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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 407-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE TRADE AND INDUSTRY COMMITTEE
OFCOM'S STRATEGIC REVIEW OF TELECOMMUNICATIONS
Tuesday 1 March 2005 MR STEPHEN CARTER, LORD CURRIE OF MARYLEBONE and MR ED RICHARDS MR FRANCESCO CAIO, MR IAN EL-MOKADEM and MR DAVID ROWE MS MARY TURNER, MR RICHARD SHARPE and MR DAVE SIMPSON MS KAREN THOMPSON, MR DAVID CARR, MR ERIC ABENSUR and MR SIMON PERSOFF Evidence heard in Public Questions 1 - 83
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Trade and Industry Committee on Tuesday 1 March 2005 Members present Mr Martin O'Neill, in the Chair Richard Burden Mr Michael Clapham Mr Nigel Evans Sir Robert Smith ________________ Witnesses: Mr Stephen Carter, Chief Executive, Lord Currie of Marylebone, a Member of the House of Lords, Chairman, and Mr Ed Richards, Senior Partner, Strategy & Market Development, Ofcom, examined. Q1 Chairman: Good morning, Lord Currie. Could you introduce your colleagues for us? Lord Currie of Marylebone: On my right is Stephen Carter, Ofcom's Chief Executive, and on my left is Ed Richards, Senior Partner and Board member. May I just start by saying that we very much welcome your interest in this area. You have many things on your agenda, but we are here to listen to your concerns and answer any questions as fully as we can. As you know, we have had very major consultation with responses from very wide parts of the industry, consumer groups, the public sector and elsewhere and we are studying those and we will be covering the issues in our final report in due course. Q2 Chairman: Thank you. We have had a couple of informal chats but we have not really taken any evidence on the record. We took the approach that it was better to let you get on with the job and then be called to account. I think we met you within a couple of weeks of you starting up. You have been in place barely 13 months. We are grateful to you for coming along. We have got some meat to chew this morning. Maybe we could start with the premise upon which your approach is base. It has been suggested that the promotion of competition, which you have taken as your starting point, places insufficient attention on the needs of the consumer. It has been put to us that perhaps the consumer should have been put first since there are a number of issues which are consumer orientated as much as provider orientated. Lord Currie of Marylebone: This is a strategic review. Right at the heart of our concerns is the interests of consumers. We are concerned absolutely to promote the interests of consumers and citizens as our primary duties under the Communications Act require. I think our analysis is that this is a market which has suffered from a lack of competition at the wholesale end part of the industry. We are seeking to address that question and if we do, we will have a much more dynamic, innovative sector that will very much serve the interests of consumers. What customers want is real value for money, innovation, diversity of provision. That is not something that we can mandate directly. What we need is a dynamic innovative market that delivers that. That is right at the heart of our strategic review. I believe the citizen and consumer are absolutely central to what we are doing. There are other considerations which we do cover in the review such as the need for better consumer information, so we have informed consumers. On the supply side we are seeking to get a better wholesale market which will then feed into retail innovation, but we are very conscious of the need that consumers on the demand side need to be better informed and we are consulting on ways in which we may enhance that. Q3 Chairman: While your review is pretty wide ranging, there seem to be other issues which have been thrown up and which have been dealt with by other reviews. There is the value of BT's copper, for example, which is the subject of a separate study. Are these studies being co‑ordinated? One would think that one would impact on another. For example, the value of copper relates to prices charged by BT's wholesale sector. Is there joined‑up regulation here? Mr Carter: We hope so. We planned our work plan for this calendar year and indeed for this financial year in the full knowledge of when the Strategic Review Phase 2 would conclude and then there would be a period between that conclusion in February and when we would publish our final outcomes, which is likely to be at the end of June. That would allow us to run in parallel with four or five other what you might call day‑to‑day ‑ although they are certainly not day‑to‑day in their potential consequences ‑ market reviews and other activities. One of those, for example, is looking at the valuation question of the underlying copper network, but there are others. We are consulting on what is an appropriate cost of capital for BT's business and whether or not that should be disaggregated and applied in different ways in different parts of the network. There are a number of other similarly significant pieces of work going on. The intention is that they are concluded at a series of points between now and the end of the summer so we get to a regulatory settlement which provides certainty to the incumbent and hopefully a framework of high levels of competition from other players. Q4 Richard Burden: Broadband will soon be available to 95 per cent of the population. Its roll‑out seems to be happening at the moment. When do you think it might reach 100 per cent? Will that extra five per cent be difficult to crack? Mr Carter: Going back to the Chairman's opening question, it seems to us that broadband is a good example at the retail level of where competition has delivered some significant benefits. I remember appearing before this Committee five years ago and we were a long way from that level of coverage and certainly a long way from the retail take-up and the pace of take-up that we are at now and that has been driven in part by some effective competition between the incumbent PSDN operator and the cable companies and also by some measure of wholesale competition, not so much as we would like. To that end we are at just north of 95 per cent likely coverage and there are some significant local projects under way to try and infill in those geographical areas which are remote. We are also trying to release in another place as much wireless spectrum as it is possible to do to encourage alternative forms of less wire bound broadband technologies to be a possible infill alternative, and we are continuing to push for aggressive competition at the wholesale level as another driver. Whether we will get to 100 per cent at this stage would be difficult to predict. It is worth recognising that 70 per cent of those people who could get broadband today choose not to take it. Q5 Richard Burden: I understand that obviously everyone's wish would be to get to 100 per cent and there are a number of things being done on that. If somebody does not want broadband then that is fine, but if they are in an area where they cannot get broadband and we are up to 98 per cent or 99 per cent, will that person who happens to live in that area not be able to get it because he is so close to 100 per cent, so that extra bit of effort will not happen, or it will not come from the various initiatives that you are talking about? Would it be worthwhile at any stage considering, as we are so high now in terms of proportions, some kind of Universal Service Obligation? Mr Carter: I think our view on that is that at this stage that would be inappropriate or preemptive, but we would not rule it out. It is undoubtedly the case that provision and access to some of these new services is unfortunately disadvantaged depending upon your geographical locality. The reason for my gentle history lesson of what has happened over the last five years is there has been significant progress over a relatively short period of time and therefore our view is that it is worth looking at this stage to see what happens over the next 12 to 18 months before rushing to a judgment as to whether or not a Universal Service Obligation would either be legitimate or required. Again, just for clarity, the USO would not be ours to determine. The application of a USO on broadband would be for the Secretary of State, it would not be for the regulator. Mr Richards: Our current technical estimates suggest that we may reach something like 99.5 or 99.6 per cent, so the residual number may be very, very small. It is worth remembering that when we embarked upon the broadband journey the consensus for quite a long period was that we would not reach beyond 70 per cent and actually we managed to get very, very close to 100 per cent. The second observation is that there are many areas that have identified local schemes sometimes with local authorities or with development agencies for that infill problem. One of the issues that have tended to be thrown up in that circumstance has been state aid questions. As you reach full maturity in the market and reach the final level which the market is likely to drive it to - and 99.5 is obviously very, very high - those state aid issues are likely to become less relevant and that is likely to give you more scope for the kind of local authority or development agency initiatives which have been considered. It would be government who would need to look at a Universal Service Obligation. Q6 Richard Burden: Do you reckon the right kind of timescale for looking at that might be about a year's time? Mr Richards: I would put it a different way. You need to have a strong sense that the evolution of the market forces has led you to a point where you understand how far the market will take you. I think the fact that it would probably have been only 60 or 70 per cent two or three years ago makes that point. Let it go as far as the market will take it, look at potential infill activity, sometimes just groups of individuals getting together, at other times in collaboration with local authorities and development agencies, and then consider the USO beyond that. It is moving at an incredible pace. This is not a static market. There are 100,000 people taking up broadband every single week at the time, so the rate of growth is intense. It does not feel like we have reached the point of equilibrium yet. Q7 Richard Burden: Let us move on to the regulatory regime. The way you are approaching this at the moment is that there are regional variations. You are looking for areas of market failure about where areas require more regulation and where things seem to be going okay. Is there not a danger that varying the regulatory regime in a regional way would act as a disincentive to future investment in those areas that are currently being developed on the ADSL network of BT? Mr Carter: I think I would put it slightly differently. The history of regulation by geography in telecommunications is quite long. Indeed, the period of licensing fixed infrastructure competition to BT was done by geographical franchise, by cable franchise and was limited to the largely urban and denser areas. We are not pursuing a policy of geographical differentiation by regulation. There is no freedom to geographically de-average voice charges, that is a fixed average charge. There is an emerging debate about where you are likely to see wholesale competition really emerge in the local loop and the economics would tell you that that is likely to be in the denser areas. So we have signaled that whilst in our view DataStream, which is one of the existing wholesale alternative products, is an important part of the current regulatory framework, we need to look at what the future relationship is between DataStream and LLU, if LLU takes off, in those areas where you are unlikely to see investors come in to invest in unbungled exchanges. That is where we are as of today. Q8 Mr Clapham: Your preferred strategy is obviously equivalence. Are you satisfied with what BT has done so far? Lord Currie of Marylebone: It seems to me that BT has engaged constructively with the questions that we have put forward. They have