Examination of Witnesses (Questions 40-59)
1 MARCH 2005
Mr Francesco Caio, Mr Ian El-Mokadem, and Mr David
Rowe
Q40 Chairman: What about regional variations
in the regulatory regime; is there a danger that it acts as a
disincentive in areas which are currently dependent on BT's ADSL?
Mr Rowe: If I could just answer
that one. From an UKCTA perspective then clearly for people like
Centrica it is important to have a national pricing environment
for their business plan and for their marketing purposes. From
a local loop operator's perspective, BT are using the argument,
if I am right, that in the urban areas, where perhaps returns
are better, those are the areas where they can lower prices differentially
to rural areas. If one turns that argument on its head and says
the reason why they are able to offer lower prices in the urban
areas is because they are making such good money in these areas
and they are the operator who holds all the cards, as we have
heard before, it is almost, and I am not going to say universal
provision, but it is something where you would expect their responsibilities
to be in ensuring that they use some of that profit from their
profitable exchanges to effectively subsidise the rural exchanges
and not the other way round. For us that is important because
we as a fledgling operator who are moving into a new area need
to reassure our investors that they are going to get a return
from the investment in the local loop. Where we can see that BT
see us as a threat then clearly that is going to alter the business
case if BT are offering differential prices in exchanges where
we are being successful. I do come back to the point, agreeing
with Francesco, that real, sustainable, long-term competitive
positioning in the telecoms industry relies on end-to-end infrastructure
competition of which the local loop is arguably the best thing
we have ever seen in that regard.
Mr Caio: I would refer to specific
examples of what we have seen in the market over the last few
months. It is not by coincidence that until this competition in
the local loop arrived that the consumers in this country and
businesses in this country have been at a disadvantage when it
comes to speed of connection compared to other European markets.
Only recently—and I am talking based on direct experience—through
the launch of a four megabit product in the area of consumers,
have we seen BT reacting to just one flavour of 500K, which is
a very low speed, and launching a new competition and you are
observing now a fairly rapid upgrade of speed available from BT.
This is one of the clearest examples of proof we can point to
in the area of infrastructure-based competition. It is of concern
that once we have committed to a roll-out of the network we see
those exchanges, as David was saying, where we are making some
inroads being targeted by BT to have differential prices on the
wholesale, where they could scupper the plan. I think there is
a perception in this country probably more than others that the
internet industry has been composed for years of whingeing people
who really do not know what they are talking about and therefore
there has been an over-reliance on regulators to keep the incumbent
honest. I think we are observing a shift in this. We are observing
a number of players, for sure Cable & Wireless, which are
now committed to implementing and delivering a roll-out that has
never been seen before in this country when it comes to the focus
on exchanges for both businesses and consumers. We have to be
cognisant of the fact that we are not in the charity business.
We are acting under the strong assumption that infrastructure-based
competition is the key driver for the quality of life for citizens
and competitiveness for businesses, and under that umbrella we
need to deliver returns to shareholders. So I think this matter
goes well beyond the Ofcom review. I think it is at the heart
of policy-making in terms of what kind of industry in the fixed
telecommunications sector this country is willing to go for. I
think clarity is of the essence because of what David was saying.
This industry has been destroying value for too long, not necessarily
because of the incompetence of the people running the net. It
is time for us as an industry—and we are very grateful for
this opportunity to speak to you, Chairman, and to the Committee—and
for the leadership in this country to come to terms with what
kind of competitive model would citizens and businesses benefit
from in such a central element of the competitive landscape as
broadband.
Q41 Mr Clapham: You heard Ofcom say that
their preferred strategy is equivalence and I note from your submission
that you support the principle of equivalence. Is that a reflection
of all your members' views?
Mr El-Mokadem: Yes, absolutely.
A fundamental principle of our association is we would not have
responded as UKCTA were there any material disagreement amongst
our members as to what we put in that document. So absolutely.
