Examination of Witnesses (Questions 20-39)
LORD CURRIE
OF MARYLEBONE
AND MR
ED RICHARDS
22 APRIL 2008
Q20 Mr Hoyle: I think we need a bit
of memory jogging here.
Mr Richards: That is not what
I believe happened. I think there were isolated incidences of
government intervention in South Wales and in the Highlands and
Islands, and there is an instance in South Yorkshire at the moment,
South Wales being objective one and South Yorkshire being objective
one. However, by and large, the 99.6% broadband basic coverage
was delivered by BT as a DSL copper based provider in reaction
to the initiative taken by cable who seized the market some years
ago. By and large that is what delivered it. It was not government
intervention that delivered that availability, or indeed that
range of options.
Lord Currie of Marylebone: I think
it is worth saying that you will start to see the same thing happening
with faster speeds. There has been a 67% increase in usage over
the year and operators need to make sure they have big enough
pipes to let people do what they want to do. There is an acknowledgement
of the issue by the operators and I think that realisation will
grow.
Q21 Mr Wright: Bearing in mind the
huge costs involved in carrying out this work, is it now the case
that the public sector will have to take the lead on this rather
than the private sector? Is it not the expectation that the public
sector is going to pick up this tab?
Lord Currie of Marylebone: Clearly
that is a decision for government, but I would have thought that
the costs we are talking about here are very considerable and
I think it would be an unnecessary use of public funds. If the
commercial private sector can deliver a very large part of what
is needed, as has happened with broadband, then we should let
the market deliver and then government take a view on which parts
the market will not deliver to. That is the approach we took on
delivery of broadband; the same approach is relevant as we go
for higher speed broadband.
Mr Richards: It is worth remembering
what happened with first generation broadband. There were many,
many people who said, "This broadband is fantastic, it's
really important, but it will only ever reach 60% of the population
and government needs to fund the remaining 40%". That was
a commonly made argument at the time. In fact, the market and
commercial operators delivered in excess of 99% and, had government
intervened and used money at that point in time to fund the final
40%, it would have been essentially a waste of tax payer's money
that could have been spent on schools, hospitals or whatever else
you want to spend it on. In our view, in this generation, it might
be the case that in due course there is a decision for government
to make about that, but it is best to see how far the commercial
operators will take it first in order to then make sure you are
only paying for what is absolutely necessary for reasons of social
inclusion. That debate will happen, it will take place and it
is a very important one. However, I think it is important not
to pre-empt what the market will provide by itself.
Lord Currie of Marylebone: Our
task is to make sure that the regulatory framework gives clarity
to allow commercial operators to make this investment. We need
to make sure that regulation does not get in the way. It is not
our task clearly to fund any such activity; that is not the business
of regulators.
Q22 Mr Weir: You have talked about
the 99% that currently get broadband, but if we are talking about
going on to fibre optic connections what are the alternatives
available for hard to reach households and businesses where it
will never be economic to put this new system in?
Mr Richards: We do not know at
the moment whether it will never be economic. If you went back
six to 12 months you would not have found a single person in the
country who would have said that it was economic anywhere. That
has already changed. You will already find people in all sorts
of places saying that now they think they might be able to see
a case in the urban areas. That will change again in 12 months'
time. Technology moves on, the costs change, the revenue associated
with services of that kind change as well. It is not a static
picture; it will change. I am nervous about drawing lines about
where it is and is not economic when the technology is changing
and developing so fast.
Q23 Mr Weir: I understand that but
the fundamental difference between broadband and fibre optics
is that for fibre optics you are going to have to lay new cables
by and large and it is going to be a very expensive process. Even
in rural areas there was an existing telephone network that could
take broadband with variations in the exchange, but fibre optics
is fundamentally different. Is it likely that anyone is going
to take the option of laying new fibre optic cables all over,
say, the Highlands and Islands of Scotland?
Mr Richards: In the circumstances
that we have a very expensive roll out of fibre optic cable beyond
the exchange, it is highly likely that there are areas where it
may not make economic sense to do it. That is why there will be
a significant question about that in due course, but I do not
think you should pre-empt it. Let us remember where we are. At
the moment fibre roll out beyond the exchange in the UK is limited
to new build like in Ebbsfleet and Wembley; it is only in new
build. So it is not actually currently, beyond the commitment
from cable, being rolled out anywhere. We have to get the core
roll out and the core economics organised, people rolling it out
in urban areas and so on as a first step and then see how far
that will go. Just to illustrate again the uncertainty, we talk
about fibre roll out beyond the exchange, there are two very different
versions of that. There is fibre that goes to the local cabinet
and there is fibre all the way to the home. The costs of those
two things are completely different, so which are we talking about?