come forward with proposals that I think have moved the debate on. We have to be satisfied that it will deliver genuine equivalence of access. There is a lot of detail to be considered there including the questions of enforcement and we are engaged with BT and with the rest of the industry in debating those issues and we intend those to be resolved over the next few months. It is too early at this point to answer your question. We are examining the question of whether we are satisfied and we will have an answer by the time we produce our final report. Q9 Mr Clapham: Is it possible to say why there is a kind of skepticism in the industry about equivalence? Do you feel that it can become a reality? Mr Carter: I think there is a skepticism based on two reasons. The first one is historical experience on the ground and, secondly, because factually the incumbent holds all the network asset cards, if you are seeking to compete with BT that is a challenging activity. Our analysis laid out some alternative options and, as David has said, at this stage we are inclined to take the view that the best option is an option called real equality of access and that requires two fundamental changes from BT, one in terms of the products they provide to competitors who wish to compete with them and those products have to be provided on an equivalent basis to allow a level playing field, but there is a second dimension, which is that there needs to be organisational, structural and behavioural changes within BT to come in behind those products so that there is not obfuscation, delay, all the things that conspire to make it even harder for competitors to compete equally. Right now we are engaged almost on a daily basis in working through the detail of whether both those products and those behavioural and structural changes are (a) deliverable and (b) legally enforceable. At the moment we are of a view that we would like to get to a position where they are. If they are not, that leads the sector to the inexorable conclusion that the only way in which you can make it work is to look at a fundamentally more radical solution. Lord Currie of Marylebone: It is also worth recording the responses to our previous consultation to this. The balance of opinion in the industry was against the alternative of going down the Enterprise Act route and we were encouraged, I think rightly, to see whether we can really make equivalence of access work. As Stephen said, if we do not then we will have to consider the alternatives, but it is worth putting in this large amount of effort both on the part of BT, Ofcom and indeed, we hope, the rest of the industry to see whether we can make this one work. Q10 Mr Clapham: Let us look at BT and the enforcement issue. Given the lengths that they seem to be going to in terms of a separate division with separate management and separate accounts, would a full structural separation not be simpler? Lord Currie of Marylebone: It has always been open to BT's management to decide whether or not they wished to structure voluntarily their business in a different way. Obviously there would be regulatory outcomes that would be different that are a matter for the board of BT plc. My own view is that they have responded to our consultation in a constructive way at this stage. The question is how you make it work. Q11 Mr Clapham: Would a full structural change not eliminate the need for regulation? Lord Currie of Marylebone: No, it would not. This is one of the reasons why many in the industry have understandably shied away from the more radical structural solution, because it is not as if with one band you are free of regulatory option, not least because in the wholesale market whatever entity was left behind would still be required to be regulated because by definition it would be a monopoly provider of wholesale, and it is not entirely clear that even a fully separated retail entity would be wholly free of regulation either. That is for now, until the market matures and develops, not a likely option. Q12 Chairman: Do you not think you should look at the British Gas model where you have the pipes and the need for having a natural monopoly? They had them separated into three linked companies and they came to the conclusion that the game was not worth the candle and basically they went their separate ways. Lord Currie of Marylebone: I think there is a very interesting parallel there. It is worth making the point that that was a decision by British Gas management to separate themselves, not a regulatory regime. Q13 Chairman: I remember the discussions we had with them over things like separate canteens and different golf clubs perhaps even. The Chinese walls became so much of a problem that it was better, in their view at that time, to have three separate managements altogether. Lord Currie of Marylebone: I think there is a parallel, but one has also to bear in mind that telecoms networks are technologically much more complex and dynamic than pipes and wires and indeed technology is moving things around all the time and therefore the question about exactly where you make the separation is a much harder one to address on the telecoms area. Q14 Mr Evans: Is BT playing ball with you? Mr Carter: It is a fair question, but it is not a game. BT is engaged in detail in answering the very specific questions we have asked them. The difference, if that is what is behind your question, is that we have been more focused on where it is we are demanding equivalence. We have been open to the question that there may be some areas of the telecommunications market where a lighter touch or a lighter form of regulation may now be appropriate because there are some markets where there is a significant measure of effective competition and therefore the need for the regulator to try and impose it or control it or structure it is not as high. The level of the detail of their engagement is high. Q15 Mr Evans: That is basically what I am getting at. Clearly what you are asking them to do is to invite competition into something where they are unused to having competition. You are basically saying to them you want them to give away part of their business. You talked about behavioural and cultural change. It is a bit like the European Union, is it not, where some countries sign up to Directives without any desire whatsoever to carry out the regulations, whereas other countries clearly do? I am just wondering whether you perceive that when BT is being genuine when they say "Yes, we will do all your requirements" and they are smiling at you when they are saying it. Do you think they are? Lord Currie of Marylebone: The conversations I have had with the senior management at BT suggest yes, but they face a challenge. BT is a large organisation. It is the top board that signs up to this. They then have to transmit that message right down through the organisation to the behaviour of the engineers and people working out on the field and that is a difficult change for BT to effect. There may well be perfectly goodwill, but there is still a challenge for BT to deliver it through the day‑to‑day operation of their activities and that is something they recognise and that is the debate about the behavioural separation issues, how to really make this work on the ground so that it really does deliver real equality of access for the industry as a whole. Q16 Mr Evans: If other companies then start complaining to you that they are not getting the equivalence that you require you basically have the last say, do you not, because you have got the threat against BT that if they do not play ball fully and co‑operate with you then you have other measures up your sleeve? Mr Carter: We do, and we have significant enforcement powers. My own view is that part of the change of tone of engagement is a function of the fact that this regulator has more significant enforcement powers. You will hear later today from people who are competing with BT in the market and I suspect they will say, and they will probably be right, that the process of registered complaint and then seeing real change on the ground is too slow, because anything that does not happen immediately in the real world of competition is too slow. What does that tell you? It tells you that you need to have a workable solution that works on the ground. However robust the regulatory regime is, it will always be after the event. Q17 Mr Evans: Is it a workable solution with timetabling as well? If something is not happening, will you make it happen? Mr Carter: An essential part of the framework we will need to conclude or not between now and the summer will not only be undertakings that are legally enforceable but that have deadlines and timelines and measurements attached to them. Q18 Chairman: There is a feeling that BT's mission statement is a bit like St Augustine's prayer, "Make me good, God, but not yet"! That is our worry, that things might take rather longer than expected. You have said you are going to put down a timetable. Do we take it that it will be a fairly short and rigidly policed operation? Mr Carter: Within the bounds of what we are allowed to do legally. We are required to consult over time periods. We have already had questions from the Committee about Universal Service Obligations and 100 per cent coverage and these things require some degree of balance. Q19 Mr Evans: Is equivalence being rolled out to the wholesale market as well? Mr Carter: Indeed. Q20 Mr Evans: I want to look at Local Loop Unbundling. Is this recognition that then ADSL now is 'the only game in town'? Mr Carter: I am not sure the cable industry would welcome that question. Clearly at a retail level and infrastructural level there is an effective and increasingly consolidating competitor. It does not have anywhere near 100 per cent geographical reach. If one is looking across the reach of the country in fixed infrastructure, ADSL is the major player. Q21 Mr Evans: Do you fear that with Local Loop Unbundling it is going to divert scarce resources away from our infrastructural investments? Mr Carter: I think that is a very important question and it goes back to the Chairman's question about timing. The judgment we took when we inherited our responsibilities ‑ and history will be the judge of whether it was right or wrong ‑ was that if we could get the conditions for alternative investments in LLU right speedily then that would facilitate other players investing in the network at the deepest point of infrastructure, which might then lead to subsequent follow‑on investments in other areas. We have never seen it as an absolute end in itself. It is a means to an end, but that means you have got to get it right reasonably fast otherwise the market or technology moves on. Mr Richards: We looked very carefully in the first part of the review at whether there was, as a result of technological change, other opportunities for full end‑to‑end infrastructure competition in the model of the cable industry but perhaps through wireless mechanisms or indeed fibre to the home. The conclusion we came to, which we tested in the consultation process, was that indeed in many people's view there was no long‑term scope for that. As a result of that, as Stephen said, what we wanted to focus on was driving competition as deep into the network as possible and we combined the consultation we did with some economic modeling and where we believe that that is possible is through Local Loop Unbundling at least for a significant part of the UK. Where that takes place within the UK should have a broader beneficial effect across the UK more generally. That is the way we have been thinking about it. We spent a lot of energy and time looking at alternatives first because clearly if it had been possible to take any measures which would have introduced full multiple infrastructure competition from end to end that would have been a preferable outcome, but there is no suggestion anywhere that that is in the offing. Q22 Mr Evans: Are we not storing up a little bit of trouble for the future with so much concentration going on ADSL as well? There is a capacity problem, is there not, with ADSL in any event? Is it 18 megabits a second? Mr