Examination of Witnesses (Questions 120-139)
8 MARCH 2005
Mr Ben Verwaayen, Ms Anne Heal, and Mr Peter McCarthy-Ward
Q120 Chairman: It would certainly be
an uncomfortable one.
Mr Verwaayen: It would be uncomfortable
but it would not be the truth. I hope you will allow me to explain.
It is true that on local loop unbundling we are now amongst the
cheapest in Europe. The reason for that is not altruism. The reason
for that is that we have a much better way of getting to the market;
we are a very efficient organisation related to the rest of Europe
and we are able to make prices that are attractive. However, there
are elements that we are not yet meeting the demands of our customers
and you focussed on one of them. We are working on it but I am
not going to make a promise that that will be effected tomorrow.
Q121 Chairman: To be frank I do not think
we would have expected you to do that, but maybe just one last
point on this. Do you think that the Ofcom consultation on the
value of your copper network is likely to result in charges coming
down even further?
Mr Verwaayen: I do not know. Anne
is a bit closer to it; what do you think, Anne?
Ms Heal: Obviously when they are
looking at the cost of copper they are looking at a number of
things, but what we have said in our submission was that we would
be intending to reduce the fully unbundled price dependent on
the cost of copper. Obviously that is the fully unbundled one;
we would not reduce the shared price any further—that has
already come down by 70%, because that is not related to the cost
of copper as an input. There is an intention, a commitment, that
subject to the output of their study we would reduce further.
Q122 Chairman: Are you trying to anticipate
that?
Ms Heal: We need to understand
what comes out of Ofcom's thinking. The cost of copper is a very
significant study which looks at the value of our copper access
network. The copper access is a major input to this and other
products and we need to understand the implications.
Q123 Linda Perham: Just going back to
local loop unbundling, you say you are fully committed to making
it a success, but I just wondered what the purpose is for the
wholesale brand of what might be called geographical deaveraging
where you reduce the price of IP Stream in the most popular exchanges.
Is that going to undermine confidence in those considering investment
in LLU?
Mr Verwaayen: It would be quite
fascinating if we would invest the amount of money we are investing
in local loop unbundling and then start to undermine it immediately.
I think it is not the reality. First of all we have 169 ISP customers,
ISP customers that demand from us services that they can bring
to their customer base. We have the most vibrant internet service
business in Europe, arguably in the world. Those customers also
demand from us a pricing that allows them to compete. Secondly,
if you look to local loop unbundling there is still a substantial
margin between the averaging pricing on IP Stream and local loop
unbundling. It is also true that we have said that we do not expect
further price reductions in the coming twelve months under certain
conditions of course, but let us say in the normal business sense,
so there is certainty also for people to invest. I think that
local loop unbundling fits certain business models. Some business
models it does not fit and you cannot have a market that has one
size fits all; you need to have a market with as we have baptised
a "portfolio of opportunities". This is a market that
has many players, many interests, not just from infrastructure
players but also from service players that need to be served.
At the end of the day I can assure you there is no market in Europe—and
arguably not in the world—that has this number of players
(successful players and sometimes unsuccessful players because
some business models work, others do not).
Q124 Linda Perham: Can I just move onto
Ofcom's proposals on equivalence? What do you think equivalence
should mean in practice? What should it cover?
Mr Verwaayen: I have the Director
of Equivalence next to me so I should probably let Peter have
a go at that.
Mr McCarthy-Ward: We have been
in discussion with Ofcom and with the rest of the industry as
to the scope of equivalence and it has a variety of different
meanings. If you read the Ofcom consultation it talks sometimes
about a concept called equivalence of outcome; it talks sometimes
about a concept called equivalence of input. I will deal with
them separately. The scope of equivalence of input we see as being
applied to a small number of enduring bottleneck services which
are vital for future competition. There is a short list of these:
they include wholesale line rental; they include unbundled local
loops; and they include Datastream and a degree of backhaul services.
These are the vital building blocks for competition as it stands
today. In terms of equivalence of outcome, there are a series
of other network services to which that would apply, including
for example, carrier pre-selection and some other call-based services.
There is a very complicated list which would be boring to the
Committee if I read out but we are happy to make it available
to the clerk.
