing
policy.
6.3 Ofcom has taken on a lot of significant
issues—co-ordination is key. In addition to the Strategic
Review, Ofcom are reviewing LLU, Next Generation Networks, and
other areas. Ofcom must take a holistic approach and understand
that "failure" on any one of these areas may spillover
into the other areas and/or hold back the broadband industry.
6.4 Despite being a convergence regulator,
Ofcom's approach to the review suggests a silo mentality to broadband.
The lack of engagement from the content sector in the process
thus far is illustrative of the weakness of adopting a telecom-centric
approach to broadband policy.
6.5 In summary, AOL is keen to see Ofcom
continue with a consultative and open approach to what are key
developments for industry, and to request that Ofcom take a more
active role toward the implementation of these policies.
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