Examination of Witnesses (Questions 140-154)
8 MARCH 2005
Mr Ben Verwaayen, Ms Anne Heal, and Mr Peter McCarthy-Ward
Q140 Chairman: Let us put it this way
then, you have offered this up because if you do not offer up
something there is a possibility that a solution will be imposed
which you might find more uncomfortable.
Mr Verwaayen: That is the perception
of the carrot and the stick.
Q141 Chairman: It is also the perception
of getting in quickly before the others have made up their mind
and perhaps influencing the debate.
Mr Verwaayen: You asked me to
tell you how I feel. I have heard many speculations of what is
going on in my mind which is always fascinating to see and read.
Let me tell you what is going on in my mind. I think this is a
unique opportunity to reset the clock; that is how I see it, to
start afresh. As long as we try to make better what is already
there we will fail because that is preset mindsets all over, from
our side, from their side, from everybody's side. I think this
is a unique opportunity to clean the field and I have to say that
that was the brilliant stroke from Ofcom to give that opportunity.
Stephen Carter has, of course, his past, the regulatory past;
I have to deal with our past; the competition has to deal with
their past. At the end it is just the consumer who is looking
and asking what is in it for them. The customers demand more so
resetting the field has the purpose of creating something very
dynamic in the UK that will bring our infrastructure—which
is like oil, an input for competition or productivity and an input
for lifestyle—into a new fresh start. That is my motivation.
Q142 Linda Perham: You said in the Phase
II response that hindrance to full input equivalence is the age
of the infrastructure. Do you think the 21st Century Network can
remove that problem?
Mr Verwaayen: I think it can and
I cannot describe how important this is for all of us. We still
have 1930s equipment somewhere in the network. It was once described
as a plate of spaghetti and if you pull here you will never know
what is happening there. If you want to introduce a new service
you have to go through 512 different systems and they are all
related. From a speed perspective it is no surprise that major
telcos in the world take eighteen months to introduce a new service
because that is how long it will take. I think we need a much
better, much thinner layer where it is much more transparent and
transparency is the friend of equivalence. Today we have a situation
that we have to go and say, well we would like to do it but we
cannot. You will not believe that, but it is the truth; we cannot
because somewhere there is someone in the network who says, get
away, that particular piece of equipment cannot be taught a new
trick. So it is a very poor situation to be in.
Mr McCarthy-Ward: I think the
heart of the problem for us lies with the fact that the systems
that deliver our core outputs were built in the 1980s, state of
the art at the time, with 13 million lines of bespoke COBOL code
at the centre of our systems. It was designed to deliver the outputs
of a vertically integrated operator. The arrival of the requirement
of wholesale services came after that system had been designed.
So we have a series of bolt-ons to this heartland contorting it
to produce outputs for which it was never originally intended.
And as those wholesale services multiplies so this edifice creaks
even more. There is a fantastic opportunity in replacing that,
but it is a difficult and complex task. The systems deal with
23 million customers, 160 million call records a day. A trivial
mistake which gives you a small percentage error is catastrophic
in terms of its impact on the quality of service that we deliver
to everybody. So it is a change that we need to make but we need
to make it with planning, care and skilful execution. Telecom
Italia have just finished this process. They have not put equivalence
into it but they have built a change out of their system and it
took them four years. We think we can do it faster than that,
but it is a massive task and it is a limitation on our flexibility
for our own retail customers and for our wholesale customers.
Q143 Linda Perham: Are you saying you
cannot build in equivalence from the start because of the history
of the 1930s equipment et cetera?
Mr Verwaayen: If you define equivalence
using the same computer equipment, if you define equivalence as
getting the same level of service we can, but now if you say no,
it is only true if I use the same equipment on your side—which
sometimes is not fair because a small ISP having to buy the same
computers as we have is ridiculous—if that is your definition
then we cannot do it today. We are going to build something new
and if you want to have that as equivalence we can give it to
you.
Q144 Linda Perham: You are saying it
would be equality of outcome, back to what you were saying before.
Mr McCarthy-Ward: Yes. Equality
of outcome is something we can deliver quickly and we are delivering
now, for example on carrier pre-selection. As for equivalence
of input it will take us a little time to deliver but we are committed
to delivering it as we change the systems we use and can provide
common interfaces for ourselves and for our competitors.
Q145 Chairman: You have mentioned this
variable age of the kit that you have across the country. Where
would you find the 1930s equipment and how significant is that
in your network at the present moment?
Mr Verwaayen: If you look to how
our network is built, we have all started from a voice network
and a voice network is upgraded over time. For example, in the
local loop there are still passive components that have been there
for ages and ages and ages. Over time we went from rotary systems
to analogue systems to digital systems and we have made generations
of changes but not in every corner of the country so sometimes
you still find 1960, 1970 in the switching because that is the
level of the economy that has also been used to make sure that
you have an end-to-end business that makes sense. The big change
is now from digital—which is still switching—to IP
which is non-switching.
Q146 Chairman: Is the old kit more likely
to be in remote areas?
Mr Verwaayen: No, you cannot say
that; it is all over. Sometimes you have upgraded by leaving the
old in but putting a computer next to it which will take certain
tasks. That is how it is done sometimes.
Q147 Chairman: You start this 21st Century
Network, you move through it very quickly but such is the speed
of the dynamic of technical change that even in a relatively short
period what you are putting in at the end is different from what
you started putting in.
Mr Verwaayen: I think that what
we are going to do in 21CN is basically collapsing all those different
networks in one and the beauty of that is that the core network
will be service agnostic, it will not know whether it is voice,
data or video, it will just be bits and bytes. The intelligence
will be at the edge of the network. So if you have to change that—and
we will over time when new technology comes in—it is much
easier to do because you can go to the edge and leave the centre
in place. The centre basically is fibre that sends at the speed
of light the bits and bytes. The intelligence to translate it
to a voice search or a video search or a data search will be done
at the edge.
