Examination of Witnesses (Questions 20-39)
LORD CARTER
OF BARNES
CBE
10 MARCH 2009
Q20 Miss Kirkbride: When you talk
about the building of new infrastructure, are you talking about
digging up the roads again? What is that structure that has to
be built for next generation?
Lord Carter of Barnes: If it is
a fixed network it would definitely require some "digging
up of the roads", as you put it.
Q21 Miss Kirkbride: Looking at who
might fund it, obviously it is good old BT that is often asked
to put its hand in its pocket. Presumably it goes much wider than
that. Should the BBC have a role? Whose pockets should be pinched
for this exercise?
Lord Carter of Barnes: In the
first instance the existing high speed cable and digital networks
at scale are being funded in the first instance by Virgin Media,
a completely private, unregulated company, which has cable networks
that in round numbers extend to 50% of the population. BT are
not being asked to put their hand in their pocket: BT have said
that they wish to invest in their own fibre networks, new networks,
and they have said that that will cover up to 40-45% of the network.
To the previous question, what the regulator has said to BT is,
"If you build those networks, here is how we will regulate
them," because BT's networks are regulated because they have
a dominant position in the market. The public policy question
that the report tries to answer is not: "What is the Government's
view on that 40-50%?" because the market is providing it.
The public policy question is: "What about the other half
of the country?" At this stage I do not think we can give
you an answer to who funds it. There are multiple answers. You
could change the regulatory environment to make it more attractive
for investment; you could look at public incentives; you could
look at some form of public private partnership. If you look around
the world there are literally as many examples of how that full-scale
network infrastructure build is being done as there are countries
doing it. There is no single answer that drops off the shelf,
largely because every country has its own geography, its own history,
its own traditional network. We say in the report that we will
do the comparative analysis, we will see what makes most sense
and then we will look at how, if a case is made, you fund it.
Is there a role for the BBC? Possibly, I think is the answer to
that. Experience would tell you today that more and more people
are getting their media experience from the internet and most
of the predictions are that internet usage is doubling every two
years. In terms of what people are getting off the internet, even
on the lowest level of production, they say that 20% of media
consumption will be internet-based rather than any other form
of distribution. If that is the case, would you not see the nation's
state-funded content provider having a role? It would seem to
me that you would.
Q22 Miss Kirkbride: Is it necessary
when nine-tenths of households have access to first generation
broadband but only six in ten have adopted it, to go down this
clearly very expensive road?
Lord Carter of Barnes: That is
a legitimate question. At the moment, I cannot say to you it absolutely
is. That is one of the reasons why we did not say in the interim
report, "Case proven". We said that we believe, based
upon the initial work we have done, that there is a strong case
to be made and we want to go away and do the work. We might come
back in June or July and say that partly for the reasons you ask
and partly for other reasons first generation capability is enough,
there is not the demand or, rather, the economic argument. I would
say, however—and this is not a reason only to do it—that
is true in about 13 or 14 other countries around the world in
round numbers and they have already made the decision to invest
fully in next generation capability. The reasons why some people
are not taking up internet services is as much to do with the
content applications available on them rather than its fundamental
usefulness or economic or cultural attractiveness.
Q23 Miss Kirkbride: How are you going
to encourage small businesses to take up broadband? Is that going
to be part of your review?
Lord Carter of Barnes: It is not
specifically, although higher capacity at lower costs is clearly
much more attractive to smaller businesses. Any medium-sized and
large business does not have a next generation fibre problem because
they can contract, they can get it built on a bespoke basis. If
you are running a medium- to large-sized business, the chances
are you already have a stand-alone contract with a network provider.
Next generation capability at an access point is much more meaningful
to small- to medium-sized businesses because there is a gap in
the market. Indirectly, it is part of our analysis but it is not
a specific area we are looking at.
Q24 Miss Kirkbride: Will the network
provided by a universal service agreement obligation be net neutral?
Lord Carter of Barnes: Forgive
me, I am not sure I entirely—
Q25 Chairman: This is the principle
that the user should dictate what goes over it, not the providers,
and the risk of having a fast lane and a slow lane for connectivity.
Lord Carter of Barnes: I am not
sure we would agree with that, if I understand the question. Our
emerging view is that it is not unreasonable for a network provider
to be able to differentiate in its pricing and charging for services.