Richards: It is 18 to 24. It varies around the world. There are all sorts of experiments and research and development going on in this area. We pretty much know now that you can do 18 to 24 per second over copper. That does have a consequence because it is very hungry and therefore it may affect the reach of the ADSL network in any particular area if you are giving very high band widths to people closer to the exchange. There may be a consequence that needs to be looked at carefully there. Nevertheless, it does raise the issue of the next generation beyond that. There will be an upper limit. It is remarkable how far people have been able to extend what you can put over copper. This is another issue that we have looked at carefully and had a lot of dialogue on in the UK and internationally. At the moment I think it is safe to say that in the UK there is very little ambition to roll out anything beyond stretching the copper as far as you can to that 18 to 24 megabits per second. That is not the case in other countries. In the US now there is more fibre going either to the home or to the kerb. Both SBC and Verizon have announced major investments in that area. As I know you are aware, in some of the Asian countries, Singapore, Korea and so on there is already investment of that kind. Q23 Mr Evans: Is our industry going to be disadvantaged compared to other countries round the world if we do not encourage or incentivise somehow proper investment into these new technologies? Mr Richards: I think the most important thing that we have thought about in this area is that we have got a clear regulatory framework which will facilitate that next generation investment should there be the demand from industry or indeed people at home for that kind of capacity. It is important to make the distinction between the UK and some other countries. The biggest difference with a country like Korea is that they have very high densities which make the economics of providing fibre to a building, for example, much more attractive. We tend to be more distributed. We want to make sure that we have got a clear regulatory framework in place so that when people are ready to roll out and when they believe the demand is there from businesses or homes that investment can be made. We have looked at a variety of different options which we are consulting on at the moment. One is full regulatory forbearance where essentially we say if you want to make the next generation access investment - and this is not BT's core network, this next generation broadband access - we would forebear from regulating for a certain time period, thereby making it the most attractive situation. They would be able to earn full returns on it. Another option is to make the ducts and civil infrastructure of BT available to other players who then may make an earlier investment. The third option that we have looked at is what we have called open access through which we would have a regulated return on a single fibre investment, but a whole variety of different providers might have one of those fibres or share that fibre access. At home you could choose between different service providers but there would essentially be monopoly regulated access. Q24 Chairman: I am not very clear here. The emphasis in the last few moments has been about technology, but we are talking about a market which requires massive resource in order to gain even a niche position. The difficulty seems to be that we have been concentrating on the technology but not the cost. My understanding is that outside of BT there are a number of people who are very precariously placed at the present moment in the sense that it costs them more to sign people up than the charges that they make. If BT just sits there and plays poker long enough the other ones will leave the table because they do not have the resource regardless of the technology. What would you say to that view? Mr Carter: It is not the most optimistic view I have heard. Q25 Chairman: We are here to get some idea of what is happening. Mr Carter: You will hear later today from companies who are trying to compete with BT. Whether they would describe themselves as precariously placed or not, I do not know. What Ed is describing in terms of alternative technologies demands an investment appetite, demands significant capital investments and OPEX investments in order to be able to make it. At this stage, partly because of the structure of the market, partly because of market valuations and a variety of other things, there is no real evidence of that. In another place in the telecommunications market, in mobile, there are significant capital investments being made not least in the rolling out of third generation network capabilities, five of them to be precise. It is not that there is no investment in new telecommunications infrastructure. We are having a conversation about fixed, but there are investments in alternative technologies taking place. Q26 Mr Evans: Do you see that as a case for the defences as well sometimes and not moving as fast on fixed when they say you have always got mobile telephony? Mr Carter: You mean the case for BT? Q27 Mr Evans: Yes. Mr Carter: I am not sure, not least because of their position in mobile. One of the conclusions we came to in our review is that fixed to mobile convergence is not yet, certainly in competition terms, a meaningful reality; in other words, you still need to treat them as separate markets for the purposes of regulation. My point really was in response to the Chairman's point that there is a scale of investment being made but it is in other areas. Q28 Chairman: Do you think the investment could go further if BT's charges were reduced? You might argue that Michael Howard could use BT as a model for immigration policy as far as letting people into the exchanges is concerned in the sense that in the past it was almost as difficult getting through the eye of the proverbial needle as getting into this place. That has changed but there are still charges involved. Fabulous sums have been paid every week to BT for what seemed to be relatively minor problems; it is £300 a throw at the moment. Have you thought about trying to get that reduced? There obviously are economies of scale coming into play and some of the people wanting to get into the LLU business are not being able to move at the speed they would like to move because of the scale of the charges. Do you have regulatory powers to look at these prices? Mr Carter: We do, we have been and we will continue to do so. We have seen significant reductions in the wholesale charges from BT in the local loop both for rental and connection, largely for shared lines rather than for fully unbundled lines. We are currently consulting on the cost of the local loop. Wherever we conclude on the cost of the copper, because that is a significant proportion of the wholesale charges, will read right across to what are, going forward, acceptable charges and I think it would be safe to say that those charges are only going to go in one direction and that is downwards. There is no doubt that your analysis is correct, that the wholesale charges in part have been an obstacle to the enthusiasm of those people who wish to compete. I do believe there is now a common acceptance across the industry including BT that we need to get a level of significant competition in the local loop. Is there absolute universal agreement as to what the charges should be? I am not so sure, but there is common agreement on the principle. Mr Richards: Connection charges have come down from £117 to £34 in the last four months and the rental from £53 to £15.60, so there has been a big change in the last 12 months, whereas last year the price was genuinely regarded as prohibitive. Q29 Chairman: There was an access charge of £300 which has never been altered as I recall, is that correct? Mr Richards: Those are the shared line prices. We are consulting on the fully unbundled. Q30 Chairman: The other thing we were a bit concerned about was the issue of regulatory uncertainty and whether this was a determined investment. Are you concerned that the length of time that your reviews are taking is creating a degree of uncertainty which is perhaps holding back LLU as well? It is not just BT who is the villain here. Lord Currie of Marylebone: If we were to be proceeding without proper consultation, without engaging with the industry about the issues, I think we would be subject to the opposite charge, that we are not taking due regard of the views of the industry. Q31 Chairman: You are damned if you do and damned if you do not. Lord Currie of Marylebone: Consultation does take time, but we are very clear that the objective at the end of this is to create a regulatory framework that gives clarity and certainty, that incentivises not just BT to invest but also other players and so we have a much more healthier wholesale scene which will then feed through as benefits to consumers at the retail end. That is absolutely at the heart of what we are trying to achieve. Q32 Chairman: How do you see the role of DataStream contributing to wholesale competition? Mr Carter: DataStream was one of the first decisions we had to face when we took over from Oftel and we made the decision at the time that we should regulate the margin available between IPStream and DataStream on a retail minus basis rather than a cost plus basis. Why did we do that? We did it because it was quicker and we thought an immediate response was what many people in the industry - some of whom are sitting behind me - were demanding. We rationalized it because the trouble with doing cost plus calculations when you are dealing with emerging technologies is you lock in cost bases which may change over time. It can be inappropriate or inefficient. What has actually happened is that I think most industry observers would say that DataStream has not developed its scale in the way that one would originally have envisaged. In a sense the development of LLU in the denser urban areas calls into question the role of DataStream. Short term our view is that DataStream has a significant role and we will continue to make the necessary regulatory interventions. Then there is the technology question. DataStream is an ATM based product and as telephone products move to IP technology we will have to look at some medium‑term changes there. That is really where we are in the industry. Q33 Chairman: As a consumer I get bewildered by speeds and charges. Is there any move afoot to simplify that for the lay person? I know that previous regulators have used Which? magazine as a kind of conduit for the transmission of information about rates and charges. Have you thought of doing anything like that? People are now being somewhat bewildered by adverts saying something is twice as fast as the one which was slowest last week and you do not really know what it is all about, and then there is quite expensive advertising about how you can get something for next to nothing and you pay for it per year. Is there not a duty on you to try and simplify this so that the lay person can get a clearer handle of what they are paying for? Lord Currie of Marylebone: We did lay out in the strategic review of the last consultation a whole set of options in this area. We are consulting on this question. We are reluctant to be prescriptive about narrowing the range of options out there in the marketplace because that does reduce consumer choice. What we ideally want to achieve is a position where the consumer is better informed and there are a range of options that we laid out that may or may not achieve that. It is a question we will be coming to. The regulator being prescriptive about tariffs and products I suspect is not the way forward. Q34 Chairman: It is not so much being prescriptive about the tariffs but how they are presented and a question of how long you consult. Lord Currie of Marylebone: We are consulted in a timely way. The danger with being prescriptive about how the data is presented is that we may prescribe it to be presented in a rather misleading way. There are a lot of options out there. It may not be possible to make it so simple, but that is the question we are asking. We will listen to views. Q35 Chairman: Are you confident that once the consultations are over, once you have got your mind clear and the industry understands what you are going to do, you will have the ability to enforce these decisions on the recalcitrance? Lord Currie of Marylebone: We have extensive powers, but one of the questions that we are specifically addressing at this moment is the question of how we would enforce real equivalence of access in a way that we ensure that BT does indeed deliver on that. There are some enforcement questions and we have different options in that respect. We have to be satisfied at the end of it that we can make it stick and if we are not confident in that then we will have to look at the alternative options that we laid out. Q36 Chairman: That has covered all the areas that we wanted to raise with you. There may well be issues which come up as a consequence of the evidence we get this morning and so we may get back to you. Lord Currie of Marylebone: If you wish to ask us further supplementary questions in writing, we would be very happy to respond. Chairman: We may well have to do that. Thank you very much. Memorandum submitted by UKCTA Examination of Witnesses
