Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 63-79)

1 MARCH 2005

Ms Mary Turner, Mr Richard Sharpe, and Mr Dave Simpson

  Q63 Chairman: Good morning, Mr Sharpe. As the man in the middle can you introduce your colleagues and then we will begin.

  Mr Sharpe: Before I do that I would like to give you a little view of ISPA, particularly in view of your last comment about BT, because they are a member of ISPA. ISPA is the leading trade association for companies involved in the internet space in the UK. This year is our tenth anniversary. We have 130 members and they range from small, medium to large ISPs in the UK. BT, AOL and Wanadoo are all members of the trade association. We therefore reckon to represent about 98% of the UK internet access market. Myself I am the managing director of a small niche ISP, AltoHiway. To some extent we are a consumer of services in terms of we would look forward to having another supplier in the local loop arena other than BT. We are a BT customer right now but at this point in time we are only seeing the emergence of some competition in that arena. We are a customer of Bulldog, for example, and have some experience of the trials and tribulations they have with the local loop which perhaps we can talk about later on this morning. To my left is Mary Turner from Tiscali.

  Ms Turner: I am Mary Turner, I am CEO of Tiscali UK. Tiscali entered the UK market in 2001. Across Europe we are the third largest ISP. In the UK we service about 1.4 million consumers which accounts for about 70% of the business. The other 30% is wholesale so we buy from BT and we compete with BT as well. We were the first and largest Datastream provider. We have got 75% coverage of the UK and we will cover some of the challenges and benefits of Datastream as well and we are committed to rolling out LLU this year.

  Mr Sharpe: On my right is Dave Simpson from Easynet.

  Mr Simpson: I am Dave Simpson. I head up Easynet's Regulatory Department, and as you already heard Easynet is primarily a business provider. We launched a wholesale product based on LLU just before Christmas and we are moving into the residential area.

  Q64 Chairman: Thank you. How do you as an organisation feel about the Ofcom review so far?

  Mr Sharpe: I think the previous three guys covered pretty much our feelings about it. I think that Ofcom have proven to be very accessible. We have had a number of meetings with them and that appears to be an improvement over what went before. There are basically two challenges in this review: equivalence and transparency and this behavioural change. The things that I think is missing from the review are the deliverables and a timescale against those deliverables.

  Ms Turner: I agree with that because I very briefly looked at the response from BT and there is a lot of politeness in the way we describe that document as being the first step, acknowledging the reality and so on and so forth. I think BT acknowledging the need for behavioural changes and organisational changes is one thing, but that is in theory and we need to see the substance and the clarity that follows. I also believe that behavioural change is at the heart of the matter. There is something that describes behavioural change, and that is DNA, and that is very difficult to change, in fact nigh on impossible, so I think we need to address this. I believe that accepting what BT has proposed as the end product will not lead to a satisfactory conclusion. I think Ofcom needs to take a much more involved and monitoring and measured role in this whole process. I think leaving it to happen and letting things roll-out would be a dangerous strategy to follow. I am expecting and I am looking to Ofcom to take a much more direct role and to bring some of the key issues on the table and discuss them with the participants that are affected. I am seeing some of the changes but is it to our satisfaction; I would say at this stage in time it is early days and it is not satisfactory.

  Q65 Chairman: We have been talking a lot this morning—and in fact you have mentioned it already—about LLU. What is in LLU for ISPA members?

  Ms Turner: If you look back at the explosive growth in broadband it was brought about by two factors. One is the extent of the coverage because as soon as you rolled out to 95-99% coverage people could access and buy broadband, but the other key thing that brought about the real growth in broadband is the choice, the value for money and the removal of the set-up fee, what we call the activation fee, that consumers have to pay. Also in a lot of circumstances ISPs have been future pricing, ie, we have been pricing broadband at the right level to the detriment of margin, so there is a very slim or no margin in the hope that when LLU is rolled out we can get the margins back. So this is what has actually brought about this enormous growth in broadband. What is it that ISPs are looking for in LLU? Exactly this: we are looking to build a long-term sustainable business, like the UKCTA members were saying, and this can only be brought about if there is market confidence, stability and improved margins, and we believe that the right deployment of LLU will give us this. On top of that what LLU will bring is product choice through innovation, exactly what Francesco Caio and David Rowe have been talking about. It is choice, it is value for money, and it is also quality. Today all of this is actually controlled by BT. The last thing that is controlled by BT is speed to market. A very good example was that two years ago just before Tiscali rolled out Datastream we approached BT to roll-out a couple of new products at different speeds. They said, "It is a very good idea but come back in 12 months' time, we will have that product ready." When we rolled out Datastream we brought out that exact product in under six weeks. Speed to market. So these are the things that LLU would give other operators: the speed to market, the ability to innovate, the ability to provide different and varying products into the market, and also to build a long-term sustainable business.