We are all signed up to equivalence being a very good basis for
a regulatory settlement. I think there is a strong preference
amongst the flavours of equivalence in the document for input
equivalence because that is the easiest to police and to ensure
in the long term. There was some discussion earlier about Ofcom's
powers and ability to intervene and pursue complaints, et cetera.
We firmly believe that input equivalence is the one least likely
to result in endless disputes into the future because basically
with input equivalence it is very clear whether we are all buying
the same thing off BT or not. It is black and white. Without input
equivalence there is a lot more of a requirement for measurement
and a lot more judgment involved in the other flavours suggested
in the Ofcom review. In the long term that is a recipe for more
regulatory intervention and more disagreement. The closer and
quicker we can get to input equivalence, the better and the more
transparent this industry will be.
Q42 Mr Clapham: Given the discussions
that you have had with your members, could you say what you feel
the equivalence principle should cover?
Mr Caio: It should cover everything
because you are dealing with an incumbent. Let me step back. Sometimes
I feel that this country loves the debate between us and BT. It
is almost like you are there as intrigued spectators to a pretty
interesting fight. The purpose of us is not that we wake up in
the morning and say, "How can we hurt BT today?" it
is really how can we develop a sustainable position in the industry
to deliver value to the users? One needs to view the debate on
equivalence in this context. Equivalence needs to cover everything,
particularly services that rely on the famous or infamous last
mile where through the years BT, as every other incumbent in this
world, has managed to build a natural monopoly position. As my
colleagues were saying before, it needs to be about input. It
needs to be very practical. One of the concerns of the industry,
and Cable & Wireless in particular, is that there a fair degree
of convergence when we talk about principles but now it is time
to act. What does equivalence mean in specific instances? For
instance, line rental is not a service that today is fit for purpose
when it comes to equivalence. Ian can elaborate on his direct
experience in WLR, as can we. There are 900 people per week deciding
to switch because it is such a complicated process to forego the
monthly line rental to BT.
Mr El-Mokadem: We shall add to
that. Wholesale Line Rental—which just to clarify for Committee
members is the ability basically for you to choose to have to
pay me for your line as opposed to BT—is a very, very basic
building block of switching. Comparisons in other industries like
gas and electricity would be that today you do not switch from
British Gas and still end up paying us for the pipe or wire to
your house. Line rental is the telecoms equivalent of that and
certainly in the five years Centrica has been in this space we
have been lobbying very hard just to have the ability for you
to be able to choose whether I bill you for your line or you continue
with that relationship with BT. We were very pleased to see finally
that Ofcom said in the last instalment of the review that the
product that has been delivered by BT Wholesale is not fit for
purpose. I am sure Committee members will have been lobbied quite
hard by BT over the last 12 months who were telling you that it
actually was. The reality is I run a business where we have got
1.4 million fixed customers, and I can tell you very clearly that
a large majority of those customers would love for me to be able
to bill them for their line rather than have a bill from BT and
a bill from us but the reality is that that product is not scaleable,
the processes are very flaky and if I were to try and transfer
thousands of customers per week through that product it would
be very labour intensive, very costly to operate, and probably
result in far too many complaints. We have been working very hard
to make progress on that very, very simple building block of competition
and have been very frustrated in that process.
Mr Rowe: It does beg the question
that someone asked earlier; are BT playing ball? I think the bottom
line there is they are in it to serve their shareholders and their
bonuses depend on certain profit targets and taking away their
ability to make those profits hurts them personally, it is less
money in their pocket from their bonuses. So it is counter-intuitive.
No-one in this room would behave like that. It is not to do with
being good or being bad; it just is. The equivalence issue therefore
goes to the heart of this because it hurts BT and it has to be
done with a big stick, not lots of meetings dragged out. They
have all the cards; remember that. If you really want to create
genuine competition which will in the long term benefit consumers
then remember what it was like before competition and how much
it cost to phone France and America and what the service levels
were like. It was not just because BT wanted to be nice suddenly.