One of them might be uneconomic, the other one might be economic.
There are all sorts of decisions and all sorts of questions that
need to be considered and answered before arriving at that final
question which is where will the market not provide. We will get
there and it is a question that we will need to address, and it
is something that I think will emerge over the next two or three
years. You are likely to be right; it is likely that there will
be areas where fibre beyond the exchange is very difficult in
economic terms and that will then throw up the question of what
is the Government's policy on a broader inclusion universality
question in relation to superfast broadband.
Q24 Mr Weir: You can turn that on
its head and ask whether broadband would have extended so far
had that network not already existed. That is still a fundamental
question, that there was an existing telephone network built up
by the GPO over many years and that formed the basis for the extension
of broadband. What I am hearing from you I think is that we are
going to get fibre optics in the larger urban areas but the chances
of getting beyond that are fairly remote, at least in the foreseeable
future.
Mr Richards: I would not want
to be as certain as that at this stage because the lesson from
the current generation broadband is that we got a lot further
than anyone ever anticipated.
Q25 Mr Weir: Because the network
was already there. That was the main reason. You are not going
to tell me that we would not have had broadband in the Highlands
of Scotland had the network already been there.
Mr Richards: You are taking the
extreme case and there is somewhere between your extreme case
and the urban areas where there will be a line.
Lord Currie of Marylebone: It
would be foolish to make a judgment on this at this point. This
is a developing thing and we need to follow it through.
Chairman: We need to move on now but
we will return to this next year with absolute certainty.
Q26 Mr Whittingdale: Can I put to
you two observations that have been made by people in this field
who might be said to have some vested interest? You will be aware
first of all that Tiscali drew attention to the pressure being
put on the ADSL network by the advent of the BBC iPlayer and suggested
that perhaps content providers should make some contribution to
the cost of the network. How do you respond to that?
Mr Richards: It is one version
of how the network upgrades that people are talking about and
that we have just been talking about may happen. It is not necessarily
the only way it can happen and it is not necessarily the way we
would anticipate it would happen. It comes back to the central
question that if more people want more capacity the demand on
the network is going up, investment has to go into the network,
there has to be an adjustment and a change to the economic models
that are in place in order to fund that investment. That is at
the heart of what we are talking about. I am not convinced myself
that the right answer to that is to get the BBC to pay for the
use of the iPlayer because in a sense what is happening is that
you and I, as consumers, are making a decision about what kind
of content we want to access over our broadband connection. That
is our decision and that places a demand on the network. However,
in a sense that is the access demand we are placing so I would
have thought that the most sensible place for that burden to fall—for
that relationship to change and modify over time—is in the
relationship between the organisations providing the network and
you and I and the decisions we make about how much we want from
that network. I would not rule out content-led type models in
which people pay for certain content in relationships with network
operators as well. I think we are in a period of discovery at
the moment; I do not think we know all the answers to these questions,
as we have just been saying. This is a period of significant technological
and market change; there is a lot of innovation in technology
and in the networks, there is a lot of innovation on the content
side of which the iPlayer is a very good example. YouTube
is another example; YouTube is a far more intensive user
of bandwidth and capacity than the iPlayer. People always refer
to the iPlayer but YouTube has got extraordinarily high
usage for video. All of this is unfolding at the moment.
Lord Currie of Marylebone: Although
Tiscali did raise that question, other operators have disagreed
with the proposition.
Q27 Mr Whittingdale: If it happened
then they would have to do it. However, it is difficult to see
how an ISP could put a charge on the BBC. You would have to somehow
put a levy on. Is that something you would at least consider as
part of the overall development of this or would you just about
rule it out?
Lord Currie of Marylebone: I rather
doubt whether we have the powers to do that.
Mr Richards: I think we would
be pretty disinclined to go down that route. The core relationship
is the one I have described which is: what demand do you and I,
or any other consumer or user, want to place on the network and
we should then buy from the network operator in line with that
kind of capacity. My mother has a far lower demand on her network
than my young cousin who is peer to peer file sharing, using the
iPlayer, using YouTube and so on and so forth; they are
very different consumers. It is not like a uniform, homogenous
telephone system of the past; there are very different consumers
with very different patterns of demands. As in any other market
you would expect the market to provide different services to those
different patterns of demand.
Q28 Mr Whittingdale: Having poured
cold water on that idea, can I put another suggestion to you?
Ian Livingstone recently said that if BT were going to be expected
to invest in next generation broadband they might have to be relieved
of the universal service obligation. How do you respond to that
one?