Q125 Linda Perham: You talk about input
and outcome, but do they together equal equality of access because
if you heard Energis' evidence they said that that was at the
heart of this matter.
Mr McCarthy-Ward: I see it slightly
differently. I see the two equivalence debates as being contributory
to the equality of access because the other component of equality
of access is to do with governance and organisation and motivation.
The suggestion that we have made of creating an Access Services
Division is the other component in delivering full equality of
access.
Q126 Linda Perham: If equivalence is
properly enforced, should that not mimic full structural separation?
Mr Verwaayen: I do not think so.
I think we are making a clear distinction between equality of
access and structural separation. Let me look to the facts. This
is the most—as I said—vibrant market in Europe, arguably
in the world. We have broadband coming in this summer to approximately
the same amount of people that have running water. We are number
one in the G8. Three years ago we were nowhere, on a par with
Albania; there is nothing wrong with Albania but you do not want
to be on a par with broadband. What is the relationship between
the one and the two? It is like starting a mall somewhere, you
need an anchor tenant; you need someone to take it and run with
it. You need to have it on an end-to-end basis, understood system-wise
and risk-wise. So BT taking that position needs to be maintained.
In a situation where you would have structural separation you
will drive the bottleneck into its own targets, into its own business
objectives that may or may not be linked with the network and
may or may not be linked with the end user's services that are
being developed. What we try to do is to give full perception
of equivalence. I use the word `perception' because in fact I
think we have already given it. I can argue until the cows come
home, but if people feel that it is not, I have to address that
issue as well. I take your report, I take the Ofcom report, I
take the other reports as an encouragement to say, "You may
think you are right, but others do not; others disagree. You have
two choices, you are going to fight it or you are going to accept,
but don't throw the baby away with the bath water. Make sure that
you maintain the integrity of the system that delivers the services
that are needed for our market in the UK." That is what we
try to do. We try to listen to what the market says and to what
you say and make sure we have an answer to that. We try to do
it in a way that maintains the benefits that we see and I think
the market will see in an output manner but at the same time ensure
that we get an end to the debate. At the end of the day it is
a debate that is running in circles. I would say that we are already
giving full access and equivalence; other people would say we
are not. If you try to run round faster and faster you end nowhere.
So we try to break out of that circle. It goes much further—I
would like to stress that—than we are obliged to do. If
you read Report Two in our response the offer we have put on the
table goes far beyond what we are required to do but I think it
is the right thing to do because it should stop the debate where
we have been and bring it to the next level.
Q127 Linda Perham: Politicians always
have a problem with perception as well as opposed to reality.
However, you are saying you think you are doing the right things
on equality of access but the perception certainly from our previous
interviewees from Energis and from others is that that does not
appear to be the case. As the Chairman indicated in his original
remarks, you are seen as the big beast out there who is being
unfair to all the rest of them and of course you do not want to
have this separation because you have vertical integration, you
are doing very well and why should you even pay lip service to
any kind of competition from lesser players as you see them. How
do you get over the perception argument where people clearly feel
that you are just keeping it all for yourself basically?
Mr Verwaayen: First of all I think
you are right that this is a real issue because perception is
hard to fight. Everybody in telco has a retail and a wholesale
if you are of any size and meaning. If you compare what happens
in the UK with what happens in other countries in Europe, my colleagues
in the other countries in Europe are looking to this debate that
we have here and they do not understand why we are having it because
if you look from a regulatory point of view the UK is more or
less the ideal that other markets are striving to reach in the
knowledge that they will never get there. That does not exclude
us from having this intense debate and I take the responsibility
for perception very, very seriously. What we try to do is to look
to two things. First of all compliance: do what you promised to
do. I can tell you the last couple of years on compliance we have
an impeccable record. If you want to know a bit more about the
record maybe we can show you some of what we produce. I do not
blame anyone for not going through it but I thought it would be
a good idea to give you a view of what we are producing. This
is all public; we can all read it. We have published a detailed
record of everything that is going on. At the end of the day it
does not do the job because we are having this debate. More of
this will not help so we have to do something radically different.
On compliance we are impeccable. If it is not compliance, how
about the ability for people to communicate with us. We have a
manager responsible for local loop unbundling, paid on their behaviour.