Q148 Chairman: Where is the funding for
this change coming from?
Mr Verwaayen: From our purses.
This is a business decision that BT takes. We are a profitable
business. I think we invest heavily. Our Cap-Ex is arguably one
of the strongest in the business and we do that because we think
to be first out of the blocks has big advantages for our customers
and therefore for us but we pay it, as we pay all our Cap-Ex,
out of our proceeds.
Q149 Chairman: Would these be proceeds
that come from this particular area of activity or would they
be coming from across?
Mr Verwaayen: It is BT; we do
not label our money.
Q150 Chairman: Do you not have profit
centres for different parts of your operation?
Mr Verwaayen: We do and what we
have are business cases and the business cases have to be proven
to be profitable business cases. Of course what we do is that
we look to the business case and see whether it can stand on its
own feet and that is what you would expect from us, that is what
we do.
Q151 Sir Robert Smith: Why does the 21st
Century Network require you to be in the retail business?
Mr Verwaayen: Because if I am
going to produce services on a wholesale level, I need to know
whether there are risk taking entities that are guaranteeing me
to use those services. Let me take the example of broadband. When
we decided to go radical on broadband we lowered our wholesale
prices substantially. You will remember that, three years ago,
from being one of the highest in Europe to being one of the lowest
in Europe in one big bang. I could do that because I could see
that we would make broadband the number one that we needed to
get to. I could not do it through another organisation. Another
organisation could say that it is not on my priority list so I
am not going to do it or yes, I will do it later or prove to me
first that it is viable, I am not going to have trained people
to go and sell it. There are a whole range of issues that if you
do not control end-to-end you would never take the risk and go
on to invest that. From that perspective I think the anchor tenant's
role for retail is always underestimated but it is a crucial one.
Q152 Sir Robert Smith: You described
this 21st Century Network as being at the heart and then on the
edges would be the changes and the innovations. What are the chances
of the rural areas and the more peripheral areas of the UK being
at the forefront or being engaged then in the next generation
of services?
Mr Verwaayen: I am very passionate
about this issue. We have a coverage of broadband in the UK second
to none in the world because I am fully of the opinion that the
economy cannot drive businesses just to certain areas and leave
others alone. I think it is absolutely crucial that you get the
coverage. From an economic model it is much more convenient just
to look to dense areas. I think that would be a big mistake. The
same goes for 21CN. I think that 21CN as a network is useless
unless it produces services that are available to as many customers
as possible and we do need to get ourselves into the situation
that we cover end-to-end.
Q153 Chairman: The opening up of equivalence,
the opening up of the market, people will come in and take advantage
of this, your share may reduce. It might almost be obvious that
that would happen. How would you see issues such as universal
service obligations being shared amongst the players? At the moment
you, with the broad shoulders you have, are able to carry that.
Do you think you could come to a situation where others might
have to share it with you?
Mr Verwaayen: This is a different
issue. Maybe Anne can say a few words about what we have submitted
on that.
Ms Heal: I think what we have
put forward is a suggestion that in time—and we would suggest
sooner rather than later—perhaps Ofcom should look at how
it tackles the universal service obligation. It should consider
alternative ways of funding it, possibly even alternative ways
of people tendering for it. We think that because we think the
market has changed tremendously since it was first created. If
you think back to 1984 where mobile phones did not exist, where
the internet did not exist, where there was really only one supplier—BT—you
see a very different picture now. You see a vibrant market with
a great many people playing all the way across the UK and you
say that perhaps we should be looking at this differently because
perhaps consumers are wanting different things and perhaps there
are more effective ways to provide them, perhaps with some sort
of levy or some sort of sharing of a fund. However, we do not
put solutions forward; we think it is something that Ofcom would
want to consider.
Q154 Chairman: We have been round the
track on vertical integration and the separation of the business
into entities, I am not meaning this in a derogatory sense but
you have pre-empted what might be the outcome of the Ofcom inquiry
by setting up your model of three separate businesses and you
have indicated that you feel that you have gone as far as you
can realistically go in having them separate but equal and still
integrated. The experience when, for instance British Gas did
this some time ago, when it had a pipe system and a retail division
and a wholesale division and I know it is not quite analogous
but it is to an extent analogous. They got to the point where
the separate parts of the business were required to become more
separate and Chinese walls, for want of a better expression, were
introduced. Then they came to the conclusion that perhaps it was
not worth it to carry on as an entity so businesses were spun
off. I know there is talk of some of them perhaps coming together
again but that is a different issue at the moment. How do you
consider that by making this pre-emptive strike—if I can
put it that way—you might be in fact creating something
that you will not be able to control and you will end up having
to split it into three parts? This Committee on its last look
at this felt that as an international player, as a driver of innovation
and investment that it would be inappropriate for you to be broken
up because of the requirement to get 21CN and things like that
in place. We are not coming at it in some kind of Austrian school
of economics but do you see there is a danger that you might create
three Frankensteins?
Mr Verwaayen: I am an optimist
Chairman, as I understand you are as well, so I think that making
walls and daring proposals do not encourage people to go into
a step that would destroy the benefits of their proposal. Is there
a danger? Life is always full of risks; that makes it an interesting
adventure. I think we have very strong arguments, I think we have
demonstrated not only intent but capability to execute. I think
that the climate is changing and people do accept that even large
organisations like ours can learn a few things and accept the
power of perception and the necessity to deal with that in an
appropriate manner. As an optimist I would say that I think in
a balanced way we have put something forward that will be appealing
enough to carry the day. Time will tell.
Chairman: We will find out in due course.
Thank you very much. We appreciate your time this morning.
| 