Witnesses: Mr Francesco Caio, Chief Executive, Cable & Wireless, Mr Ian El-Mokadem, Managing Director, Centrica Telecommunications, and Mr David Rowe, Chief Executive, Easynet, UK Competitive Telecoms Association (UKCTA), examined. Q37 Chairman: Good morning, Mr El‑Mokadem. Perhaps you could introduce your colleagues. Mr El-Mokadem: Could I perhaps just introduce our Association first and I will let my colleagues introduce themselves? Q38 Chairman: Yes. Mr El-Mokadem: We represent UKCTA, which is the UK Competitive Telecoms Association. It is the trade association committed to establishing a genuinely competitive landscape in the telecoms market in the UK. We represent basically both the major players who compete against BT and each other and also have the privilege of buying services off BT in this marketplace. Between us we are well placed to comment on the topic under investigation. Our primary objective is to deliver a level playing field. Our firmly held view is that that is the way in which investment will be maximized in this industry and that will ultimately be to the benefit of customers and the economy; that is our objective. We have been working with Ofcom, government and other stakeholders as hard as we can to that end. There are some 23 members of our Association. I am Ian El‑Mokadem. I run Centrica's telecoms division. Committee members will be very familiar with the main brand we operate in the UK, British Gas and perhaps less familiar with One.tel. Between One.tel and British Gas we have established ourselves as the largest service based competitor to BT in the fixed line market in the UK. Mr Rowe: My name is David Rowe. I run Easynet group, which is an alternative telecoms operator in the UK. It is probably best known for pioneering the local loop in the UK which we have been in for a couple of years now. Our footprint covers around 750,000 businesses and our primary roll‑out was based on a return for businesses, not for the consumer market. Having said that, as a result of some of the things that Ed Richards was saying earlier, the price drops have encouraged us to move into another phase potentially for expanding our network to include a more consumer orientated footprint and it depends partially on the outcome of some of the reviews as to what we do. We launched a wholesale product at the end of last year which competes head-to-head with BT wholesale and we have had a very good response from the industry in general. We are a little bit worried about some of the de-averaging things that BT are doing in terms of differential pricing, we believe they are trying to hit us slightly competitively, but, notwithstanding that, we have been very encouraged with the local loop infrastructure so far. Mr Caio: My name is Francesco Caio, Chief Executive of Cable & Wireless. We have a large business in this country, about £1.6 billion in revenues and we have recently launched under the Bulldog brand a Local Loop Unbundling service to both consumers and small businesses. We are now rolling out the network account and the first phase will be to unbundle 400 exchanges by the end of this year that will cover something like 30 per cent of the population and about 35 per cent of the businesses. As David was saying, we have been observing the evolution of Local Loop Unbundling processes and prices very closely and we have concerns about some of the geographic de-averaging of BT. We have recently submitted a complaint to the adjudicator after having worked very effectively with both Ofcom and the adjudicator. We are committed to innovating this space, we are committed to taking full advantage of infrastructure‑based competition and we are committed to both capital and management band widths to make sure that we offer to consumers and businesses a quality alternative in the area of broadband. Q39 Chairman: Thank you. One of the reasons we are holding this inquiry at the moment is to try and get a feel as to how the review has gone and I think really what we would want to start off with this morning is your impressions of the review. How satisfied are you? Do you think they have maybe taken the wrong approach, been too kind to BT or too rough with them? What is your general view? Have they been asking the right questions as far as you are concerned? Mr El-Mokadem: I think broadly the answer is that we are very happy with the way the review has been conducted thus far. Generally all of our members would say that a review of this market was long overdue and I think the years that came before Ofcom's establishment were typified by regulatory uncertainty, and almost a paralysis in some cases in terms of getting decisions made, and I think a strategic review of this market was long overdue. We believe that Ofcom's approach has been highly consultative and pitched at the right level, starting to look at the strategic issues in Phase I and then drilling down into a very good framework in Phase II. All of our members are signed up to the principle of equivalence as being a good basis for a regulatory settlement in this space. So far we are very pleased with the progress that the review has made. I guess at the end though we have been at this for a year and a bit and we now need to look very quickly to see some results on the ground. Whilst we do not mind the review going on for another few weeks if it gets to a decent, robust structural answer, at the end of the day it is the results on the ground that now matter and that is where we want to see Ofcom turning very quickly. Q40 Chairman: What about regional variations in the regulatory regime; is there a danger that it acts as a disincentive in areas which are currently dependent on BT's ADSL? Mr Rowe: If I could just answer that one. From an UKCTA perspective then clearly for people like Centrica it is important to have a national pricing environment for their business plan and for their marketing purposes. From a local loop operator's perspective BT are using the argument, if I am right, that in the urban areas, where perhaps returns are better, those are the areas where they can lower prices differentially to rural areas. If one turns that argument on its head and says the reason why they are able to offer lower prices in the urban areas is because they are making such good money in these areas and they are the operator who holds all the cards, as we have heard before, it is almost, and I am not going to say universal provision, but it is something where you would expect their responsibilities to be in ensuring that they use some of that profit from their profitable exchanges to effectively subsidise the rural exchanges and not the other way round. For us that is important because we as a fledgling operator who are moving into a new area need to reassure our investors that they are going to get a return from the investment in the local loop. Where we can see that BT see us as a threat then clearly that is going to alter the business case if BT are offering differential prices in exchanges where we are being successful. I do come back to the point, agreeing with Francesco, that real, sustainable, long‑term competitive positioning in the telecoms industry relies on end‑to‑end infrastructure competition of which the local loop is arguably the best thing we have ever seen in that regard. Mr Caio: I would refer to specific examples of what we have seen in the market over the last few months. It is not by coincidence that until this competition in the local loop arrived that the consumers in this country and businesses in this country have been at a disadvantage when it comes to speed of connection compared to other European markets. Only recently ‑ and I am talking based on direct experience - through the launch of a four megabit product in the area of consumers, have we seen BT reacting to just one flavour of 500 K, which is a very low speed, and launching a new competition and you are observing now a fairly rapid upgrade of speed available from BT. This is one of the clearest examples of proof we can point to in the area of infrastructure‑based competition. It is of concern that once we have committed to a roll‑out of the network we see those exchanges, as David was saying, where we are making some inroads being targeted by BT to have differential prices on the wholesale, where they could scupper the plan. I think there is a perception in this country probably more than others that the internet industry has been composed for years of whingeing people who really do not know what they are talking about and therefore there has been an over‑reliance on regulators to keep the incumbent honest. I think we are observing a shift in this. We are observing a number of players, for sure Cable & Wireless, which are now committed to implementing and delivering a roll‑out that has never been seen before in this country when it comes to the focus on exchanges for both businesses and consumers. We have to be cognisant of the fact that we are not in the charity business. We are acting under the strong assumption that infrastructure‑based competition is the key driver for the quality of life for citizens and competitiveness for businesses, and under that umbrella we need to deliver returns to shareholders. So I think this matter goes well beyond the Ofcom review. I think it is at the heart of policy‑making in terms of what kind of industry in the fixed telecommunications sector this country is willing to go for. I think clarity is of the essence because of what David was saying. This industry has been destroying value for too long, not necessarily because of the incompetence of the people running the net. It is time for us as an industry ‑ and we are very grateful for this opportunity to speak to you, Chairman, and to the Committee - and for the leadership in this country to come to terms with what kind of competitive model would citizens and businesses benefit from in such a central element of the competitive landscape as broadband. Q41 Mr Clapham: You heard Ofcom say that their preferred strategy is equivalence and I note from your submission that you support the principle of equivalence. Is that a reflection of all your members' views? Mr El-Mokadem: Yes, absolutely. A fundamental principle of our association is we would not have responded as UKCTA were there any material disagreement amongst our members as to what we put in that document. So absolutely. We are all signed up to equivalence being a very good basis for a regulatory settlement. I think there is a strong preference amongst the flavours of equivalence in the document for input equivalence because that is the easiest to police and to ensure in the long term. There was some discussion earlier about Ofcom's powers and ability to intervene and pursue complaints, et cetera. We firmly believe that input equivalence is the one least likely to result in endless disputes into the future because basically with input equivalence it is very clear whether we are