It was because competition forced them into it. Unless we get
equivalence properly done and also a benign environment for loop
operators to invest in, then it is not going to change.
Q43 Mr Clapham: Are you confident that
Ofcom can actually achieve equivalence in the market?
Mr El-Mokadem: I think in our
view Ofcom has more than enough powers to impose or to reach a
regulatory settlement that would work. With the combination of
the Enterprise Act, the Communications Act and the Competition
Act there is more than enough legal basis for them to operate.
I guess my own experience is I have dealt with most regulators
beginning with `Of . . . ' over the last eight years from Ofgas
through to Ofgem in energy and then Oftel through to Ofcom in
telecoms and I think a key part of this is the demeanour of the
regulator, that the regulator has to be strategic from the outset.
They must say, "What are the macro issues which I must sort
out here?" They need to be forceful, clear with all parties
and then they have more than enough powers sitting behind them
to execute. If I look back to the Oftel days, the problem with
Oftel was there was no strategic context for decision-making.
None of us really quite knew what Oftel was trying to achieve
at the end of the day and Oftel was typified by endless complaints
and endless investigations into this and that but without a context
in which to make proper, robust decisions in terms of where are
we trying to get to, what are the key building blocks, how do
we get there. The key thing Ofcom needs to use this review to
do is to establish that framework so that everybody understands
and so there is certainty about investment, and then they can
use their powers very successfully to execute against that. I
would say that the key to this being successful moving forward
is the closer you can get to input equivalence, the less need
there will be for endless investigations and dispute resolution
into the future, so it is worth taking the pain now to see what
we have seen in other markets which is a gradual relaxation of
regulation over time once the structure is right.
Mr Caio: And I think it would
be useful to bear in mind the practical elements of what we are
talking about. At the moment we are offering consumers the opportunity
to have full local loop unbundling and to take telephone lines,
telephone services, voice services and fast internet on the same
line. In order for us to get that opportunity to offer this innovation
to consumers we need to get into what the industry recognises
as address matching. We need to specify an 11-number code that
is associated with a customer account and we need to spell the
address as in BT's database. If the postcode or if the database
is wrong they do not recognise that. In any other country you
give the number and the name of the consumer and that is enough.
I think my concern and our concern is that we run the risk of
focusing on principles without looking at the practicality. Equivalence
means having the same data that is available in BT Retail to everybody
else who is willing to put money into the ground to develop innovation.
Q44 Mr Evans: Going back to your relationship
with British Telecom, while Francesco may not get out of bed with
the intention of wanting to kick BT every morning the fact is
you want to compete with them and you want to get more of their
business, do you not?
Mr Caio: I do not think it is
their business; it is the consumer business and it is the company
business.
Q45 Mr Evans: But you want more of it,
do you not?
Mr Caio: Sure I do. I want more
of that. I want to offer something and earn customers through
innovation, quality of service and value for money.
Q46 Mr Evans: They are not going to give
it to you out of the goodness of their hearts so the only way
it is going to happen is through the regulation of Ofcom, which
basically gets to the heart of it. I think you were all listening
to the Ofcom representations here and you heard what they had
to say. Are you happy with Ofcom?
Mr El-Mokadem: I think so far
so good. Frankly, it has been a breath of fresh air compared to
Oftel which I think had run its course. There is a good team in
Ofcom. I think they started the process, as we said earlier, very
intelligently. They are asking the right questions. They have
got a good set of frameworks in the Phase II document for the
basis for a solution but what we are going to see over the next
few months is a real test of their mettle. Personally—and
this is me speaking rather than UKCTA—I have a slight concern
that we are in the realms of it is time for a bit of a fudge to
get this thing through. I would prefer personally to see this
review going on for a few more weeks and achieving the clarity
that input equivalence provides the basis for. There is a lot
of work to do. In terms of the proposals that they put forward,
whilst there is no doubt it is a step in the right direction—and
to be fair to Ofcom they have brought BT to the table in that
respect—there is an awful lot of detail missing, and we
may go on to talk about some specific areas of that. I think the
key thing in the response from BT was that whilst there were some
apparent concessions around things like an access services division
and structural remedies internally, a big chunk of their document
was dedicated to denying the need for that change and denying
a lot of the Ofcom comments about BT's behaviour in the market
which we would all recognise very clearly as being what it is
like to deal with them on a day-to-day basis.
