Examination of Witnesses (Questions 100-109)
8 MARCH 2005
Mr John Pluthero, and Mr Andy May
Q100 Sir Robert Smith: If you were breaking
up BT would you be breaking it up in the right way that the chunk
that will produce the 21st Century Network would still be there
to drive that forward?
Mr Pluthero: I do not really understand
the argument that says if you separate out Wholesale—if
you have a `netco', the core kind of infrastructure from local
loop through the main core network, if you separate that out from
the retail activities, why does that change anything? The only
way it could possibly change things is if Retail was getting a
disproportionate return, a supernormal profit because of its conjunction
with the Wholesale arm. If it is not, then Wholesale can invest
as it needs to on its core network and sell that to the market
in an equivalent way to everyone and drive innovation, revenue
and profit that way.
Q101 Sir Robert Smith: You do not accept
the sort of argument that the retail experience drives the innovation
in the Wholesale side.
Mr Pluthero: There is no evidence
for that. It has not happened in the past by BT. That is an absurd
notion.
Q102 Chairman: Are you really saying
that at the end of the day BT has not really broken free from
the mindset of the monopolist in the sense that it is just trying
to kill competition?
Mr Pluthero: I am not sure that
that is the mindset of a monopolist. I would like to kill my competition
as well; it is what we do for a living. It is just that I am not
gifted with 91% market share so it is quite difficult for me to
do that. I have to try to give customers the kind of service and
quality that makes them always choose me.
Q103 Chairman: Local loop unbundling
is a classic example of where we could have been making money
out of allowing competitors to come in without losing a great
deal of market share, but making a lot of money out of rental
charges and the like from LLU.
Mr Pluthero: I disagree with that.
I think local loop is the gate to the Crown jewels. The local
infrastructure, the twisted copper pair is the fundamental kind
of attack on BT's cash cow, on its real profitability around residential
telephony and around control of the product set to customers.
It is unsurprising that they are reluctant to move quickly in
that regard and we have seen the battle started on local loop
now with the adjudicator being called on. There are a couple of
ways around that. One is to walk backwards slowly and the other
is to make the local loop environment, the DLE, almost redundant
in a few years' time through a combination of 21CN and the various
other technologies that allow you to go out to the street cabinet
and so on, but also in the meantime to undermine the economics.
The people are going to local loop because it represented a way
of delivering consumer broadband profitably because there is not
an ISP selling the IP Stream product today that makes money on
it. They are subsidising this market like billyo. But if you drop
the price of IP Stream only in those locations where local loop
unbundling takes place, you make that quite challenging for those
businesses. Local loop is important so restricting access to that
and making it difficult to the point where it is a redundant piece
of infrastructure is pretty smart.
Q104 Chairman: At the moment if you are
a medium sized to small player.
Mr Pluthero: We are the third
largest in the market.
Q105 Chairman: Nevertheless, given the
dominance of BT, let us say that BT is broken up and a number
of people have access to customers that hitherto they have not
been able to reach for whatever reason, and BT's market share
does diminish, what do we do about things like universal service
obligation? Should it be a responsibility of all the licensees
in proportion to their business? Or should it still be carried
as a responsibility by the dominant market player?
Mr Pluthero: That is quite a challenging
one. Fundamentally it should sit with what I call BT Wholesale
if that is the group which owns the fundamental network asset
because that is where access is driven from. One of my concerns
about local loop from a public policy point of view is that it
has struck me as quite similar to what happened to the post office.
You de-regulate a bunch of high-value services like overnight
parcel delivery and so on and allow people to compete in those
spaces. The network equivalent is allowing people to go into the
most attractive exchanges and you take away a degree of the economic
return that the incumbent gets which makes funding the second
post delivery van or the local exchange in a rural location somewhat
more difficult so I think that does have to be reconciled. I do
not see why Wholesale, which would be regulated in a very light
touch way if it were separated because all the commercial drivers
are then lined up behind a regulatory agenda effectively. They
would be selling to everyone equally; they would want to do innovation;
they would want to encourage competition because that grows the
total cake. They can set aside some part of those returns to ensure
that service is provided across all of those locations. I think
also that some of the technologies over the next five or ten years
will change that.
Q106 Chairman: You said that they would
set something aside; would that be by way of a levy or would it
be business largesse?
Mr Pluthero: All the licensed
operators would pay it by way almost as a kind of purchase tax
through Wholesale because their prices would have to be such that
they could get the right return to maintain service standards
across the country. I do not think you need to step outside of
that and say that we are going to charge someone half a million
pounds a year for the privilege; we get enough of those charges
today. I think then it will fall to who is successful. The more
successful you are effectively, the more you are picking up of
that cost.
Chairman: The danger is that naturally
businesses will go for the low hanging fruit first. From a public
policy point of view we have to look at this as well. Maybe the
nettle does not have to be grasped right away, but I do think
it is something we have to get across. Telecoms for some people
can be a means to enjoy a hobby; for others it is running a business,
but it is a utility and as such has importance and almost life
and death terms like you have with gas, electricity and water
and I think that maybe we have not looked at it sufficiently closely
because it has been under the umbrella of one organisation, but
it is something that Ofcom is going to have to address perhaps
not in the short term but certainly in the medium term.
Q107 Sir Robert Smith: Your analysis
is that it is the Wholesale side that is crucial to the universal
service yet would people who are not in the money pot areas be
missing out on all of the frills that might come from the bonuses
of bringing so much competition in because people would not be
competing to reach those customers?
Mr Pluthero: That is right. The
wholesaler would get to charge prices to all these customers buying
services built off the back of this network in a way that makes
sure they can invest in the areas that do not justify it from
a direct commercial point of view, but actually this market is
no different from most other markets in that regard. There are
demographic segments which no-one is chasing because they are
not worth it.
Q108 Sir Robert Smith: That is where
a universal service protects those people.
Mr Pluthero: That is why you would
want some way of making sure there are the funds to provide an
appropriate level of service to those areas.
Q109 Chairman: I think that has covered
our points with you this morning, Mr Pluthero and Mr May. If we
need any further information we will get back to you and if you
want, on reflection to send us supplementary memoranda then we
would be happy to receive it within a reasonable space of time.
Thank you very much.
Mr Pluthero: Thank you for your
time.
| 
