APPENDIX 10
Memorandum by ntl
KEY RECOMMENDATIONS
1. Ofcom must use the opportunity created
by the Strategic Review to ensure that the UK telecommunications
sector is amongst the most attractive places in the world to invest.
2. There isn't a regulatory regime yet designed
that provides the same incentives to innovate as a competitive
market. Therefore Ofcom should not seek to use regulation to mimic
competition; instead it must create an environment conducive to
investment, especially in infrastructure.
3. For infrastructure competition to develop,
investors require certainty, and therefore Ofcom must adopt a
credible strategy that can be followed consistently for the foreseeable
future.
4. Equivalence is a good solution for areas
where there is no prospect of true infrastructure competition.
However, if it is applied too liberally, it will damage the prospect
of developing sustainable infrastructure competition.
5. Ofcom must not start to regulate on a
geographic basis without first understanding the potential negative
impact on the urban/rural digital divide.
NTL
6. Over the past 15 years ntl has built
the largest privately funded fixed access network in the UK. This
now passes 8.25 million premises, or roughly one third of the
UK population. In addition, ntl has built a world class high capacity
core network to connect the local franchise areas. So far, in
excess of £9 billion has been invested to create this infrastructure.
The network allows ntl to deliver a full complement of converged
communications services, ranging from interactive digital TV and
high quality telephony, to high speed data services for both residential
and business consumers.
7. ntl is also very well placed to deliver
the communications services of tomorrow. A key strategic objective
in building the network was to take optical fibre close to the
customer to enable the delivery of multi-channel interactive television.
ntl is now poised to exploit this network advantage and deliver
a range of innovative new services. We are currently investigating
the most efficient upgrade path to offer much higher bandwidth
services. The proximity of optical fibre to our customers (over
90% are within 1,000 metres) means that advanced services can
be offered without the need for expensive and disruptive civil
engineering work.
8. ntl believe this will prove to be a repeat
of the cable industry's success during the initial roll-out of
broadband services. Perhaps more than anything else, this episode
has demonstrated the benefits of, and therefore the continued
need for, competition between alternative and independent access
networks.
9. The cable industry has used its network
advantage to drive broadband growth:
— ntl did not need to wait for regulation
to force BT to provide an appropriate wholesale product, and was
therefore able to meet customer demands quickly.
— Our entry-level service set the trend
for sub-£20 broadband that has helped deliver unprecedented
levels of growth in the UK market.
— In ntl areas the proportion of homes
subscribing to broadband remains significantly higher than the
national average.
— ntl remains the largest individual
broadband service provider in the UK with almost 1.3 million customers.
THE STRATEGIC
REVIEW OF
TELECOMMUNICATIONS
10. Ofcom's Strategic Review of Telecommunications
presents the best opportunity to ensure that UK consumers and
the economy as a whole benefit from the most advanced and efficient
telecoms industry in the world. This is a review of regulatory
strategy—a forward looking assessment of what can be achieved
in the future. In this sense Ofcom are faced with a tough investment
decision: spend time and effort now in order to achieve the greatest
rewards in the future; or, focus resources to ensure delivery
of immediate benefits. ntl hope that Ofcom have the courage to
invest in a better future.
11. Since 1984, the liberalisation process
overseen by Oftel has brought significant benefits to UK consumers.
We currently enjoy amongst the lowest call charges in the world;
the broadband market is now growing at one of the fastest rates
in the world; the mobile market continues to offer a wide choice
of competitively priced services; and businesses face a wide selection
of products from a variety of suppliers.
12. On one level, this is a time to bask
in the light of the success of telecommunications regulation.
But herein lies the problem: far too much of this success has
been driven by detailed regulatory interventions attempting to
mimic market forces. In fixed line telecommunications, we are
still a long way from having well-functioning, self-sustaining,
effectively competitive markets. The market structure remains
heavily concentrated around BT Group, and without continued regulatory
support many competitors would soon disappear.
13. We believe that Ofcom must take this
opportunity to renew the liberalisation effort—to develop
a new market structure that supports effective and truly self-sustaining
competition wherever this is possible. There isn't a regulatory
regime yet designed that provides the same incentives to innovate
as a fully competitive market. Once competition is self-sustaining,
the regulatory structures that currently permeate the entire industry,
supporting many firms and controlling market processes, can be
removed safely.