Indeed, that already happens. If you are a Virgin Media customer,
you will pay a higher amount per month for a higher service and
you will pay a lower amount for a lower service. It gets slightly
more complicated when you get into the question to which the Chairman
alluded: Is there active filtering in traffic management by the
network providers? I think that is a different question. Differentiation
of pricing depending upon speed of delivery I think is perfectly
legitimate.
Q26 Chairman: It goes back to the
whole philosophy of the internet, does it not, the sense that
the users control it?
Lord Carter of Barnes: My own
view is that that is changing. Let us take 2012 as a start point—we
may or may not get there, but it is a good conceptual start because
it is near enough to imagine—and let us say we do have a
universal service, we do have the emergence of mixed-generation
broadband, both fixed and wirelessly, so internet connectivity
at speed is all around us everywhere. I am not so sure that we
are going to be quite as comfortable with the pure theological
expression that the internet is for the users to use as they see
fit. My own view is that at that point we are entering into a
very different world, and one of the things we are trying to do
in the report is lay out a framework for what that might look
like.
Q27 Mr Hoyle: Could I take you on
a little bit further on cable, Virgin Media. You quite rightly
said that only 50% of the country is connected, and yet we believe
in a USO. Do we pick which part of the USO? Surely cable should
be an entitlement of everybody, or certainly a lot higher than
50%, because we have seen that cable has cherry picked the areas
they want and everybody else has been discarded. That cannot be
right, surely.
Lord Carter of Barnes: That is
a simple matter of economics. The cable franchises were granted
and, in simple terms, my understanding is that at the time that
public policy was designed, this was under another government,
the exchange was, "I'll give you a geographical monopoly
for a period of time, unregulated, and in return for that licence
I will require you to build out to certain levels of coverage."
What happened, not unreasonably, was the owners of those licences
went where they could make returns, and where they could make
returns was in the dense urban areas. They did not go to the rural
areas because the economics do not add up. That is why, going
back to the earlier question, when you are talking about new networks,
as opposed to the exploitation of existing networks, which is
what first generation broadband is, on the basis of the current
analysis there is not much evidence that the market alone will
provide it because the cable networks were built during the hey
days of the capital markets, and I think we can all agree we are
not in the hey days of the capital markets right now. If you could
not raise the money to build universal cable markets in the 1990s,
it is unlikely that you are going to be able to raise the money
on purely economic terms today. If you want to do what you are
suggesting, which is to demand that cable networks go everywhere
else, you would have to incentivise them to make that economically
attractive because no private investor would do it.
Q28 Mr Hoyle: What you are saying
is if you live in an urban area, you can have choice, you can
have competition. If you live in a rural area, there is no competition
and you will be lucky if you have the USO. It is a bit of a failure
really, is it not?
Lord Carter of Barnes: I would
not say it was a failure.
Q29 Mr Hoyle: Well, it is not success
then.
Lord Carter of Barnes: It depends
whether my glass is half full or half empty.
Q30 Mr Hoyle: Which is it today?
Lord Carter of Barnes: I would
say it is half full on current generation broadband, but if you
want it to be half full on next generation broadband, you have
to make some conscious decisions and now is the time to make them.
Q31 Mr Hoyle: What you can say to
us is you have a guarantee that the rural areas, or in fact quite
big urban areas, will not be neglected, because that is what cable
did. Biggish urban areas were neglected.
Lord Carter of Barnes: I cannot
disagree.
Q32 Mr Hoyle: We agree on that.
Lord Carter of Barnes: We agree
on that.
Q33 Mr Hoyle: What are we going to
provide to ensure that those areas will not be neglected in the
future? It is all right talking about the USO and this is the
objective, but how can we guarantee that that will happen?
Lord Carter of Barnes: Frustrating
though it may be, today I cannot say, "The answer is x.
" I can say that we recognise the issue in relation to universal
service and we recognise the issue in relation to next generation
networks. We have said in the interim report that we want to do
the analysis on both of those to make the case. In order to make
the case, you have to do the analysis as well as the argument,
and that is where we are right now.
Q34 Mr Hoyle: There is hope but no
definition.
Lord Carter of Barnes: There is
hope and an awful lot of work and a clear commitment to get an
answer out by this side of the summer but today I cannot tell
you that the answer looks like this.
Mr Hoyle: Thank you, Chairman.
Mr Binley: Allow me just to stray off
a little bit, because I was particularly interested to hear your
response to the concept of network neutrality being the principle
that internet users should control the content that they view.