  Mr Simpson: We must not forget there are almost as many different business models for ISPs as there are ISPs. Not everyone is an infrastructure player, as we heard earlier, and in that case if you are not an infrastructure player, are you even interested in LLU? I guess the answer is yes, you would be because potentially something like Easynet offering a wholesale product puts commercial pressure on BT to innovate on their own wholesale products. We have seen that with the eight meg product where, as we heard earlier, BT have now said, "Okay, we are going to introduce higher speeds and more features and functionality into our own products." In terms of LLU and the practicalities of it something that is often pointed out is whether it is working? Certainly we have seen a new zest behind LLU and a focus on it since Ofcom started and certainly with the adjudicator scheme which they have introduced to look at all the processes and crunchy issues about how you do this in practice, the adjudicator is working through those. I will leave it there but in terms of the adjudicator scheme we certainly see that as achievable.

  Q66 Mr Clapham: Just looking at the number of ISPs in the market—and there are 300 currently in the market—do you feel there are too many or is the market sufficiently large to be able to provide for them all?

  Mr Sharpe: Consumer choice is all about having multiple choices of supplier. It is an interesting statistic. I did some research on the basis of that assumption and you are about right, there are around 300. Nobody knows exactly because people come and people go all the time, they are being bought up and there are new entrants into the game. If you take ADSL as an example, the ADSL Guide shows 110 players in this space. Net4Nowt, another monitor of this, shows about 182, so we guess there are probably between 160 and 180 ADSL players. If you take away the larger players, 15 or so, that is a significant number of suppliers in this market. Right now they are all likely to be BT re-sellers or BT central IP Stream customers. I am sure that every one of them, as we are, is looking for some competition in that arena simply because we are a consumer of those wholesale services and we only have one choice right now. My big concern about LLU, however, is, as I said, we take IP Stream and that is a central pipe into BT's core network and the core network very, very rarely fails. 99.9% of the problems we have are in the local loop. When you are a business-to-business ISP (and perhaps this shows in some of the statistics about those 160 players) most of the services we provide do not just go to a consumer sitting in his home with a single PC, they connect to a local area network. We have done some work on the number of seats that we service as a niche player and we reckon to service some 70,000 business seats. If you multiply that across 160 ISPs, that is an awfully big number. By the way, we do not believe that Ofcom consulted with us as a group when they did this review, however they are addressing that now so I do not want to make too much of it. I think the issue is that we are seeing an awful lot of problems in the local loop and what concerns me as a customer of BT is if I become a customer of Easynet, for example, they still have to buy the local loop from the BT infrastructure as it currently exists. If there is a problem in the local loop and my business customer goes down he screams blue murder because his business stops. If a consumer goes down for a minute, for 10 minutes, for half an hour it is not such a big deal (although it may seem it to them) but to a business where e-mail stops flowing, where their website may stop working, and all of the VPNs connecting various offices stop working, that is a big deal. Like I said, we are seeing significant problems in that area. The situation right now is that BT is my supplier. If they screw the local loop up I can stop paying them. If I am an Easynet customer do I have the same leverage? The answer is probably no from a legal point of view. So the issues about who owns the local loop, how it is funded and how it is managed are really important. So this access services division is a step forward but, as David Rowe said, the devil is in the detail and the proof is in the pudding. Our experience to date has been that that pudding might not be around to taste for some time.

  Q67 Mr Clapham: So are the problems that you encounter relating to technology due to the lack of investment that is going in?

  Mr Sharpe: No, I believe BT have made and continue to make investment. I cannot really have an opinion about that. If you examine the problems that you have they are all about on the ground problems so an engineer goes to a box in the road, he has not got enough twisted pair, he listens on a line, he cannot hear anything, he pulls it off and sticks it somewhere else. The line is live with ADSL and my customer is no longer working. When you go back to BT and say "you have screwed it up", first of all they give you a wishy-washy reason so that you spend three or four days trying to get to the bottom of the problem and when you get to the bottom of the problem they say "it is season re-provide, sorry, the line does not exist any more", then you have to insist "put it back", and those are the day-to-day practical problems you see in the local loop every single day. There may be a fault on the line because of some issue over the reach you may have. There are all sorts of apocryphal stories that I will not go into here but it is a practical issue and it is something that needs to be addressed with this access services division.

  Q68 Mr Clapham: Presumably, as you said earlier, you have a dialogue going with Ofcom which you did not have previously so they have been made aware of some of these problems?

