House of Commons - Trade and Industry

Select Committee on Trade and Industry Written Evidence

APPENDIX 15

Memorandum by Wanadoo UK plc

1. Wanadoo is a leading Internet Service Provider (ISP) and part of the France Te«le«com group. With approximately 9.5 million Internet access customers of which approximately 4.4 million are broadband customers, Wanadoo is the largest broadband ISP in Europe. Wanadoo welcomes the opportunity to submit evidence to this Inquiry, focusing on broadband-related issues.

2. This submission covers the following themes:

— Broadband Growth and Competitiveness:

— Broadband Speed and Definition:

— Product Innovation and Convergence:

— Local Loop Unbundling:

— Regulation:

— Role of Government and Ofcom:

BROADBAND GROWTH AND COMPETITIVENESS

3. At the time of the 2003 inquiry, ONS reported that some 16% of UK households had broadband services, although Wanadoo estimates put the figure at 11%. Around one household in five that was Internet-enabled had broadband. This amounted to 2.335 million subscribers as at June 2003. ADSL was available to 71% of households and cable to 45%.

4. Ofcom recently reported 5.122 million broadband subscribers (of which 1.81 million were cable) as at the end of Q3 2004, with a provisional estimate of six million by the end of the year. By September 2004 more than a third of Internet connections were broadband, projected to reach 50% in the first half of this year:

5. We anticipate that some 2.8 million broadband customers will be added during 2005, although this number is perhaps flattered by the current misleading statistical definition of broadband to include anything faster than narrowband (see below).

6. BT announced in December 2004 that 95% of the population was broadband-accessible and forecasted that 99.4% would be reached by this summer. While growth has been encouraging, there is still a significant gap between broadband availability and adoption.

7. In our 2003 submission, we considered the UK's current and projected adoption rate alongside our G7 and European competitors. We assessed that at that time UK household penetration was matched by France, although unbundling there would shortly give it an advantage, and beaten by Germany (24% of Internet-enabled subscribers) and Spain (25%). Jupiter Research projected that UK broadband adoption level would rise to 20% by 2005 and 29% by 2008, compared with France (18/25), Germany (20/31) and Spain (22/31). Jupiter's forecasts placed Austria, Belgium, Denmark, Luxembourg, Netherlands Norway, Spain, Sweden and Switzerland ahead of the UK in 2005 and suggested that by 2008 we would have overtaken only Luxembourg but Germany would have jumped ahead of us. The UK was then in sixth place in the G7 in terms of overall broadband penetration and even the most optimistic forecasts for 2005 placed UK broadband penetration considerably behind Canada, the best performing G7 country (45%). However, we observed that international comparisons can be misleading: for example, the average German and Dutch broadband products offered a speed of 768Kbit/s, in Canada it was 960Kbit/s, 1-2Mbit/s in the US and 12Mbit/s in Japan in comparison with the UK's 2003 average of under 512Kbit/s.

8. At 38%, UK market growth in 2004 exceeded that of France (34%), Germany (17%), the Netherlands (23%), Spain (30%) and Sweden (13%) and was beaten among our European competitors only by Greece, Ireland, Norway, Italy and Luxembourg (European Residential Broadband Forecast, Forrester Research) although this is as much a measure of market maturity as anything else. Jupiter's updated forecasts, however, still suggest that the UK will lag behind, with 27% of households and 48% of Internet households having Broadband in 2005 and 38%/61% in 2008 beating Germany (18/32 2005; 31/51 2008) and Italy (16/37 2005; 25/50 2008) but trailing France (28/60; 37/69) Spain (27/62; 36/71) and the Netherlands (43/65; 56/80). Forrester projects further, to 2010, concluding that by then 42% of UK households will have broadband, ahead of France and Spain (38 each) and Italy (40) but behind Germany (44), Sweden (52) and the Netherlands (54).

9. Both Forrester and Jupiter forecast that cable development across Europe will be constrained by cash shortages, with Jupiter projecting cable's share of UK Broadband households declining from 31% in 2005 to 25% in 2008 and 24% in 2009.

10. Government policy is to achieve the most extensive and competitive broadband market within the G7. In the past—and arguably for good reason—the factors taken into account were focused as much around broadband availability (the ability of a customer to be provisioned on a broadband line) as around broadband penetration (the actual number of broadband subscribers). Given the market is more mature (albeit growing significantly), the focus now should be on broadband penetration and competition at the underlying infrastructure layer. It is timely that the Broadband Stakeholder Group and Analysys are reassessing the criteria for extensiveness and competitiveness.