Mr Richards: It is a connection
that is indirect rather than direct in my view. I think what Ian
Livingstone was talking about was the broad range of change in
the market and if you look at what is happening in the market
BT does face more competition than it has ever faced; it has a
lower retail share in broadband than any other incumbent in any
other European country so it faces tougher competition in this
country than probably any other European country. The point that
Ian Livingstone was making was that in that situation at some
point we are going to have to look at the distribution of the
burden of the universal service obligation which currently falls
square on BT. I think in that sense he is right. I would see that
as having an indirect connection rather than a direct connection
with the question of investment in next generation access. There
is a question about what is the cost of the investment or the
returns associated with it. You can see it as a stand alone question.
Q29 Mr Weir: Do you remain content
with BT's progress to date in implementing its Undertakings and
Strategic Review of Telecommunications?
Lord Currie of Marylebone: In
very broad terms yes we are. If you look at the progress that
we have made since the agreement on the Undertakings the transformation
in the market place has been enormous. There have been something
like four million unbundled lines, which is more than we were
talking about when we entered into the Undertakings. There have
been some technical breaches of the Undertakings of a small kind,
but the broad direction of travel that BT has accomplished is
very considerable.
Q30 Mr Weir: Are you intending to
put any requirements on BT Group or are you happy with the way
things are going?
Lord Currie of Marylebone: We
do have to think what equality of input and equality of access
means in the new world, as we move into the next generation networks
and next generation access. There is a lot of work in thinking
about what the Undertakings should look like in that future world
and that is a task that is under way and a considerable amount
of work is going on there. That is a very significant area of
work.
Q31 Mr Weir: We have talked about
next generation and the many providers of services, but they are
all reliant on BT's system at the end of the day. Do you see yourselves
pushing BT to move to next generation if you do not feel it is
moving fast enough to allow other providers to provide services
if they wish?
Mr Richards: What we have made
clear in our consultations on this so far and in some comments
we made on it two or three weeks ago is that we cannot force BT
to do anything. It is a company and it has to act in its shareholders'
interests; we cannot impose on it an obligation of that kind.
What we can do and what we are doing is making sure there is a
clear regulatory environment so people know where they stand on
these investments and also ensure that there is scope for other
companies to enter that market wherever that is possible. There
are at least two or three different things we have done in relation
to that but the most important thing is to start by reminding
ourselves of what David said earlier which is that cable have
already said that they will move to a 50 Mbps service which is
a very substantial change and we will see what impact that has
on the market. We have set out a proposal for what is called sub-loop
unbundling which would allow other players to access the local
cabinets and put fibre in beyond the exchange. We have also recently
announced our intention to have a survey of ducts. What this would
involve is sampling a range of ducts around the whole country
and asking a question about whether that could provide a route
to competition or market entry by other players, other than BT.
In other words, if the ducts are shareable then they could be
used by another party. This is precisely what has happened in
France; it has been looked at and will happen in France. It is
used in Germany and in Spain. We are now looking at that as well.
The way we see this is that it is not for us to impose on anybody
because I do not think we have the powers to do that, but it is
for us to make sure that we are not leaving any stones unturned,
we are exploring every avenue to make sure there is a contestable
option, that innovation can take place and there are a range of
providers who could offer these kinds of services. Clearly BT
are an important part of this story, but I do not think they are
the only part of the story.
Q32 Mr Wright: In terms of the mobile
spectrum usage, how have Vodafone and O2 responded to the proposals
to liberalise usage of the 2G spectrum, in contrast to Orange
and T-Mobile?
Mr Richards: They disagree with
our current proposals, O2 and Vodafone; others agree with them.
T-Mobile and Orange are more in agreement and some do not think
we have gone far enough. It is worth going back and just asking
ourselves why we are doing this. It is a difficult policy area
and there is no easy answer. The reasons we want to push forward
with second generation liberalisation are two-fold. Firstly, allowing
liberalisation of those licences will allow that spectrum to be
used for a range of other services, in particular 3G services,
mobile broadband. It will allow much cheaper roll out and a much
wider roll out of 3G services of mobile broadband across the country.
There are very significant economic benefits and availability
benefits for the UK as a whole of doing this. In a sense that
is our core purpose. We have to act in the consumer interest and
that is what we are seeking to do. Getting from where we are today
to that point is very difficult. One of the problems we have is
that the 900 MHz spectrum held by O2 and Vodafone is absolutely
key to competition in mobile broadband. It confers a significant
advantage and therefore what we have proposed is that in order
to be allowed to use that spectrum in a liberalised way they should
hand back three lots of 2 x 5 MHz paired spectrum which we would
then release to the market. Our intention there is to try to ensure
there is fair competition in the future, so we are trying to ensure
there is liberalisation with those broader economic benefits alongside
fair competition. Clearly what we have put out is a consultation.
We are now in the process of listening to the responses we have
had. Vodafone and O2 have put in very interesting responses with
good evidence, so have the other MNOs, so have other companies.