14. To ensure that the telecoms sector delivers
the greatest public value Ofcom must create an environment conducive
to investment. Ofcom should not use regulation to mimic the effects
of competition by continually forcing lower prices and requiring
BT to develop new wholesale products. Instead Ofcom should use
regulation to encourage investment in competing infrastructure,
and only where such investments are not viable should Ofcom require
equal access to BT's network.
15. Increasing the bandwidth capability
of the last mile will remove a binding constraint on service innovation.
It is for this reason that Ofcom acknowledge the greatest need
for investment lies in access networks. BT are proposing to upgrade
their access infrastructure as part of their 21st Century Network
plans. However, regardless of the technology employed, physical
characteristics constrain the capability of the BT network. The
bandwidth potential of the local loop is constrained by the length
of copper. The shorter the copper, the higher the bandwidth.
16. This is where the ntl infrastructure
delivers real public value; the ntl network was built for the
future. In contrast to BT, ntl's significant upfront investment
means that we already have optical fibre very close to the customer.
Over 90% of the premises passed by our network are less than 1km
from fibre. Furthermore, the short run from street cabinet to
the customer site consists of both twisted copper and coaxial
cable. This gives ntl an unrivalled choice of upgrade path.
17. For example, with relatively small additional
investment ntl could deliver broadband at speeds of up to 28Mbps
using the twisted copper cables (that is 56 times faster than
BT's original 1/2Mbs broadband product). However, coaxial cable
has a far greater inherent capability to deliver high bandwidth
services. At present, we provide approximately 3,000Mbps of bandwidth
into homes, most of which is used for broadcast and on-demand
TV. We are currently evaluating the deployment of new technology
which would enable more efficient use of the spectrum available
within our network, and allow up to 100Mbps of shared bandwidth
to be used for broadband whilst still maintaining the broadcast
and on-demand TV.
18. These upgrades, and others to enable
Gigabit Ethernet services for businesses, could all be delivered
to one third of the population in the very near future. However,
ntl is a commercially driven business operating in a very competitive
environment. We compete not just for new customers, but for access
to funds to finance the investment. It is therefore imperative
that we are able to earn a fair return on both existing and future
investments. Without this, we simply will not be able to continue
investing in the development of the network.
19. Any move by Ofcom to reduce the value
of the existing access infrastructure will almost certainly delay
the introduction of the sort of advanced communications services
in the UK that cable is capable of offering. This will clearly
have a detrimental impact on consumers, and on the prospects for
productivity and economic growth in the UK. Ofcom must use the
opportunity created by the Strategic Review to ensure that the
UK telecommunications sector is amongst the most attractive places
in the world to invest.
KEY PRINCIPLES
20. The ntl response to Phase 2 of the Strategic
Review focussed on how Ofcom can create an environment conducive
to investment. Telecommunications is both capital intensive and
subject to unprecedented technological change. This combination
creates a very challenging environment for investment. Physical
assets have traditionally been depreciated over a very long period
of time, but the uncertainty generated by constant advances in
technology effectively reduces the expected economic life of assets.
It is therefore imperative that uncertainty from other sources
such as regulation is kept to a minimum. This will be achieved
by having a clear regulatory strategy which is implemented consistently.
21. ntl made three proposals which we believe
Ofcom should follow to ensure efficient investment in infrastructure:
(a) Ensure that regulated prices are set
to encourage the development of competition. Specifically, this
means that pricing must not be structured in a way that devalues
existing investment in infrastructure that competes with BT. Also,
the pricing should allow all operators to make a reasonable rate
of return. This is necessary to create an efficient and sustainable
process whereby existing business funds future investment.
(b) The adopted regulatory strategy must
be credible, and remain fixed for at least as long as the payback
period of the investments it is trying to encourage. That is Ofcom
must adopt a set of policies that can be implemented consistently
for the duration of the payback period.
(c) In order to give all stakeholders a better
understanding of the regulatory objectives, Ofcom should provide
a clear description of the market structure they expect will support
sustainable and effective competition. Essentially, this is a
description of the market structure that Ofcom is seeking to encourage
through its regulatory interventions.