all buying the same thing off BT or not. It is black and white. Without input equivalence there is a lot more of a requirement for measurement and a lot more judgment involved in the other flavours suggested in the Ofcom review. In the long term that is a recipe for more regulatory intervention and more disagreement. The closer and quicker we can get to input equivalence, the better and the more transparent this industry will be. Q42 Mr Clapham: Given the discussions that you have had with your members, could you say what you feel the equivalence principle should cover? Mr Caio: It should cover everything because you are dealing with an incumbent. Let me step back. Sometimes I feel that this country loves the debate between us and BT. It is almost like you are there as intrigued spectators to a pretty interesting fight. The purpose of us is not that we wake up in the morning and say, "How can we hurt BT today?" it is really how can we develop a sustainable position in the industry to deliver value to the users? One needs to view the debate on equivalence in this context. The equivalence needs to cover everything, particularly services that rely on the famous or infamous last mile where through the years BT, as every other incumbent in this world, has managed to build a natural monopoly position. As my colleagues were saying before, it needs to be about input. It needs to be very practical. One of the concerns of the industry, and Cable & Wireless in particular, is that there a fair degree of convergence when we talk about principles but now it is time to act. What does equivalence mean in specific instances? For instance, line rental is not a service that today is fit for purpose when it comes to equivalence. Ian can elaborate on his direct experience in WR, as can we. There are 900 people per week deciding to switch because it is such a complicated process to forego the monthly line rental to BT. Mr El-Mokadem: We shall add to that. Wholesale line rental - which just to clarify for Committee members is the ability basically for you to choose to have to pay me for your line as opposed to BT - is a very, very basic building block of switching. Comparisons in other industries like gas and electricity would be that today you do not switch from British Gas and still end up paying us for the pipe or wire to your house. Line rental is the telecoms equivalent of that and certainly in the five years Centrica has been in this space we have been lobbying very hard just to have the ability for you to be able to choose whether I bill you for your line or you continue with that relationship with BT. We were very pleased to see finally that Ofcom said in the last instalment of the review that the product that has been delivered by BT Wholesale is not fit for purpose. I am sure Committee members will have been lobbied quite hard by BT over the last 12 months who were telling you that it actually was. The reality is I run a business where we have got 1.4 million fixed customers, and I can tell you very clearly that a large majority of those customers would love for me to be able to bill them for their line rather than have a bill from BT and a bill from us but the reality is that that product is not scaleable, the processes are very flaky and if I were to try and transfer thousands of customers per week through that product it would be very labour intensive, very costly to operate, and probably result in far too many complaints. We have been working very hard to make progress on that very, very simple building block of competition and have been very frustrated in that process. Mr Rowe: It does beg the question that earlier someone asked; are BT playing ball? I think the bottom line there is they are in it to serve their shareholders and their bonuses depend on certain profit targets and taking away their ability to make those profits hurts them personally, it is less money in their pocket from their bonuses. So it is counter‑intuitive. No‑one in this room would behave like that. It is not to do with being good or being bad; it just is. The equivalence issue therefore goes to the heart of this because it hurts BT and it has to be done with a big stick, not lots of meetings dragged out. They have all the cards; remember that. If you really want to create genuine competition which will long term benefit consumers then remember what it was like before competition and how much it cost to phone France and America and what the service levels were like. It was not just because BT wanted to be nice suddenly. It was because competition forced them into it. Unless we get equivalence properly done and also a benign environment for loop operators to invest in, then it is not going to change. Q43 Mr Clapham: Are you confident that Ofcom can actually achieve equivalence in the market? Mr El-Mokadem: I think in our view Ofcom has more than enough powers to impose or to reach a regulatory settlement that would work. With the combination of the Enterprise Act, the Communications Act and the Competition Act there is more than enough legal basis for them to operate. I guess my own experience is I have dealt with most regulators beginning with 'Of...' over the last eight years from Ofgas through to Ofgem in energy and then Oftel through to Ofcom in telecoms and I think a key part of this is the demeanour of the regulator, that the regulator has to be strategic from the outset. They must say, "What are the macro issues which I must sort out here?" They need to be forceful, clear with all parties and then they have more than enough powers sitting behind them to execute. If I look back to the Oftel days, the problem with Oftel was there was no strategic context for decision‑making. None of us really quite knew what Oftel was trying to achieve at the end of the day and Oftel was typified by endless complaints and endless investigations into this and that but without a context in which to make proper, robust decisions in terms of where are we trying to get to, what are the key building blocks, how do we get there. The key thing Ofcom needs to use this review to do is to establish that framework so that everybody understands and so there is certainty about investment, and then they can use their powers very successfully to execute against that. I would say that the key to this being successful moving forward is the closer you can get to input equivalence the less need there will be for endless investigations and dispute resolution into the future so it is worth taking the pain now to see what we have seen in other markets which is a gradual relaxation of regulation over time once the structure is right. Mr Caio: And I think it would be useful to bear in mind the practical elements of what we are talking about. At the moment we are offering consumers the opportunity to have full local loop unbundling and to take telephone lines, telephone services, voice services and fast internet on the same line. In order for us to get that opportunity to offer this innovation to consumers we need to get into what the industry recognises as address matching. We need to specify an 11-number code that is associated with a customer account and we need to spell the address as in BT's database. If the postcode or if the database is wrong they do not recognise that. In any other country you give the number and the name of the consumer and that is enough. I think my concern and our concern is that we run the risk of focusing on principles without looking at the practicality. Equivalence means having the same data that is available in BT Retail to everybody else who is willing to put money into the ground to develop innovation. Q44 Mr Evans: Going back to your relationship with British Telecom, while Francesco you may not get out of bed with the intention of wanting to kick BT every morning the fact is you want to compete with them and you want to get more of their business, do you not? Mr Caio: I do not think it is their business; it is the consumer business and it is the company business. Q45 Mr Evans: But you want more of it, do you not? Mr Caio: Sure I do. I want more of that. I want to offer something that I earn through innovation, quality of service and value for money. Q46 Mr Evans: They are not going to give it to you out of the goodness of their hearts so the only way it is going to happen is through the regulation of Ofcom, which basically gets to the heart of it. I think you were all listening to the Ofcom representations here and you heard what they had to say. Are you happy with Ofcom? Mr El-Mokadem: I think so far so good. Frankly, it has been a breath of fresh air compared to Oftel which I think had run its course. There is a good team in Ofcom. I think they started the process, as we said earlier, very intelligently. They are asking the right questions. They have got a good set of frameworks in the Phase II document for the basis for a solution but what we are going to see over the next few months is a real test of their mettle. Personally ‑ and this is me speaking rather than UKCTA ‑ I have a slight concern that we are in the realms of it is time for a bit of a fudge to get this thing through. I would prefer personally to see this review going on for a few more weeks and achieving the clarity that input equivalence provides the basis for. There is a lot of work to do. In terms of the proposals that they put forward whilst there is no doubt it is a step in the right direction, and to be fair to Ofcom they have brought BT to the table in that respect, there is an awful lot of detail missing, and we may go on to talk about some specific areas of that. I think the key thing in the response from BT was that whilst there were some apparent concessions around things like an access services division and structural remedies internally, a big chunk of their document was dedicated to denying the need for that change and denying a lot of the Ofcom comments about BT's behaviour in the market which we would all recognise very clearly as being what it is like to deal with them on a day‑to‑day basis. Q47 Mr Evans: It goes back to David's point, does it not, that because you want to take some of their business they are not going to be happy about it, are they? Are you getting a much better relationship with British Telecom than you have ever had and do you see any of the behavioural and character change that was talked about by Stephen earlier on? Mr Rowe: If I could just answer your original question first which was about Ofcom. I agree wholeheartedly with what has been said before, but the proof is in the pudding. There are two big issues for me. One is equivalence, and the devil is in the detail, and the other is we need to be protective of the local loop because BT really do not like that. That goes right to the heart of their future. So you need to protect it now in some way or other to help it thrive to increase the investment case for it. Q48 Mr Evans: Are you seeing a sea change in BT's relationship with you? Mr Rowe: To be fair, most people in BT are ordinary people who get up, go to work, come home, and we have a reasonable relationship with them because we are quite civil to them. The people at the top are scheming; that is what they are paid for. Q49 Mr Evans: I do not want you to beat about the bush! What do you really think about the people at the top? Really? You just think they have got a strategy which is they send their nice people out to chat to you but there is something different going on upstairs? Mr Rowe: If I were a shareholder of BT and I wanted to get the maximum dividend, I would hope they would do whatever is necessary to get the maximum profit that they can. Mr El-Mokadem: To put it another way, if we look at a specific example, I should be one of BT Wholesale's biggest customers. I have been shouting for that product for four years. I could sell a lot of it. I have had no material senior level engagement with BT in terms of progressing wholesale line rental for months, in fact probably really for years, and even after Ofcom put in its document before Christmas that the thing was clearly not fit for purpose (because before that BT had been saying it was) there has still been no real serious