Q47 Mr Evans: It goes back to David's
point, does it not, that because you want to take some of their
business they are not going to be happy about it, are they? Are
you getting a much better relationship with British Telecom than
you have ever had and do you see any of the behavioural and character
change that was talked about by Stephen earlier on?
Mr Rowe: If I could just answer
your original question first which was about Ofcom. I agree wholeheartedly
with what has been said before, but the proof is in the pudding.
There are two big issues for me. One is equivalence, and the devil
is in the detail, and the other is we need to be protective of
the local loop because BT really do not like that. That goes right
to the heart of their future. So you need to protect it now in
some way or other to help it thrive to increase the investment
case for it.
Q48 Mr Evans: Are you seeing a sea change
in BT's relationship with you?
Mr Rowe: To be fair, most people
in BT are ordinary people who get up, go to work, come home, and
we have a reasonable relationship with them because we are quite
civil to them. The people at the top are scheming; that is what
they are paid for.
Q49 Mr Evans: I do not want you to beat
about the bush! What do you really think about the people at the
top? Really? You just think they have got a strategy which is
they send their nice people out to chat to you but there is something
different going on upstairs?
Mr Rowe: If I were a shareholder
of BT and I wanted to get the maximum dividend, I would hope they
would do whatever is necessary to get the maximum profit that
they can.
Mr El-Mokadem: To put it another
way, if we look at a specific example, I should be one of BT Wholesale's
biggest customers. I have been shouting for that product for four
years. I could sell a lot of it. I have had no material senior
level engagement with BT in terms of progressing Wholesale Line
Rental for months, in fact probably really for years, and even
after Ofcom put in its document before Christmas that the thing
was clearly not fit for purpose (because before that BT had been
saying it was) there has still been no real serious engagement
on that issue. If BT had really made a mind-set change that was
going to take on board the spirit of some of the comments in Ofcom's
proposals, then I would not hesitate to say that a few of us have
had a bit more engagement at a senior level on some of these real,
fundamental issues. Speaking personally, I am still waiting for
the call.
Q50 Mr Evans: So you think it is that
nice Ben Verwaayen and his mates at the very top who have a different
strategy completely and you think that they are pulling the wool
over Ofcom's eyes and you are wanting Ofcom to take further harsher
action against them?
Mr Caio: May I bring your attention
to some facts because there is always the danger of double guessing
what people in closed rooms think about it. At the moment I am
observing these two interesting points. When we have to buy access
to a local loop line from BT to then offer full local loop unbundling
to our customer, we need to pay £168. When we have to buy
that same capacity and capability in the context of Wholesale
Line Rental, the cost is £91.99. From an engineering standpoint
I have very great difficulty in understanding what the difference
is and I think it is time for the industry to have BT addressing
these issues in an open forum and decide which is the right price,
and I hope the conclusion is not £168!
Mr Rowe: This comes to the equivalence
of inputs that we were talking about.
Q51 Chairman: Are you happy with the
suggestions on the structural changes that are going to take place?
This possibility of the business being split up into three elements?