22. The high level regulatory principles
proposed by Ofcom represent a considerable step forward. However,
ntl believe that the current strategy is likely to devalue existing
investment in access networks, and reduce the rate of return on
current and future investment. ntl are also concerned that Ofcom
will not be able to apply the strategy consistently, since practical
considerations will force subjective interpretation of the regulatory
principles that will vary from case to case.
23. This last criticism is extremely important.
In each instance where regulatory interventions do not follow
documented policy the shift may be readily justified. However,
any such movement detracts from the credibility of the original
strategy and policy. This makes it more difficult for stakeholders
to predict the nature of specific regulatory interventions, ie
regulatory uncertainty increases. As a consequence, investment
suffers.
EQUIVALENCE
24. Ofcom's strategy is focussed on achieving
"real equality of access" to the BT network. Very briefly,
equivalence or equality of access raises two significant questions.
First, to which parts of the BT network should competitors get
equal access? Secondly, how are Ofcom going to enforce equivalence?
25. In terms of the first question, Ofcom's
regulatory principles suggest that equivalence should be applied
in areas where market conditions imply effective and sustainable
competition is not possible. These areas are referred to as enduring
economic bottlenecks. Unfortunately, Ofcom do not suggest a method
of analysis to find these enduring economic bottlenecks. A possible
reason for this omission is that the problem is simply too complex
to solve accurately.
26. Understanding where competition will
and will not be possible requires Ofcom to second guess industry
investment decisions. They need to understand where business plans
to enter a particular area of the market will be viable. Specifically,
Ofcom must decide where market entry is not possible. ntl do not
believe that it is appropriate for Ofcom to make such decisions.
However, if they must be made, the strong negative impact on investment
incentives should be taken into account: if Ofcom determine that
a particular area is not suited to competition, and will therefore
mandate that BT offer cheap access to their network, it is extremely
unlikely that an investor will risk capital to develop an alternative
network.
27. Since it is inherently difficult to
establish the precise scope of enduring economic bottlenecks,
we have recommended that Ofcom publish the criteria by which enduring
economic bottlenecks are to be determined. Also, ntl believe that
equivalence should only be applied to a very restricted set of
assets where cost-based access to the BT network will not damage
the business case for investment in competing infrastructure.
A more stringent application of equivalence is likely to contravene
the EU's Access and Interconnection Directive, which states that:
"The imposition by national regulatory authorities
of mandated access that increases competition in the short-term
should not reduce incentives for competitors to invest in alternative
facilities that will secure competition in the long-term."[8]
28. As for the second question, mandating
equivalence would be extremely difficult and time-consuming. Existing
legal powers only allow equivalence to be enforced in piecemeal
fashion, through individual market reviews and subsequent product
specific remedies. Each step of the process is highly complex
and relatively controversial, and therefore more likely to be
subject to appeal. More fundamentally, true equivalence requires
behavioural change. The well documented asymmetry of information
between regulated and regulator will mean that, even if the powers
to enforce equivalence did exist, the regulator is unlikely to
know what to ask for.
29. In conclusion, issues over definition
mean that a strict interpretation of the equivalence is impractical
to implement. Furthermore, equivalence requires behavioural and
organisational change from BT, and can therefore only be implemented
as a negotiated settlement between regulator and regulated. This
is the "regulatory contract" that Ofcom and BT have
referred to. Confidentiality concerns mean this negotiation cannot
be conducted in public. Consequently, the transparency of the
overall strategy is reduced.
30. As a prescriptive strategy for future
interventions, equivalence leaves too much room for interpretation
and therefore cannot give industry the certainty needed to make
long term investment decisions. Equivalence is extremely useful
in analysing and understanding market dynamics. However, forcing
BT to offer true equality of access to its network will not always
be the most appropriate regulatory intervention.
EQUIVALENCE AND
THE URBAN/RURAL
DIGITAL DIVIDE
31. The strict application of equivalence
implies the need for geographically varying regulatory remedies.
As such, the accommodation of geographically varying remedies
is included as one of Ofcom's core principles to guide regulation.
ntl believe that this is a very serious issue with the potential
to destabilise market development and to negate the achievement
of many benefits that competition has brought to consumers and
citizens.