We have a manager on the Wholesale line rental, only paid on their
behaviour. So we have tried to get the message to the market that
we take you seriously; we take your input seriously; we understand
that we have not been successful in taking the perception where
it should be and the only way to do that is to take it step by
step by step; there is no magic formula.
Q128 Chairman: I think it is fair to
say that across Europe regulation is somewhat patchy and we were
one of the first in on the game because of the privatisation policies.
You made the point about the US where they had geographical itemisation
in much the same way as we had with electricity companies and
in 15 years the situation has changed. However, what has been
addressed at least in part in the UK and in other parts of regulation
is the issue of vertical integration. I just make the point at
this stage. There are still misgivings that some people have.
Nobody is saying that you do not comply, because if you did not
comply you would be up in court and paying massive fines. So you
are damned if you do and you are damned if you do not. I accept
that. There is still, however, amongst some people unease about
vertical integration and also about the market. As you have hinted,
you can integrate vertically and still be fairly small, but when
you have vertical integration and market dominance it does create
challenges for regulators.
Mr Verwaayen: I accept that but
at the same time I look to the reality. This is a scale market.
If you want to invest in the UK not just in 560 exchanges but
if you have business in Southampton or business in the north of
Scotland and want to compete on a world scale, you need to get
access to world-class full broadband network. That will require
an investment of over £10 billion. You cannot help that;
that is what it is. So you need scale to go and do that and at
the same time you need to go to the financial market and say,
"Not only do we have a great plan for the UK, we also have
a great plan for you because you are shareholders, you bring the
money, you bring the risk, we have a return for you." What
happens in the US today is an acknowledgement of the change in
technology and the change of scale. At the end of the day they
now have five players left in a country of that size. They will
eventually maybe have three left, fully integrated on all spectrums,
from mobility to triple play, all of that. Why is that? Why do
they regard that in the US as fully acceptable, a country that
is the champion of competition? Well, because there is competition
between platforms; mobile platforms compete with fixed platforms;
cable platforms compete with mobile platforms and satellite platforms
compete. The old way just to measure how many people have access
to your copper going from the cabinet to your home is only one
way to measure the choice that people have.
Q129 Sir Robert Smith: Would that box
be a lot smaller though if you did have properly enforced equivalence
that mimics structural separation?
Mr Verwaayen: This box is twenty
years of detailed work. Sometimes I have compared it with the
Russian dolls, you know, you open up and you get the next one,
the next one and the next one. Everybody thinks that asking the
next thousand questions will help them because regulation is also
part of the competition. If you compete with one another, regulatory
rules could help you in the competition. I do not think, to be
honest, that all those answers are anything else than our incapability
to deal with the bigger issues. That is why we try to get rid
of this and put something else in place, equivalence being the
biggest of them.
Q130 Sir Robert Smith: If Ofcom were
minded to go down equivalence that mimicked full structural separation,
is that something you would resist?
Mr Verwaayen: Full structural
separation, I cannot imagine that they would do it. Your last
report said that it is not desirable. I think that nobody in the
world that I have talked to on a policy level anywhere has looked
at that as a solution. If they would do it anyway, I think it
would be a disaster. It would be a disaster to do the structural
separation itself not just because it would be painful, very costly,
very slow, very cumbersome, but the end result for the UK will
be very bad because you would structurally separate an end-to-end
service into different entities that may or may not be aligned
and all the time they will go from here in a divergence. So what
you will get is the incapability to take an end-to-end decision
to bring innovation where it needs to be.
Q131 Sir Robert Smith: Do you accept
though that behavioural changes are necessary internally within
BT?
Mr Verwaayen: I accept that the
perception is a leading principle that we have to take into account.
We are the first company in the world that has a Director of Equivalence
and Peter has no peers anywhere in the world. We accept that what
we have to do is not only deal with the facts but deal with the
perception as well.
Q132 Sir Robert Smith: So the Access
Service Division is designed to deal with perception.