engagement on that issue. If BT had really made a mind‑set change that was going to take on board the spirit of some of the comments in Ofcom's proposals, then I would not hesitate to say that a few of us have had a bit more engagement at a senior level on some of these real, fundamental issues. Speaking personally, I am still waiting for the call. Q50 Mr Evans: So you think it is that nice Ben Verswaayen and his mates at the very top who have a different strategy completely and you think that they are pulling the wool over Ofcom's eyes and you are wanting Ofcom to take further harsher action against them? Mr Caio: May I bring your attention to some facts because there is always the danger of double guessing what people in closed rooms think about it. At the moment I am observing these two interesting points. When we have to buy access to a local loop line from BT to then offer full local loop unbundling to our customer, we need to pay £168. When we have to buy that same capacity and capability in the context of wholesale line rental, the cost is £91.99. From an engineering standpoint I have very great difficulty in understanding what the difference is and I think it is time for the industry to have BT addressing these issues in an open forum and decide which is the right price, and I hope the conclusion is not £168! Mr Rowe: This comes to the equivalence of inputs that we were talking about. Q51 Chairman: Are you happy with the suggestions on the structural changes that are going to take place? This possibility of the business being split up into three elements? Mr El-Mokadem: I was very interested earlier in the comments about British Gas. I think there are some very relevant parallels there. Let me try and answer the question in this way. We were pleased to see the proposal for an access services division in the BT document. That is a significant shift in terms of concessions that BT put on the table. However, there is an awful lot of detail missing so far in those proposals. We do not see so far in what is contained in those proposals the very clear, transparent, stand‑alone entity within BT that is free to serve all customers including BT Retail on an independent arms' length basis. There were a lot of words like "monitor" and "observe" and things like that but very little feeling that this was a true commercial arms' length entity. If I look to our own history, obviously British Gas has been through this whole separation debate and the conversation earlier was absolutely right, when done properly the Chinese Walls become so high that arguably there is a case for separation because there is no benefit ultimately in the integrated model. We have as an industry group shied away from calling for separation because if we can get within BT a properly ring‑fenced transparent entity then that will serve our purposes. It is then a matter of personal opinion as to whether the BT board would ultimately see divestment or demerger at that point as being the right solution, and that is really for them. The key thing is that the access services division so far is a long way off that clearly transparent proposal with high Chinese Walls that we would like to see and there are also some things missing from it. Some of the key products like wholesale line rental and carrier pre-selection, which are in the current proposals on the table, are not going to fall within the remit of the access services decision, they are still going to be in BT Wholesale. Frankly, from my perspective I do not think that is going to change. I have been trying to get those products out of BT Wholesale for five years with very little success so I am not encouraged by the other promise in the document which is that there will be an equality of access board that will somehow sort all that out. Q52 Chairman: You must be taking this to Ofcom; what do they say? Mr El-Mokadem: This is exactly where we are at. We have obviously pushed back since we saw the BT proposals and UKCTA has been heavily engaged in conversation with Ofcom. One of the key areas we are pushing for is much greater transparency around the access services division. I am a bit concerned that having put it on at the table they say, "Whoopee, BT, thank you very much," and actually the devil, as everybody keeps saying here, is in the detail and so far the detail around that organisation is very lacking. Mr Rowe: I think it is also important if the access services division does come about that the management of it is clearly separate and is not just BT management on that board. It must be industry management with a remit on that board for it to have a chance to work. Q53 Mr Clapham: The review document talks of the need to promote investment. Are you satisfied that its proposals will be fulfilled? Mr Rowe: I think it depends on what comes out of this. Clearly the bulk of the investment, as we heard earlier, in this country is being focused around local loop investment, both at Cable & Wireless and at Easynet, and there are one or two other players involved as well. This comes back to my point that the local loop needs to be encouraged. The review does not necessarily focus all of its efforts in that area by any means, but I know that Ofcom is aware of that and their view, broadly, is in line with that too. Q54 Mr Clapham: I hear what you say about the investment in local loop unbundling, but is there a possibility that it may cause a distraction and therefore move the focus away from the need for an improved network to allow faster speeds? Mr Rowe: Not really. If you look at the stuff that both Cable & Wireless and Easynet are putting in now we already have eight meg. We are waiting for the final homogenification of ADSL II Class to offer eight meg on our network. Our network is already ready for that. It is not a question of holding back the investment so that BT can get there. We are there already. What we need to do is to get a better environment so that we can roll out to a wider area and focus on the consumer as well as the business from our perspective. It is a bit of a myth that BT needs to recycle all this money to get the next generation. If you let free competition go, we will out‑innovate BT every single day of the year. Q55 Mr Clapham: Are you confident that that environment is evolving, shall we say? Mr Rowe: It is nascent. Q56 Mr Clapham: It is nascent? Mr Rowe: Yes. Mr El-Mokadem: I think it is also right to have sight of other forms of investment in this industry. It is not all about kit. There is a real tendency to think about telecoms and to think about exchanges and wires. Obviously that is at the heart of it but if I look at my business we do not invest in that stuff. We choose to partner with players like these guys to deliver that. That is their expertise. What we bring is an insight into managing mass market propositions, sales, marketing, call centres, customer service. There is a lot of innovation and a lot of investment, in our case hundreds of millions of pounds, that have gone into that portion of the value chain. I think it is very important that the Ofcom solution encourages investment at the customer end of this because I think that is the way in which you keep the technologists on it because at the end of the day if it does not have an application that the customer is willing to buy that is where a lot of telecoms models have fallen down in the past. It is important that we see the embryonic investment at that end of the value chain which many UKCTA members are bringing ‑ people like us, Carphone Warehouse and Caldwell Communications. That is a very important part of this jigsaw and should not be forgotten. Mr Caio: May I add one point on innovation which I think is very important. Through local loop unbundling we have for the first time a serious opportunity to unlock that kind of monopolistic resource at a time when there is a shift in demand from traditional narrow band services to broadband. I do believe that there is a sense that around Europe incumbents are somehow the repository of innovation and "we had better not touch them because if we touch them the rest are so flaky that we might be left without innovation". I would seriously ask BT to reconsider that. There is a genuine opportunity to drive sustainable innovation through limited but very well-focused investment, as David was saying. Both our networks offer today capabilities that BT is now associating with the notion of the Twenty First Century Network where they are just somehow constrained by the lack of innovation in the last mile. At the moment two smaller companies than BT ‑ us and Easynet ‑ are offering a higher speed than BT and I think this is a point I really would like to emphasise. There is an opportunity to see genuine innovation coming back into the fixed telecommunications industry for the benefit of consumers and businesses and it would be a shame to see that window closing now. Mr Rowe: Also if I could pick up on your point earlier about where does the speed go to, ADSL and fibre to the kerb. To give you an idea, something like five megabits is good enough to do TV broadcasts. Q57 Mr Evans: We are almost there now. Mr Rowe: Once you start to go to eight or ten then you can get high definition TV‑type quality. The question is then what else do you want to do with it. Who knows what the possibilities are in terms of video conferencing and stuff like that. Q58 Mr Evans: What do you need for video conferencing? Mr Rowe: I was going to think of another application but just forgive me for a moment. Yes, all of those things in fact can be done within the kinds of speeds that we are talking about with ADSL. To talk about the next generation is far too early. Mr Caio: The market is now, the demand is now, and a lot of debate about ADSL being long term sounds like that has diverted attention from what is today. If you think about analogies with the mobile industry and waiting for the next generation, there is always time to wait for the next generation but if we keep waiting nothing will happen. This is what is available today and I think we can genuinely address the demand for innovative services with ADSL in a very effective way. Q59 Mr Clapham: A little earlier, Francesco, you mentioned the need for more infrastructural competition. What do you see to be the main factor holding that up? Mr Caio: Again it is the point we were making before. There has been an abundance of infrastructure competition at the core of the network but all that innovation has been somehow wasted because it has been constrained by lack of competition in the critical last mile. Also I was saying before for years consumers in this country have been offered "all colours they want as long as it is black" type of thing, and again analogies with the mobile industry indicate that infrastructure‑based competition brings innovation, new services, declining prices and value for money. Without that innovation I do not think that situation is sustainable. Back to what Ian was saying before, it is important to have certainty in the regulatory framework to isolate the commercial entrepreneurial risk. We do not want to shy away from that risk with commercial businesses but we cannot afford to have another risk which is BT, or incumbents in general being left with the power of playing with wholesale retail prices in a way that scuppers the significant investment plans which drive innovation. Mr Rowe: Also the first and last questions investors always ask when you come up with a new plan is, "This sounds great but what if BT do this or what if BT do that? We heard that BT are going to do this." It is a big risk factor in your investment. All we need is a clear playing field. Q60 Chairman: Thank you very much, gentlemen. One last question. What do you do if BT asks to join you? Mr Caio: UKCTA? Q61 Chairman: Yes? Do you have a fetish doll that you stick pins in and it is BT? Mr El-Mokadem: I think that would be an ultimate measure of the success of the review. If we get to the stage where BT Retail is a competitive telecoms candidate member because it is playing in a level playing field, that will be a good measure of whether or not Ofcom has done a good job. Q62 Chairman: I thought you might say that! Mr Caio: We are very open. Chairman: Thank you very much. Memorandum submitted by Internet Service Providers Association (ISPA)
