Broadband - Business, Innovation and Skills Committee Contents

Examination of Witnesses (Question Numbers 20-39)



  Q20  Mr Clapham: Judging from your answers to the Chairman I think it is fair to say you are all agreed that the 2Mbps is a fair basis for the Universal Service. Would that be correct?

  Mr Heaney: Yes.

  Q21  Mr Clapham: Given that, is the 2012 deadline for the Universal Service achievable?

  Dr Whitley: My view is the deadline is achievable. There are a couple of parameters that as we get into understanding what the 2Mbs might mean in practice are important. 2Mbs is a good notional aspiration for a minimum, and it is pretty important to remember this is a minimum, however right at the extremes of the network there are another couple of factors we need to think about. We need to think about whether or not having a bit of flexibility to drop down to 1Mbps if there is a particular technology that would be better suited and more economic would be good to have, the reliability of nature of the bandwidth, if you like, so quality of service, stability, and characteristics that will ultimately impact what services you can deliver. For example, whether or not the capacity is there irrespective of the number of users in a particular area is important. That is the thing that people are familiar with where sometimes performance can dip when it gets very busy. There is a whole raft of second order items that need to be understood and defined because they will dictate both the cost of delivery, the particular technology that will be most suited for delivery and, most importantly, they will dictate ultimately what a customer gets. There are quite a few little bits that need to be understood and defined as the Government goes through the procurement process.

  Mr Heaney: A couple of weeks ago I was at an APCOM session where there was a question of is it a guaranteed 2Mbs to 100% of people and I think you are alluding to that. In some cases at the edge you are going to be saying it may cost £10,000 to lift a home up from 1Mbps to 2Mbps and do we either have enough money or is that a good use of £10,000. There is a little bit of optimisation to be done at the edges. The funds should hit 2Mbps for the majority of that remaining 10%.

  Mr Williams: I will tell you what percentage of that target I will hit. My shareholders have got £200 million of capital invested in launching the first super-fast broadband satellite ever to launch in Europe. That goes up in a few months' time. That will service about 350,000 customers around Europe and in the UK about 150,000. Hopefully, I will be announcing within a few short weeks the financing of my second satellite which will have much more capacity and will service another 300,000 consumers in the UK as well as others elsewhere in the world. About 450,000 consumers will have the ability to access speeds of up to 10Mbps on a super-fast broadband satellite; the first one next year and the second one in early 2012.

  Mr Paul: We have done quite a bit of analysis on what constitutes theFinal Third and where it is because that is the really critical area which is the last bit affecting whether or not the Universal Service target will be met. We did a complete design for redoing Cornwall. There are two issues that we found with that. One is that it is very difficult to find statistics on where people actually are. You could do it up to a certain point, but physically finding data, other than going round and walking the streets, on where the last 5% live is extremely difficult. The ONS, the main source of the information, does not do it down to the granularity. I will give you an example of the two areas that we are looking at in Cornwall, Saltash and Hatt. Hatt is a small settlement just north of Saltash and Saltash is the other side of the Tamar from Plymouth. Hatt is three kilometres away, a small settlement of 210 buildings, 400 people. The ONS has it down as 500 people because it does it on a parish basis. You then start to get into what the quality is, how much does it cost to get it to those other people and you cannot cost that where they are. That is where I think something like satellite comes in which is not dependent upon having to work out and do calculations on those final pieces. If we come back to something like Hatt, once we started looking at that there were two essential things about it. One was there are lots of Hatts. There are 12,000 Hatts in the UK mainland, excluding Northern Ireland, representing something like 11% of the population between half the size of Hatt and twice the size of Hatt. If you then take it up to half the size of Hatt and four times the size of Hatt you have 18,000 of these settlements representing something like 23% of the population. Most of these are too far away from the local exchange to get service. Either there is a small local exchange there or they are like Hatt, three kilometres away and, therefore, they are already on the end of a long line and it does not much how much power you squirt down from a local exchange you are never going to get any improvement. I have provided a map of those Hatt-like settlements and have taken the liberty of sticking on it all of your constituency boundaries. Mr Öpik is not here but he is the worst, unfortunately. Montgomery is the worst. The fact of the matter is that if you take all of the Members of this Committee you have all got issues of a Hatt-like area.

  Q22  Chairman: It is a single map and we have not seen it yet as a Committee but it is available to us for inspection afterwards, is it?

  Mr Paul: It is available to you.

  Q23  Chairman: We are not allowed visual aids in Committee hearings.

  Mr Paul: The second issue is the barriers to connecting Hatt. The reason why we wish to connect Hatt is that BT does not, not at the moment at any rate, whereas we are interested in doing so. In order to be able to do so economically we need changes in the regulatory environment. BT will not give us connectivity at an economic rate back from Hatt to Saltash.