  Mr Sharpe: Yes but equally I, in common with the 160 other MDs, have the real problem of trying to run my business on a day-to-day basis as you can appreciate. We have 50 people and my whole time is spent keeping them fed and watered and trying to grow the business. When you go to Ofcom and you talk to them about it they have no mechanism for taking these inputs. You could ascribe to BT a divide and conquer scenario because it is only when you get to situations like this and I meet Mary and we start talking about things, that we discover that we have got common problems. I do not believe there is a mechanism for logging all of these problems so that you can see first of all if there is a common thread and secondly if you are looking for a sea change in BT's attitude then how do you measure the change in the attitude? You can only measure it by seeing if there has been an improvement.

  Mr Simpson: One of the advantages of being a trade body is you have different views on things. I have a quite different opinion on some of the things you are saying, with all due respect. I think a lot of the issues you have pointed to are probably more historical issues. Certainly at Easynet we sell direct to businesses and we compete directly against leased lines which are very high reliability products therefore we cannot accept the kinds of things that Richard was alluding to, which we do not find actually happens in practice. What we are using when we do LLU is copper in the ground and perhaps some bits of BT's backhaul and they are bits which we have found quite reliable so we do not necessarily have so much trouble. The issue specifically with our wholesale products is that we are secure and confident enough in our wholesale products that we are going to run our consumer business on our own wholesale products. When we talk about equivalence would it not be very sweet if BT built their entire 21st Century Network/Next Generation Network based on LLU, the proof of the pudding being in their own eating. We would certainly point to that going forward. Finally, on the adjudicator scheme which I point back to again, that is Ofcom's mechanism for addressing all the practical issues associated here. Yes, there have been issues in the past and they have been acknowledged, but we are getting through them. We are already seeing improvements. There is a lot of automation coming online from BT systems around Easter and we should see the real practical application of that in the summer. At that point we will know whether LLU is really a scale play.

  Ms Turner: It is not all doom and gloom, I must say. If you look at the last six months there have been significant improvements not just from Ofcom; it is Ofcom and inquiries such as this. If you look at three significant improvements we have achieved (since the last TISC inquiry), one is the margin squeeze between IP Stream and Datastream. That has been addressed to satisfaction. Albeit it took some 17 months but we have got it now. If you look at migration fees which used to be 70 or 80 quid, they have come down to £11. Also the pricing on LLU has come down significantly. These are some of the achievements. However, the reality today is that we still have 95% of wholesale in the hands of BT so one must ask why. If you look at the achievement of the drop in price of LLU and the migration fee coming down, that is a great achievement on paper but a bulk migration process is still awaited by the industry. Ofcom set the delivery of that product to the market for October last year. That date was missed and it was extended to March of this year. I await that because we are in March so let us see whether that is actually delivered. If you look at the price of LLU, that is great, however it is an achievement on paper today because, lo and behold, as soon as the prices came down we have got the destabilising factor of deaveraging, which BT Wholesale is bringing down the IP Stream prices in the busiest exchanges. These are exactly the exchanges that most operators will LLU first. Then there is the destabilising factor that is brought about by the 21st Century network. Nobody is clear about the implications of the 21st Century Network. There is very little clarity in terms of connectivity, compatibility, and so on and so forth so for an investor like myself, if we are looking at rolling out LLU there are some fundamental questions that need to be answered to satisfy my shareholders before they would invest because the payback period on LLU exchange is two to three years and that is exactly the time when the 21st Century Network is going to be rolled out. I need to know with some confidence that the amount of investment that I am placing in LLU is not going to be made redundant and where there is some form of migration path and whether there is a cost involved, what are the compatibility issues so the 21st Century Network is still enshrined in secrecy. We need to bring those issues to the table and debate with clarity and transparency. We are pushing Ofcom to do that. They are facilitating but the progress is slow. We need to move faster. Sure we need to be considered. I was listening to Ofcom earlier today and there is a payoff between speed and effectiveness or correctness, the right decision, but we need to find that balance and find that balance soon.

  Q69 Mr Clapham: Could I just ask about the wholesale market and Datastream because the last time that the Committee looked at the industry the points that you made were in relation to the wholesale market and of course the failure of Datastream. Is that still the main issue or are there others now?