Examination of Witnesses
Witnesses: Ms Mary Turner, Chief Executive Officer, Tiscali UK, Mr Richard Sharpe, Managing Director, AltoHiway, and Mr Dave Simpson, Manager of Regulatory Affairs, Easynet, Internet Service Providers Association, examined. 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 and whether they are a member 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 per cent 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 the. 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 per cent of the business. The other 30 per cent 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 per cent 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 acknowledge 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 per cent 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 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 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 IPstream 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 IPstream and that is a central pipe into BT's core network and the core network very, very rarely fails. 99.9 per cent 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 ten 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 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 backfall 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 Twenty First 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 on line 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 our view is really 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, one is the margin squeeze between IPstream 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 per cent 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. The telecoms adjudicator 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 de-averaging, which is bringing down the prices of the congested exchanges. These are exactly the exchanges that most operators will LLU first. Then there is the destabilising factor that is brought about by the Twenty First Century network. Nobody is clear about the implications of the Twenty First 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 Twenty First 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 Twenty First 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 IPstream and where Datastream is not possible we would actually then buy a re‑sale product from BT which is IPstream is data. The belief of most operators, certainly Tiscali, is that 80 per cent of the 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 IPStream, 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, so 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 time-scale 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; the 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 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 we will be able to get in touch. Mr Sharpe: Thank you very much. Memoranda submitted by AOL and Wanadoo Examination of Witnesses
Witnesses: Ms Karen Thompson, Chairman and Chief Executive, Mr David Carr, Vice President Broadband, AOL UK; Mr Eric Abensur, Chief Executive and Mr Simon Persoff, Head of Regulatory Affairs, Wanadoo, examined Q74 Chairman: Good morning. Perhaps you could introduce yourselves and then we will get started. Ms Thompson: I am Karen Thompson, I am Chief Executive of server AOL UK. Can I introduce, on my left, David Carr, who is my Vice President of Broadband, who is responsible for various broadband services in the UK? Mr Abensur: I am Eric Abensur, Chief Executive of Wanadoo UK, and Simon Persoff is the Director of Regulatory Affairs for the UK. Q75 Chairman: Thank you. Very quickly, on the question of the review to-date: this is a new body, starting with a slightly different approach from its predecessor, how do you feel about them? What is your view of the review at present? Mr Abensur: Very good. Extremely positive, I think. We attended this Committee in December 2003 and reading again the report, I think we said at that time that we were cautiously optimistic about the new body, and I think every action they have undertaken so far has been extremely positive. So I think the consulting period they have launched and the key decisions they have taken during the first half of 2004 were extremely positive and gave some very good messages to the industry. So, so far, we would say we are quite positive about what Ofcom has delivered to the market. Ms Thompson: We would echo that. It has been a good consultative approach. I think a lot of the issues have been got on the agenda and really opened up in a way that we did not feel was happening before that. Getting a clear roadmap for competition on the agenda was extraordinarily helpful. I am going to avoid any reference to puddings or eatings but it is quite clear that moving forward it is now all about how it is executed, how competition is brought into the market, and that will ultimately be the proof of the strength of the process. However, a good start. Q76 Chairman: Obviously, we have had to look this morning at LLU and in a number of instances we have been discussing the price reductions and the access to LLU. Are you happy that things have gone on far enough there? Are the prices low enough? Is access reasonable enough now to the LLU process? Is there anything else Ofcom needs to do in that area, do you think? Mr Abensur: I think we said, once again, twelve months ago, when we started this discussion regarding Local Loop Unbundling (and this Committee was, really, the first to start launching again the Local Loop Unbundling in the UK - and we thank you for that), we made this comment, and your report made this comment - I think it was in paragraph 32 - about the fact that there is some criteria to make sure that local loop can expand positively. Those criteria, in my mind, are about price, about processes, and the third point was stability. You mentioned that stability in your report twelve months ago. The price we have; I think the price has come down quite dramatically. The processes: we have this Telecom Adjudicator scheme and I think all of us agree it has created some positive dialogue. We are still very early in the process but it is positive, again. The third is about stability. When we have to build a business case for investing in Local Loop Unbundling, yes, you talk about margin but this business case is for the next five, six or seven years, so you want to make sure that your key assumptions are likely to happen, and if over the next two or three years some key assumptions have been jeopardised, yes, we may have an issue and we may have some concern. So I think we have reached the two criteria of stability, in terms of price - we are happy about the price of Local Loop Unbundling - and we are happy about the way the process has started. However, we have a question mark about stability: margin stability, and the stability of the regulatory framework, and a question mark about the 21st Century Network - that is the kind of concern and question mark we may have today. Ms Thompson: I would certainly echo some of that: on the pricing we are broadly happy; on the process side I would point out we manage a customer base of well in excess of two million customers in the UK, most of whom will go to broadband at some point. When you look at the quality of the processes to support a migration from IPStream, the technology we are currently dependent on, across to LLU we have to be striving for extraordinarily accurate and solid processes. Where we are at the moment is definitely not the quality that we would require to be able to effect a significant migration across to LLU. I understand it is early days and I think the Adjudicator is doing a very good job, but with the size of customer base that we are talking about we absolutely have to nail these processes. On the environment side, what we absolutely have to have is an environment in which the investment cases can be put and in which we have some stability. The removal of IPStream's regulatory framework was, frankly, unhelpful and I think we have seen the result of that in BT's announcements on de-averaging, and that does impact on the business cases that we have been putting together. So it is really about creating a more stable environment in which investments can be calculated and then brought to market. I will pass over to David, because he is the person in my team who is putting those business cases together and doing this on a day-to-day basis. Mr Carr: I would agree with what Karen says. I think the business case works very well in the early exchanges, it is when you start trying to really push it out as we would like to do to some of the further exchanges that the pricing around backhaul still has some work to do on it; that is an area that I know the OTA are looking at and needs additional work. On the processes, I have just underlined the importance of that. We are talking, currently, of about 30,000 people, from my understanding, on LLU, and over the next two years we are talking about pushing several million out there, and that just requires a completely different infrastructure than is in place at the present time. Ms Thompson: I think that comes back to quality and quality of delivery. I think it is one thing that we certainly have active discussions with BT on, which is about benchmarking against world-class quality standards rather than incrementally improving standards which, frankly, we do not think will be enough to get us there. Q77 Mr Clapham: I think you were all sat in when your colleagues from ISPA said they still have some reservations about the wholesale market. Do you feel that Local Loop Unbundling can overcome some of the issues with the wholesale market, or does it have the potential to perhaps undermine it? Ms Thompson: I think if you project forward a number of years and in a situation where there are a number of large players using LLU, you would potentially have a lot of product and service innovation. LLU also provides the ability for smaller and perhaps more regional players, more specialist players, to compete. Provided we get the environment right to get us to that environment, then I think LLU will bring a much more vibrant, competitive market. We have already seen over the last couple of years how more competition has brought us much more reach into the network; the demand has been higher than anybody anticipated and certainly than BT anticipated at the time. So I think it is really about the structure and environment that we have to have now to make that picture come true. So it is really about making sure that the practical aspects of allowing that competition to get into the market, to get the customers migrated, to get that product and service innovation, are running, and that is really about getting through the next couple of years positively and proactively, and seeing that the investment case has really been proven out. If we can get there it will be an extraordinary market - very dynamic and very colourful - and there will be lots of different aspects that we have not necessarily thought of yet, but we have to make sure that the environment is right to get us there. Mr Abensur: Just one additional comment to what Karen and David said regarding the number of lines unbundling in this country. Today it is 30,000. Every time I use this example, which is pretty easy for me, which is the French example: we have in France 1.7 million unbundling lines. To get to this position, probably, the best case would be, I would say, the end of 2006. I hope as quickly as that. But it requires everyone, not only Ofcom and key players but BT, to be really working extremely hard to help on the migration and on the processes. So we talk about Local Loop Unbundling; we have said we were extremely positive and optimistic but it is still the early stage (mentioned by Karen). Yes, it is the early stage. Once again, in relation to stability for the next two or three years, it is extremely important that we have that - extremely important. In two years' time, when we will have 1.7 to 2 million unbundling