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 morningand in fact you have mentioned it alreadyabout
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 marketand there are 300 currently in the
marketdo 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 Wholesaleie,
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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