Mr El-Mokadem: I was very interested
earlier in the comments about British Gas. I think there are some
very relevant parallels there. Let me try and answer the question
in this way. We were pleased to see the proposal for an access
services division in the BT document. That is a significant shift
in terms of concessions that BT put on the table. However, there
is an awful lot of detail missing so far in those proposals. We
do not see so far in what is contained in those proposals the
very clear, transparent, stand-alone entity within BT that is
free to serve all customers including BT Retail on an independent
arms' length basis. There were a lot of words like `monitor' and
`observe' and things like that but very little feeling that this
was a true commercial arms' length entity. If I look to our own
history, obviously British Gas has been through this whole separation
debate and the conversation earlier was absolutely right, when
done properly the Chinese walls become so high that arguably there
is a case for separation because there is no benefit ultimately
in the integrated model. We have as an industry group shied away
from calling for separation because if we can get within BT a
properly ring-fenced transparent entity then that will serve our
purposes. It is then a matter of personal opinion as to whether
the BT board would ultimately see divestment or demerger at that
point as being the right solution, and that is really for them.
The key thing is that the access services division so far is a
long way off that clearly transparent proposal with high Chinese
walls that we would like to see and there are also some things
missing from it. Some of the key products like Wholesale Line
Rental and carrier pre-selection, which are in the current proposals
on the table, are not going to fall within the remit of the access
services decision, they are still going to be in BT Wholesale.
Frankly, from my perspective I do not think that is going to change.
I have been trying to get those products out of BT Wholesale for
five years with very little success so I am not encouraged by
the other promise in the document which is that there will be
an equality of access board that will somehow sort all that out.
Q52 Chairman: You must be taking this
to Ofcom; what do they say?
Mr El-Mokadem: This is exactly
where we are at. We have obviously pushed back since we saw the
BT proposals and UKCTA has been heavily engaged in conversation
with Ofcom. One of the key areas we are pushing for is much greater
transparency around the access services division. I am a bit concerned
that having put it on at the table they say, "Whoopee, BT,
thank you very much," and actually the devil, as everybody
keeps saying here, is in the detail and so far the detail around
that organisation is very lacking.
Mr Rowe: I think it is also important
if the access services division does come about that the management
of it is clearly separate and is not just BT management on that
board. It must be industry management with a remit on that board
for it to have a chance to work.
Q53 Mr Clapham: The review document talks
of the need to promote investment. Are you satisfied that its
proposals will be fulfilled?
Mr Rowe: I think it depends on
what comes out of this. Clearly the bulk of the investment, as
we heard earlier, in this country is being focused around local
loop investment, both at Cable & Wireless and at Easynet,
and there are one or two other players involved as well. This
comes back to my point that the local loop needs to be encouraged.
The review does not necessarily focus all of its efforts in that
area by any means, but I know that Ofcom is aware of that and
their view, broadly, is in line with that too.
Q54 Mr Clapham: I hear what you say about
the investment in local loop unbundling, but is there a possibility
that it may cause a distraction and therefore move the focus away
from the need for an improved network to allow faster speeds?
Mr Rowe: Not really. If you look
at the stuff that both Cable & Wireless and Easynet are putting
in now we already have eight meg. We are waiting for the final
ratification of ADSL 2 + to offer 18meg on our network. Our network
is already ready for that. It is not a question of holding back
the investment so that BT can get there. We are there already.
What we need to do is to get a better environment so that we can
roll-out to a wider area and focus on the consumer as well as
the business from our perspective. It is a bit of a myth that
BT needs to recycle all this money to get the next generation.
If you let free competition go, we will out-innovate BT every
single day of the year.
Q55 Mr Clapham: Are you confident that
that environment is evolving, shall we say?
Mr Rowe: It is nascent.
Q56 Mr Clapham: It is nascent?
Mr Rowe: Yes.
Mr El-Mokadem: I think it is also
right to have sight of other forms of investment in this industry.
It is not all about kit. There is a real tendency to think about
telecoms and to think about exchanges and wires. Obviously that
is at the heart of it but if I look at my business we do not invest
in that stuff. We choose to partner with players like these guys
to deliver that. That is their expertise. What we bring is an
insight into managing mass market propositions, sales, marketing,
call centres, customer service. There is a lot of innovation and
a lot of investment—in our case hundreds of millions of
pounds—that have gone into that portion of the value chain.