You had doubts about that and that clearly is straying into the
area of content control or censorship—call it what you like.
I think that is an absolutely good thing. I just wonder if you
would help me just a little, without straying too far in that
respect.
Chairman: We probably get there later
on. Can we just hold that. It is quite a difficult session to
control, because there are a lot of overlapping issues here. Brian
is right to raise that issue but I think it comes a little later
on.
Mr Binley: Okay. I am happy with that.
Q35 Miss Kirkbride: Going back to
the universal service obligation, what percentage would that be
deemed to be? In TV coverage it is 98.4%. What is the USO short
of 100%?
Lord Carter of Barnes: We do not
know the answer to that, but you are right to say that in regulatory
parlance "universality" is between 98.5% and 99%. We
do not know, because we do not have a universal service in broadband,
we have a universal service in fixed line telephony, so we have
to change the rules in order to define it and then you have to
do the analysis to say how economic it would be. We have put out
in the interim report what I have described as the minimum wage
for technology services, which is a 2Mb service. We are not saying
that that should be the limit of our ambition, but we are saying
that should be the base level of service. The reason we peg it
at 2Mb is because we thought 2Mb was the base level which you
could get up and down service quality in broadband. To be quite
candid with you, do I think you will get 2Mb for every single
household in the country? I think that is highly unlikely, because
I think the economics will be of an order of absurdity, so you
might have some gradation at the top end, where you are in the
very, very difficult to reach areas, but that is all work we need
to do at the moment. My understanding—I could be wrong on
this and I will check it for the Committee—is that about
85% of the population could get 2Mb today, so there is an order
of magnitude of 15% that would not be within that ambition today.[1]
Q36 Miss Kirkbride: You know from your
old company NTL that this is an expensive thing that can get people
into trouble, but from the things you have seen elsewhere is there
anywhere that is providing a universal service obligation to the
whole country without public money?
Lord Carter of Barnes: No, there
is not. Nor is there in any other service. We should accept that
universal service obligations are not funded by the markets. They
are funded either by regulatory intervention—in other words,
there is some discounting on the wholesale price or cross subsidy
from an existing margin linked to somewhere else—or they
are funded by public intervention. The reason why the cable companies
got into the difficulty that you allude to was because the cable
industry went and raised enormous amounts of money in the capital
markets to build networks, and even in the areas they built them
it has taken 20-odd years to get to the point where they are making
something resembling an economic return and they still have large
debts on their balance sheet.
Q37 Chairman: I had a letter yesterday
from Astra, a satellite company, saying that Ofcom estimates there
are 200,000 commercial and domestic properties that cannot get
current broadband arrangements but via satellite they could get
them immediately at 2Gbs at a cost, they expect, of £300
million. Is satellite one of the options you are looking at to
provide a universal service obligation?
Lord Carter of Barnes: It definitely
is. I leave this meeting to go to chair the meeting of something
pretentiously called the Universal Service Commitment Design Group,
which is doing exactly what you describe. In the main we are looking
at fixed networks, mobile networks and satellite for delivery
of broadband. In some areas the economics of satellite delivery
are far, far more attractive than building up fixed networks.
Q38 Chairman: Can I try to understand
exactly your rationale for 2Mb USO at this stage? This next generation
could offer much faster rates. You have said it is just a new
minimum level, it is a base level.
Lord Carter of Barnes: Yes. It
was a judgment based upon an analysis that said what would be
an acceptable level of, as I say, a minimum wage for broadband
service, what would be an acceptable minimum service. 2Mb was
judged to be a service level where you could get a suite of applications
which would represent the sort of services that you would want
any household to be able to use and receive.
Q39 Chairman: Has that view met with
approbation by the consultees so far? At that sort of level do
people seem to say, "Yes, that's right".
Lord Carter of Barnes: To be candid
with you, Chairman, I have been slightly surprised by the degree
to which even the notion of a universal service in broadband has
been regarded as lacking ambition. I think most people's response
has been, "2Mb! You've got to be kidding me. The average
speed in the country today is already 3.2Mb."
1 Footnote by Witness: Our current estimate
is that about 85% of the population have operational access to
2Mbs, so there are approximately 15% that are not within that
today, though we believe that a proportion of these homes can
be resolved by relatively simple modifications to their broadband
connection or computer rather than requiring significant network
extension. We are seeking to clarify these precise figures as
part of the final Report. Back
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