32. Our greatest concern is that the policy
could actively encourage a divergence of competitive conditions
between urban and rural areas. Regulation that reacts to market
developments will see investment in densely populated urban areas
where economies of scale are greatest. Consumers in these areas
are likely to benefit from lower prices and a better range of
products than sparsely populated rural regions. Ofcom have a duty
to work in the interests of all UK consumers, and therefore should
not just accept that certain areas are less attractive for private
investment.
33. It is possible that regulation which
differs between geographic areas could seek to reduce the divergence
in competitive conditions and therefore attempt to reduce the
competitive and digital divide. However, Ofcom do not discuss
such policy issues in the Strategic Review. Ofcom should not proceed
to vary regulation according to the competitive conditions in
different geographic areas without a comprehensive and rigorous
review of the implications of doing so. Since this analysis has
not yet been undertaken, it is inappropriate for Ofcom to adopt
geographic variation as a guiding principle for future regulatory
interventions.
CONCLUSIONS
34. Achieving real equality of access to
the BT network, even through local loop unbundling, can only take
the UK so far. Without doubt, the successful implementation of
local loop unbundling will deliver benefits to consumers in the
short term. However, there is a significant risk that concentrating
on the BT network to the exclusion of encouraging investment in
alternative infrastructure will actually damage the long term
prospects for competition. It is also likely to hinder the development
of next generation access network capabilities, and therefore
delay the provision of advanced communications services to UK
consumers.
35. ntl's understanding of the current regulatory
process is that Ofcom is negotiating a settlement with BT. If
BT promises to improve its wholesale products and behaviour towards
competitors to a greater degree than Ofcom can actually force
through existing legislation, Ofcom will accelerate the withdrawal
of regulation in retail and some wholesale markets. However, if
BT does not cooperate with these proposals, Ofcom is making several
threats. First, there is the possibility of a reference to the
Competition Commission, but this will take several years to reach
a conclusion, and even then there is no guarantee that the findings
will concern BT. More importantly, Ofcom are conducting two consultations
that will dictate the wholesale price that BT is able to charge
for access to its network. One relates to the valuation of the
BT access network, and the other concerns the rate of return that
BT should be allowed to earn on its access network assets.
36. This approach may[9]
have been appropriate if the BT access network were a monopoly
asset. In this case, any punitive measures applied to this set
of monopoly assets would only affect BT. However, the BT access
network does not represent a monopoly. BT faces competition at
the access level in varying degrees from cable and mobile operators.
Cable companies have invested heavily over the last 15 years building
local access networks which now cover around half the population.
These networks consist of short runs of both copper and coaxial
cable, supported by a deep deployment of optical fibre. Cable
companies provide in excess of 4.6 million access lines for voice
services representing a market share just under 14%; and over
1.9 million broadband connections representing a market share
of approximately 36%.
37. Competition may not yet be fully effective,
and significant further roll-out of primary infrastructure may
be unlikely in the near future, but this does not imply that the
BT access network is a monopoly. Consequently, it is highly inappropriate
to consider sanctions to persuade BT to behave in a particular
manner that will also affect other owners of access infrastructure.
38. Alternative infrastructure providers
need to earn a return on the significant investment that has already
been made. This provides the most efficient source of funding
for the maintenance and upgrade of the existing infrastructure.
Perhaps more importantly, it sends signals to attract investors
worldwide to the UK telecommunications sector.
39. Although there is unlikely to be significant
new build of alternative access network in the near future, some
will take place. This will occur alongside substantial investment
to maintain and upgrade the existing infrastructure. At the very
least, Ofcom should explicitly acknowledge the effect that the
regulatory treatment of BT's copper network will have on the incentives
to invest by operators other than BT.
8 Access Directive, 2002/19/EC. Back
9
Even in this hypothetical situation, reducing the returns BT is
allowed to make is likely to store up trouble for the future.
It would reduce BT's incentives to invest in maintaining and upgrading
their infrastructure. The UK should learn from previous failures
to invest sufficiently in national infrastructure, leading to
poor quality of service, and ultimately to increases in retail
pricing for consumers. Perhaps the most pertinent example is the
rail industry. Back
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