11. One of the issues limiting the take-up of Internet access is the penetration of PCs or other Internet-enabled devices. As at October 2004, 34% of adults had never used the Internet (Source: ONS). Another impediment to growth of the broadband market is the high connection fee charged by BT for its wholesale broadband products. It currently costs ISPs £50 to connect a customer to ADSL. However, the work involved is less complex than the connection for LLU, which costs approximately a third less.

BROADBAND SPEED AND DEFINITION

12. In 2003, standard broadband—by which we mean the most popular type offered by resellers of BT's wholesale broadband product range—was 512Kbit/s. Now, with wholesale broadband offering speeds up to 2Mbit/s nationwide and 8Mbit/s in metropolitan areas, the average speed is considerably higher than previously stated. Wanadoo's LLU plans involve utilising latest technologies such as ADSL2+, which offers speeds of up to 18Mbit/s to consumers.

13. In our 2003 evidence to the Committee, we highlighted customer confusion as to what is the definition of broadband. Oftel's old definition (used for statistical and statutory market review purposes) was that broadband was anything faster than narrowband (56Kbit/s). We are concerned now as then that consumer expectation, especially when more bandwidth-intensive services are being offered, is unlikely to be met. A more robust definition of broadband is needed—one that will both protect consumers from misleading advertising and further would enable a more accurate comparison with broadband elsewhere in the G7.

PRODUCT INNOVATION AND CONVERGENCE

14. In the past, broadband and other forms of Internet access were fairly simple propositions, concentrating primarily on web-surfing and email communications. In the future, broadband will be at the heart of home entertainment activities. Broadband ISPs will evolve into Broadband Service Operators, offering bundles of "multi-play" products.

15. The Wanadoo LiveBox is an example of a broadband home gateway through which a wide range of products and services—including fast Internet access, voice telephony over IP (VoIP), TV services (movies on demand and broadcast TV) and home security—will soon be offered, followed by full convergence between fixed and mobile telephony. This is shown graphically below:

16. Such a range of innovative products and services requires control of infrastructure and guaranteed quality of service, which is one of the reasons why LLU is important to operators' strategies, in addition to the cost savings which may be gained through ownership of network assets. Such innovations are also bandwidth-intensive, which again is why average broadband speeds are set to rise considerably during 2005.

LOCAL LOOP UNBUNDLING

17. As committed to TISC in 2003, following Ofcom's decision to reduce prices, Wanadoo and at least two other operators announced a significant investment in LLU. We have now started this process.

18. Total investment over the next few years is likely to be in the hundreds of millions of pounds. Without Ofcom's excellent work in this area, this investment would not have happened. However, there is concern that Ofcom's LLU policy will be difficult to implement due to ongoing problems with pricing, products and processes of LLU and related products such as backhaul and that these problems will constrain investment in LLU. There is still no mass-market migration product from wholesale broadband to LLU despite protracted industry negotiations. Backhaul products are still not fit-for-purpose and in addition are too expensive to make LLU a viable option for more rural areas at present.

19. Furthermore, there were fewer than 38,000 unbundled lines in the UK at the end of September 2004. This compares to over 1.6 million unbundled lines in France (as at 1 January 2005), of which over 500,000 were added during Q4 2004. In France, such growth was only achievable with the cooperation of France Te«le«com. BT will need to effect a significant change in operational behaviour for LLU to be as successful in the UK as it is in France.

REGULATION

20. The UK broadband regulatory environment significantly improved during 2004:

— Ofcom reduced the price of shared LLU by approximately 70%. It also established the Office of the Telecoms Adjudicator to resolve LLU product development and process issues.

— Ofcom issued a Statement of Objections against BT for breach of UK and EU competition law in relation to its residential retail broadband pricing strategy. A final decision is expected later this year and may well involve a significant financial penalty as well as subsequent damages claims from those ISPs which have been forced to follow BT's pricing behaviour.

— Ofcom reviewed the regulatory framework for Voice over Broadband (VoB), allowing it to fulfil its potential to constrain BT's dominance in voice telephony markets.

21. Ofcom's strategic review of telecommunications has addressed many of the structural problems which have plagued the telecommunications market since 1984:

— Ofcom acknowledged that regulation has not succeeded in constraining BT's dominance.

— It was critical of the way in which BT has given its downstream operations discriminatory access to its monopoly assets (referred to by Ofcom as "enduring economic bottlenecks").

— The principle of "equality of access" is appropriate given that reliance on competition law investigations has not constrained BT's behaviour in the past.