I think it is very important that the Ofcom solution encourages
investment at the customer end of this because I think that is
the way in which you keep the technologists on it because at the
end of the day if it does not have an application that the customer
is willing to buy that is where a lot of telecoms models have
fallen down in the past. It is important that we see the embryonic
investment at that end of the value chain which many UKCTA members
are bringing: people like us, Carphone Warehouse and Caldwell
Communications. That is a very important part of this jigsaw and
should not be forgotten.
Mr Caio: May I add one point on
innovation which I think is very important. Through local loop
unbundling we have for the first time a serious opportunity to
unlock that kind of monopolistic resource at a time when there
is a shift in demand from traditional narrow band services to
broadband. I do believe that there is a sense that around Europe
incumbents are somehow the repository of innovation and "we
had better not touch them because if we touch them the rest are
so flaky that we might be left without innovation". I would
seriously ask BT to reconsider that. There is a genuine opportunity
to drive sustainable innovation through limited but very well-focused
investment, as David was saying. Both our networks offer today
capabilities that BT is now associating with the notion of the
21st Century Network where they are just somehow constrained by
the lack of innovation in the last mile. At the moment two smaller
companies than BT—us and Easynet—are offering a higher
speed than BT and I think this is a point I really would like
to emphasise. There is an opportunity to see genuine innovation
coming back into the fixed telecommunications industry for the
benefit of consumers and businesses and it would be a shame to
see that window closing now.
Mr Rowe: Also if I could pick
up on your point earlier about where does the speed go to, ADSL
and fibre to the kerb. To give you an idea, something like five
megabits is good enough to do TV broadcasts.
Q57 Mr Evans: We are almost there now.
Mr Rowe: Once you start to go
to eight or ten then you can get high definition TV-type quality.
The question is then what else do you want to do with it. Who
knows what the possibilities are in terms of high definition video
conferencing and stuff like that.
Q58 Mr Evans: What do you need for video
conferencing?
Mr Rowe: I was going to think
of another application but just forgive me for a moment. Yes,
all of those things in fact can be done within the kinds of speeds
that we are talking about with ADSL. To talk about the next generation
is far too early.
Mr Caio: The market is now, the
demand is now, and a lot of debate about ADSL being long term
sounds like that has diverted attention from what is today. If
you think about analogies with the mobile industry and waiting
for the next generation, there is always time to wait for the
next generation but if we keep waiting nothing will happen. This
is what is available today and I think we can genuinely address
the demand for innovative services with ADSL in a very effective
way.
Q59 Mr Clapham: A little earlier, Francesco,
you mentioned the need for more infrastructural competition. What
do you see to be the main factor holding that up?
Mr Caio: Again it is the point
we were making before. There has been an abundance of infrastructure
competition at the core of the network but all that innovation
has been somehow wasted because it has been constrained by lack
of competition in the critical last mile. Also I was saying before
for years consumers in this country have been offered "any
colour they want as long as it is black" type of thing, and
again analogies with the mobile industry indicate that infrastructure-based
competition brings innovation, new services, declining prices
and value for money. Without that innovation I do not think that
situation is sustainable. Back to what Ian was saying before,
it is important to have certainty in the regulatory framework
to isolate the commercial entrepreneurial risk. We do not want
to shy away from that risk with commercial businesses but we cannot
afford to have another risk which is BT, or incumbents in general,
being left with the power of playing with wholesale retail prices
in a way that scuppers the significant investment plans which
drive innovation.
Mr Rowe: Also the first and last
questions investors always ask when you come up with a new plan
is, "This sounds great but what if BT do this or what if
BT do that? We heard that BT are going to do this." It is
a big risk factor in your investment. All we need is a clear playing
field.
| 