lines in this country, which means, probably, I hope, 20, 25 per cent - perhaps a third - of all the lines of DSL unbundled, yes, maybe we can talk about some other services, some other way to improve the competition, but let us try to get there. Q78 Mr Clapham: As an organisation, you support the concept of equivalence but you express some reservations with it. Are the measures that BT are taking adequate, do you feel? Mr Persoff: I think, on a very high level, BT has agreed that the principle of equivalence is appropriate, and that is positive and we support it. The phrase "the devil is in the detail" has been mentioned previously today. We are concerned in terms of what they mean by "equivalence" - are they talking about BT retail using the same products and services as their competitors do? Mr Simpson from Easynet previously mentioned it would be a very good idea if BT, when implementing their 21st Century Network, were to use the same products, processes, systems and prices - ie LLU - as we would have to if we wanted to build our 21st Century Network. So issue number one is what they mean. My fear is that, in some parts of their network, because some of BT's products claim that inputs equivalence is not appropriate and, rather, there should be this continued discriminatory access to monopoly assets, a much more watered down version of equivalence is applied. However, it is not only in terms of what type of equivalence we have to ascertain, it is also the issue of how is it measured? We are totally reliant on BT to tell us: "Yes we are compliant with the principle of equivalence"; we do not have access to anything more than BT's regulatory accounts, which are not the most detailed documents in the world. We feel that there is an on-going need for Ofcom to assess BT's compliance, and that while BT might be one setting up a board to oversee its compliance with equivalence this is not a replacement for Ofcom and the regulatory process. We feel that going forward, in order for BT to demonstrate that they are serious about going forward and stopping discriminatory access to these monopoly assets, Ofcom should take a much more interventionist approach than BT is suggesting is appropriate. Q79 Mr Clapham: Are any of your concerns known to Ofcom? Mr Persoff: The industry, as a whole, finds Ofcom listening; they are looking at a range of options and, of course, not wishing to fetter their discretion, have expressed support for the general principles. My concern is that there might be some element of bartering going forward between equivalence, or general opportunistic deals which might be done, whereby for a certain product range to find a weaker level of equivalence BT will give ground on another issue. We think, overall, that the principle of equivalence must be looked at not only in terms of the regulatory environment but, also, in terms of competition law. It is our view that any discriminatory access which BT's retail business units gain from monopoly assets is de facto unlawful; you have got to look at that context when looking at what type of equivalence is appropriate. We mentioned in our response, both to Ofcom's Strategic Review and in our submission to the Committee, that we believe that BT does not naturally have a dominant position in retail markets, and that the only reason it has dominant positions in retail markets is because of this discriminatory access to these enduring economic bottlenecks. We are happy that Ofcom is listening. The industry has, clearly, priorities: different players wish different products to be at the forefront of the focus of Ofcom; Wanadoo has clearly stated that LLU is its focus, although we also rely on wholesale broadband products, and going forward we will continue to rely on wholesale broadband products for those areas in which LLU is not viable. We do find Ofcom to be engaging in this area. Q80 Mr Clapham: That is good to hear. So your concerns, really, come down to the discrimination in the market and the feeling that Ofcom have got to be positive in dealing with that? Mr Persoff: Yes. Ofcom is a national competition authority as well as a national regulatory authority. In its Strategic Review it has recognised the fact that competition law has not acted as a constraint on BT's behaviour up till now. We are part of an international company, which has its historic operator in France; it is our position that where competition law acts as a competitive constraint on the incumbent to the extent that they are not engaged in unlawful activity, then such structural measures as are being suggested (and may even go further, according to some of our competitors) may not be necessarily appropriate. However, to the extent that there is clear evidence that BT is not constrained by its competition law obligations then equivalence is appropriate. Q81 Chairman: How do you view BT's proposals to reform themselves? Some people have welcomed them, some people have said "We'll have to wait and see how far they actually go", and other people have been telling us that they are a bit thin on the detail; that they have the bones but not much flesh. Are you in any way concerned about this restructuring of BT or is it not something that is a great source of anxiety to you? Ms Thompson: I am quite a practical person and I think good intentions are wonderful things, but you do not get many points for that. I have been in the industry a very long time and I have heard lots of good intentions from BT about how they are going to operate as a wholesale provider, and on the matter of equivalence that is a very good intention but what I want to see is them operating like the best wholesale types of companies that we work with in any sector. The intentions and what they are saying are very good, but it is really about the practical details, it is about saying: "If you are going to launch certain types of products then what are the services, what are the support systems that go into that? What can we, as customers, expect?" If the equivalence agenda works then we will have what mimics (?) against separation; it will be a true wholesale market for our customers who do have the kind of input that we have in other commercial situations. I have heard BT say a lot of those things, I still have not seen an overwhelming drive from the company to operate like that. David is the person in our business who operates with BT on a day-to-day basis, so do you want to add anything to that, David, in terms of the practicalities? Mr Carr: Coming back to the way that Ofcom is looking at the regulation, they are talking about a light-touch regulatory strategy, and that seems to us sometimes to support BT's infrastructure investments rather than rolling out the LLU process and really driving competition. We are keen to see Ofcom actually get its hands dirty on some of this stuff and drive down into the detail. It is great that they have set themselves a strategic framework, but I think now what we really need to do is to see them start delivering on some of the practical stuff, and that includes to force BT to put some more detail of what they are talking about in terms of equivalence and actually to see it working and operating and driving results. Q82 Chairman: Just one last question to you, on the impact of Next Generation Networks. How do you view this in relation to the products you will be providing? Mr Abensur: If we are - and we want and we must be - to be thinking always about the consumer, if we talk about giving much more high speed, if we talk about developing a new form of communication in services, to provide entertainment and communication services to the world through broadband and through DSL technology, Local Loop Unbundling, obviously, as we can observe that across Europe, is a very good route to do that. If we were talking three or four years ago about developing 15 megabit speed over DSL, I think few people would have believed it was achievable, and today we talk about 20-25 meg. It is not only about having the DSL technology enhanced every time; we talk about compression, we talk about new application and services that can be provided to the customer much easier. Do we need to talk about New Generation Network when we have today a copper wire which is available that can improve and enhance and provide all sorts of services? We are talking today about providing home watching through DSL technology with a WiFi connection; we are talking about mobile and fixed conversions through DSL, GSM, 3G network. We have all this technology available today. Make them work. Once again, we talk about Local Loop Unbundling, that is three letters, and as we mentioned earlier it is just at the beginning, so let us try to use this extraordinary network available to this country successfully and be available as much as possible to everyone. Ms Thompson: I would add to that there is an implicit assumption that innovation will come from BT's roll-out of new network technology, whereas I think we would agree with what Eric just said, which is that we have a network available, let us get out there and get our customers on to it. We both come from companies that have a history of innovation and bringing new products and services to market; what we need is the infrastructure and the actual certainty in terms of getting out there to enable us to move on to different services and platforms. That should not be uniquely delivered by BT; BT will make certain decisions about reducing its operating costs and opening up new networks that allow it to do that, but the innovation agenda is something that I think the whole industry can actually contribute to. I think there is a distortion; an assumption that BT will bring products to the market and then we will necessarily buy them; what we want is to get out there to have the infrastructure and then I think competition will deliver a whole range of services that are really only starting to be thought of at the moment. The question is how fast can we get there, to get that competitive environment operating as broadly and as deeply in the network as possible? Q83 Chairman: What sort of requirements are there of the regulator in relation to NGN? Is it to have these what seem like endless consultation processes, where everybody gets first, second, third and last words, as it were, or do you have to move more quickly? Ms Thompson: First of all, there is one thing we could do, which is to bring IP-stream back into the regulatory framework. If you bring that in there is more certainty in the environment and, therefore, the business cases start to be built in in a different environment. That is the first thing we could do. I think that gives more certainty to the environment. The second thing, really, is about setting very strong service standards around the delivery of LLU. I think the adjudicator is doing a good job on that, and we need to push further and faster, because the big customer bases have not migrated yet; as I referenced earlier, the thought of moving in excess of two million customers is a really significant move. These are two things that would support the next stage. Mr Abensur: I do not have anything to add specific to that. Stability: let us get delivery of Local Loop Unbundling in this country. It is a formidable opportunity we have; we have key players willing to invest in that - Tiscali, AOL and Wanadoo - that have already got 40, 50 or 60 per cent of the market. We are willing to get there, we are wiling to bring those new services to our customers; it is a formidable opportunity to invest money in this country, and we want to do that. Chairman: Thank you very much. It is very often in these inquiries that, when we have had a lot of other witnesses, the last witnesses seem to get a shorter time, but I think in some respects the clarity and precision of your responses have been such that we have not taken very long, but please do not think that is in any way a lower consideration of your evidence, because it was helpful. If there is anything else you want to let us know about then please get in touch. We may well get back to you on one or two points once we have crawled over what you have said. Thank you very much. |