Where we are at the moment is in the middle of a consultation
which is one of the best kind. We are learning new things, people
are providing us with new, further evidence, real technical information
and that will allow us to move the debate forward.
Lord Currie of Marylebone: The
prize here is to get the extra advantage of this liberalisation
of the 2G spectrum, as Ed has said, without unbalancing what is
possibly the most competitive mobile market in Europe. We want
to keep that; we do not want to unbalance it and give undue advantage
to one or two players as a consequence of the 2G's liberalisation.
That is why it is a technically difficult exercise to pull that
out.
Q33 Mr Wright: What are the next
steps in the process then?
Mr Richards: We have gone through
a consultation, we are in dialogue with industry and others at
the moment and we will have to make a decision whether we move
to a statement or whether we move to a further consultation in
light of the evidence that we have received. We may well do the
latter—although we have not yet made a final decision on
that—because we have had good quality interaction and good
quality evidence from a number of parties which means that we
can revise our thinking in that area.
Q34 Mr Wright: How did the distribution
of the 900 MHz and the 1800 MHz come about in the first place?
Mr Richards: It is historic, of
course. What we are having to deal with is the outcome of historic
decisions over many, many years. The 900 MHz was awarded many,
many years ago to O2 and Vodafone when there were only two operators.
Then some years later our predecessors released the 1800 MHz to
T-Mobile and Orange and then there were the 3G auctions which
you will all remember. So at different points over many, many
years spectrum has been allocated and that has given us a particular
competitive mixture. I think we do benefit in this country from
having five players. You can see evidence of that in lower consumer
prices and so on. We are now at a different point in that cycle
and, as David says, we need to make sure that we deliver the broader
economic benefits but we do not end up distorting competition
so much that UK consumers lose out as a result of those decisions.
Lord Currie of Marylebone: This
is a particularly important example of the general problem of
moving from the old regime of command and control where government
and the regulator decided how spectrum was used and how it was
allocated to a more market based system that we believe will deliver
very considerable benefits to UK citizens and consumers, but that
transition is a difficult one to manage.
Q35 Mr Hoyle: I do not know whether
you have any ability to actually try to persuade mobile operators
to mast share instead of creating steel forests right across the
country. I just wondered if that was something you could take
up with them. Moving on to the proposed European Telecom Market
Authority, how is Ofcom engaging with the European Commission
on its proposals for a European super quango for the telecom market?
Mr Richards: Very extensively.
We have worked very closely with our colleagues on the European
Regulators Group. We do not think the European super quango is
the right answer. We think that there does need to be more effective
coordination and collaboration across Europe but you can do that
through a network of national regulators who remain independent
as opposed to being essentially run by the Commission.
Lord Currie of Marylebone: We
are worried that the Authority as proposed would not be independent
of the political processes and independent regulation, we believe,
has given very considerable benefits.
Q36 Mr Hoyle: So we are better off
with a UK quango than a super quango.
Lord Currie of Marylebone: It
is for others to judge that question. We think that the centralisation
at European level would not be desirable.
Q37 Mr Hoyle: So I can take that
as a yes. To what extent will the ETMA have the power to dictate
to national regulators on telecom issues? Do you really believe
it will have power, that it will have teeth, or will it be a bit
of a toothless tiger like yourselves?
Mr Richards: We are certainly
not a toothless tiger; we will no doubt come onto that in due
course. If it was created as the Commission proposed I think there
is a risk it would make non-independent decisions and decisions
which would not be very well informed about national and local
markets. The truth is that there is an enormous difference between,
for example, the UK market—which is highly developed and
relatively competitive—and a country like Poland where the
fixed network that we were talking about earlier is limited to
about 60%. There are great differences and you need to have a
real knowledge of the national and local markets within that national
market to make good decisions.
Lord Currie of Marylebone: To
be clear, you need better coordination amongst the national regulators
in order to deal with the pan-European issues that do arise. We
are not saying that the status quo is right; we do need to strengthen
European regulations and make them more effective.
Q38 Mr Hoyle: Presumably the worry
would be who would serve on the ETMA? Would it be dominated by
the French and Germans who would have absolutely no interest in
the UK?
Mr Richards: I do not think we
are going to get there. I do not believe it will happen. I think
what we will have is a much more coordinated, strengthened, European
Regulators Group and that is a group that we play a very full
part in and represent the UK interests very fully. I think we
can take that issue forward.
Q39 Mr Hoyle: So it is a bit of a
dead duck.
Mr Richards: That is a matter
for the European Parliament and the Council of Ministers, but
I think the argument for it has not been won. I think the argument
for a strengthened European Regulators Group has been won.
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