  Ms Turner: We have actually rolled out Datastream. We are now probably, other than the cable operator NTL, the singular operator that has rolled out Datastream extensively. I understand from some of my fellow colleagues that they decommissioned the Datastream network because they are finding it is not scaleable, it is not robust, and so on and so forth. My belief is that Datastream still has a valid role in this market because not all operators will go and unbundle every exchange in the market, so our strategy is three-fold: in the congested or highly concentrated areas where it makes sense we will LLU, in the outer regions we will do Datastream because it still gives us a degree of innovation over and above IP Stream and where Datastream is not possible we would actually then buy a re-sale product from BT which is IP Stream. The belief of most operators, certainly Tiscali, is that 80% of the United Kingdom should be either LLU-ed or Datastreamed which will give me control over the quality that I provide, the innovation, the choice, and so on and so forth.

  Mr Simpson: I think, probably, where the debate has moved on slightly is that whereas it was more about how Datastream and IP Stream, these two wholesale products, fitted together, now the debate is more about how can we make sure you can still be on LLU without being squashed by BT and their wholesale products in areas where you can compete with LLU?

  Q70 Mr Evans: You have clearly got huge reservations about BT and how they are rolling this equivalence out, whether they are going to comply with it or not. What is your biggest reservation on that?

  Ms Turner: I was disappointed by BT's response. I do not wholly go to say that they are scheming; I think they are smart, rather than scheming. My disappointment is that there was a recognition and an acknowledgement by BT that change is necessary, that equivalence and input level is required but beyond that most of the paper was spent defending and denying poor performance and attitudes. What I would like to see more of is how the proposal for the access service division is going to work because today it is going to be no different to BT Wholesale—ie, it is going to be a separate division but with the same management and with the same shareholders. Operationally and functionally, on a day-to-day basis, it reports to the same group of people. How is that going to change? Also, there was recognition that there have to be behavioural changes. It is an easy statement to make but how do you go about making those changes, and when do you make those changes? How are we going to monitor those changes and measure those changes? One step further: is Ofcom going to enforce compliance? Are they going to penalise for failure? What is this process? How long is it going to take? Are we going to participate in this process? I think there are more questions than answers in the response from BT, and that is my disappointment. However, time will tell because the process is not concluded, it is still in midstream; we are participating in that process and, as everyone keeps saying, the proof is in the pudding. I say the proof is in the eating of the pudding, not the pudding in itself.

  Mr Simpson: The irony is, as we reach the end of the Strategic Review and the rush to finish, and this is where the real meat is going to happen, that this is the bit that is going to carry us forward over the next ten years, potentially, so we have really got to focus on what are the key issues? What are the actual practical issues? BT has presented their response as a package, saying "It will do this for you, the industry, and you deregulate us elsewhere". You cannot take that deregulation, until you have proven the bits that we want are out there and working.

  Q71 Mr Evans: I assume, Richard, with what you said earlier on (with your catalogue of disasters, that every time something goes wrong it takes days to find out what has gone on), you feed all this stuff into Ofcom, perhaps, on a daily basis, if you are not getting answers? There must be a fear that once this whole procedure is over, once our Committee has finished and made our recommendations, then things may just fall back to their old ways. Is that what your greatest fear is?

  Mr Sharpe: I think that the issue with Ofcom is that we are discussing with them a mechanism for getting that feedback, because there actually is not one at this point. The feedback is at the macro level not the micro level, but it is at the micro level that you work out whether there has been a sea-change in attitude or not. As I said, I think we are going through that process with Ofcom. One of the fears I have is that they have set a deadline of June for getting this sorted out, and there is an awful lot to do between now and then, and I just wonder whether that is putting a little bit of a monkey on everybody's back. Maybe that is what is needed, but it is a very short timescale to get to a point where you are saying, "Well, actually, if you have not now complied, when you have not even put in measures at this point that can tell you whether you have complied or not, we are now going to report it to the Enterprise Act", and so on. I am just a little concerned about that.

  Mr Simpson: The industry is fully committed to engage in that dialogue, and really it is probably going to be down to BT to respond quickly enough and to commit to binding commitments by that date.

  Q72 Mr Evans: Are your members able to access the cable network?

  Mr Sharpe: The answer is yes. In fact, AOL has access to the network.

  Mr Simpson: It is kind of done on a commercial basis, at the moment. I think, probably, our view would be let us concentrate on the copper because the copper goes everywhere; cable is only in certain areas. We have got other members who do wireless, we have got all sorts of different infrastructures, access infrastructures, out there, and we think if you focus on the copper let us not get distracted by other things. Of course, it is open to commercial negotiation with these other guys, but let us concentrate on the copper.

  Q73 Chairman: We had some more questions but, in fact, your answers have covered them. That is very helpful. There may be further points we would like to raise with you and we will be in touch, or if you have anything else you think afterwards you should have said or would like to have said, then please get in touch.

  Mr Sharpe: Thank you very much.





 
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