22. We support Ofcom's principle of promoting competition at the deepest levels of infrastructure where effective and sustainable and of focusing regulation to deliver equality of access beyond those levels. History has shown us that where regulation focuses solely on promoting competition at the service-provider level (and ignoring competition at the infrastructure level), it only deals with the symptoms, not the root cause of persistent dominance and as such, does not lead to effectively competitive markets.

23. However, a number of policy and practical issues remain unresolved, which together call into question whether the environment is conducive to attracting significant investment in LLU. The above successes, while clearly significant, must be read within this wider perspective:

— Despite being served with a Statement of Objections, BT's residential retail broadband pricing remains anti-competitive. Since receiving the Statement of Objections in early September 2004, BT has further reduced the price of its retail broadband product from £19.99 to £17.99 and again to £15.99 for the first three months of subscription. It has seen its cost base increase by (in some cases as much as) quadrupling the bandwidth given to its customers. This is clear evidence that competition law does not act as a constraint on BT's behaviour which, it is submitted, is why the principle of equality of access is required to ensure a level playing field.

— LLU implementation is slow. The market still has the impression of significant reluctance on the part of BT to make LLU a success. While BT senior management are giving signals of support, this is not always met with the same enthusiasm operationally.

— Full LLU prices remain much higher than elsewhere in Europe. It is 35% higher than the expected price in France. While BT has suggested that prices may fall by 8%, this is not enough and is in any event apparently dependent upon Ofcom giving ground on other regulatory issues. A 25% reduction is required to bring the UK in line with the expected price in France.

— The cost of backhaul—the BT product range needed by LLU operators to extend their network reach beyond metropolitan areas—remains high and is a major constraint to the expansion of competition in wholesale and retail broadband markets.

— There is currently no margin stability for investment in LLU. BT can reduce its wholesale broadband prices so as to fundamentally undermine the business cases of LLU operators, risking stranded assets where it would be cheaper to purchase wholesale broadband than to continue using LLU assets. This is not a theoretical problem: BT recently "deaveraged" its wholesale broadband prices, but only in the 561 telephone exchanges likely to be the initial targets for LLU investment. This may delay or even reduce LLU rollout volume because it will be cheaper to take IPStream than LLU in a significant number of exchanges and it will create unnecessary postcode-based price discrimination.

— BT's recent behaviour risks creating a significant digital divide between metropolitan and more rural areas. In addition to higher pricing in rural areas, BT has recently announced to its ISP customers that it will only be offering higher-bandwidth products (such as IPStream Max and ADSL2+) in those 561 metropolitan exchanges where it will be subject to competition from LLU operators.

— BT's 21st Century Network (21CN) project raises significant risks of BT building unreplicable and discriminatory access into its new network infrastructure. While BT seems to have acknowledged this in its response to Phase 2 of Ofcom's strategic review, we are still concerned by the lack of clarity on this issue.

ROLE OF GOVERNMENT AND OFCOM

24. Both Government and Ofcom have a crucial role to play in facilitating this vision of a Broadband Service Operator. The environment in which such companies operate requires them to control the underlying network infrastructure (which can only be achieved through LLU), requires regulatory certainty and protection from abuse of dominance.

25. This is especially true given the considerable investment anticipated by the market in LLU. The primary focus of Government and Ofcom should be to encourage and protect investment in LLU as best method of stimulating effective competition, which is in the benefit not only of the telecommunications sector but also of consumers.

26. Government and Ofcom's duty to protect consumers dovetails with this vision. Effective competition spurs innovation: BT for example is only increasing the bandwidth of its wholesale broadband products in areas where it is subject to competition from LLU operators. By providing protection from anti-competitive activities, Government and Ofcom will be protecting the vision to provide them with next-generation broadband services.

27. We believe that a number of further actions are required to remove the remaining barriers to achieving the UK's competitive potential and to provision of next generation broadband services to as many customers as possible:

— Margin protection should be afforded to LLU operators to ensure that BT cannot undermine their business plans. For areas where LLU is viable (which is larger than the 561 exchanges currently identified by BT), there should be a fixed minimum margin between LLU and wholesale broadband. For areas where LLU is not viable (and where wholesale broadband is therefore the enduring economic bottleneck), wholesale broadband pricing should be cost-orientated (also known as "cost-plus").

— The definition of broadband should be changed to one which recognises the shift towards higher speeds and one which will not disappoint or mislead our customers.

— A more robust application of competition law is needed against dominant companies which repeatedly engage in anti-competitive activities.

— BT should be required to reduce the connection fee for wholesale broadband, where it is found to be making excessive profits.

— It may also be appropriate for Government and Ofcom to set a target of unbundled lines and set strict contractual penalties against BT should they fail to deliver this.