Mr Verwaayen: It deals with two
ends. It deals with the realities of a bottleneck and tries to
ring fence it in a way that you get people focussed on different
criteria of success. As Peter was saying, what you try to do in
the Access Service Division is to say that we have KPIs, we publish
our KPIs, I think if I will be on the board as an independent
I will take it extremely seriously—it will be my reputation
at stake so that will be a major driver—I will chair that
board so I do not understand when people say that it is not serious.
It is reputation that is at stake. At the same time what I would
do is make sure that the reward system, the payment system, the
bonus system is all focussed on the equivalence factor and on
the performance factor. Equivalence is one thing but you can be
equivalent and be very poor. If we are all very bad but we are
still equivalent it is not good enough. At the end of the day
it is the demanding consumers, demanding customers that will drive
the behaviour.
Q133 Sir Robert Smith: Can you see ways
of making it more independent to reassure the witnesses we have
heard? Can you think of a way of reassuring them?
Mr Verwaayen: I think what we
have done, if you look through history, is pretty stunning. Just
take five years back, three years back when I arrived and see
what our proposals are today, I think we have dealt with the issues.
You and others have been very eloquent in pointing out to me what
the perception of the market and the perception of the public
is. I think we have given a very robust response and I think we
would be much better off to go and implement and make sure that
we do it flawlessly without giving people the wrong impression.
This is a monumental task; this is a truly monumental task. If
people say that the systems are in place, yes, they are built
over 25, 30 years. They are built piecemeal because technology
comes in piecemeal. If you have to untangle those and bring them
into a state of the art where we are, it is a monumental task
which involves a lot of effort from a lot of people. What I would
like to do is to go on with it and demonstrate that we can do
it.
Q134 Sir Robert Smith: In one of the
earlier answers about the geographical deaveraging and the effect
on investors you talked about a 12 month stability period, but
in a sense there are a lot of people going into local loop unbundling
and it takes more than twelve months to get a return on their
investment.
Mr Verwaayen: Yes, but as in every
market you take decisions not just on the regulation, not just
on BT. If I have to make good for everybody's business assumption
I have to say to you that I am incapable of doing that. Going
into business is taking risk. I do not know whether the local
loop unbundling plans from people who have them will address the
needs of their customers. I do not know because local loop unbundling
is not a magic word; it is a way to get service to people who
may buy or may not buy.
Q135 Sir Robert Smith: Is it a way of
getting more variety into the market?
Mr Verwaayen: Yes.
Q136 Sir Robert Smith: If the 169 ISPs
are all buying at the very end from you in a sense, there is a
very narrow market.
Mr Verwaayen: They will not because
some of them are integrated companies as well. They will do ISP
and LLU. You have heard of Wanadoo and with the knowledge of their
French parent they are very well aware of how regulated markets
may or may not work and they see a fantastic opportunity in the
UK. They are integrated on a different level and that is fine.
I think that what you see is a market that will have different
models, some will be successful others will not, but you cannot
come to BT and say, "Here is Joe and he was not successful
and it's your mistake". That is not the way to look at it.
Q137 Sir Robert Smith: That is the problem
that you are going to have to address, achieving the confidence.
Mr Verwaayen: I give that to you;
that is true. I have not heard anybody ever not say, "I made
a mistake but it's also BT". With some we have to live with;
with others we have to scratch our head and ask what we can do
about it. That is true.
Q138 Chairman: You admit the point that
you have a very big task ahead of you. Why is it such a big task?
Is it down to the internal workings of a former monopoly? Or is
it down to inadequate regulation in the past and they should have
been nudging you towards this or helping you clear up some of
the rubble that has accumulated?
Mr Verwaayen: To be honest I think
it is all of the above and more. It is systems. You cannot change
systems overnight and everything is related to everything. It
is regulation. These big books of details that I would not dare
to say that I fully understand; it is sometimes attitude; it is
sometimes what we call culture. I think we have changed dramatically
as a company. We understand customer needs; we put customers first.
We have a hundred million customer contacts per month in any way
shape or form. The slightest percentage of things going wrong
means that everybody has an example where we have gone wrong.
I will take it as a personal issue that we go after each and every
one of them. Having said all that, the combination of that makes
it into a big task, we will not deny that.
Q139 Chairman: Should we view what you
are doing as concessions or as improvement in management ambition?
Mr Verwaayen: They are not concessions
because a concession—
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