  Q24  Chairman: This is moving on to another question. You will have a good chance to make that pitch a little later.

  Mr Paul: That is the issue. The issue in Universal Service is what is the economic way of connecting Hatt. If you can crack Hatt you can do 18,000 other Hatts, you can do 23% of the population which constitutes a large proportion of the Final Third. That is the key to the Universal Service.

  Q25  Chairman: The footprint of your satellite covers all of the United Kingdom including the outlying islands to the north, Mr Williams?

  Mr Williams: The whole of Europe including all of the UK, including the outlying islands, yes.

  Q26  Mr Clapham: Just coming back to what Mr Williams said, it seems to give the picture of a number of technologies that are in the market and at the time that we are saying 2Mbps is going to be the Universal Service, is there a danger that as we move to the future, come out of this recession and move to a new economy, demand is going to be such that we are going to see investment in other technologies that for the future are not going to prove to be adequate? Could that be a picture that maybe will come from the Universal Service as it is defined?

  Mr Paul: There are two elements to that. If you take the fixed side then the two essential media are copper and fibre. The way of getting speed up on copper is there is a technological increase but essentially what you do is you do it by making it shorter and you do that by fibre to the cabinet and ultimately getting rid of it completely. Once you put fibre in then on the whole the fibre connections, even with the existing technology, are going to last pretty much forever, or at any rate for the next 20 or so years. The satellite issues can be physically upgraded by replacing the satellites. The more you put fibre into the network the more you are preserving the future because there is this continued significant improvement in the speeds and costs you can put over fibre such that any fibre based investment is likely to last, I think, for in excess of 20 years.

  Mr Williams: I think it is about what you can afford. I wish the Government would run the railway line to my front door so that I can just step out in my slippers in the morning and straight on to the train, but it is not economically viable to do so, and actually it is perfectly sensible to drive two miles to the local station. There are technologies that can offer benefits in terms of economics, and technologies that have benefits in terms of physics, and it is a mix-and-match in terms of where you are and what you need.

  Q27  Mr Hoyle: Why do you not compare it with gas or electricity, something sensible to people's doors, rather than something that is impossible?

  Mr Williams: Because I was trying to make the point that the notion of stringing fibre through everyone's door is preposterous.

  Chairman: I would just point out that about a third of my constituents do not have mains gas.

  Q28  Mr Hoyle: We have telephones ...

  Mr Paul: But they do have access to copper wires and telephony; so again we are dealing with differences in certain technologies. Gas mains are expensive. On the whole people have accepted the cost of getting copper to their houses, and I cannot think there are very many areas that have a problem with delivery of a copper line.

  Q29  Mr Clapham: Can I get your opinion on the difference between satellite and wireless as opposed to copper and fibre? Is it your view, Mr Williams, that wireless and satellite is the way of addressing, for example, the problems we now experience in some of the suburban and rural areas? Is it also your view, Mr Paul, that you could address these problems anyway with copper and fibre?

  Mr Paul: No, I think wireless has a definite place in one form or another. If you take Cornwall, basically anywhere with a crinkly coast has a problem. The location of people tends to be near the coast rather than in the middle, and that presents additional problems that do not apply in Berkshire or wherever where routes are on the way to somewhere else. Coasts have their own particular problems. In Cornwall a satellite solution for those people we cannot identify—the isolated farms—is absolutely the right sort of thing, where it does not merit upgrading. Where you have concentrations of people like in Hatt, then the equation is different and it reverses. You therefore have a concentration of economic activity, and the requirement then is to find some way of connecting that concentrated settlement back to somewhere else useful. That is the so-called "backhaul" problem. You might use radio for that, but I would distinguish between the two: those isolated areas, farms, or small groups of half a dozen buildings that are too far away from somewhere else in the short term to justify upgrading, versus settlements like Hatt where you have 200 to 400 people all clustered together and already partially connected to something that can be improved.

  Mr Williams: My answer is that the satellite technology that enables us to do this is very new, brand new, built in the UK by a British company called Astrium. The UK currently has a global leadership in the construction and operation of these new super-fast broadband satellites, but it is very new, so not many people here are very familiar with it. Fundamentally here, I am here to make money, and I am confident that through the proper operation of a well-regulated market, we will make money without subsidy. I do not need or want government subsidy to roll out satellite broadband services to rural areas. It is a proposition that actually makes very handsome returns without government subsidy. I will definitely fill my first satellite very quickly. I think my second satellite will fill pretty quickly, and we are addressing what is a relatively small proportion of a very large European market digital divide. So through the proper forces of the market we will make lots of money and solve the problem for quite a few people. We will not solve it for everybody though—we are capacity limited. If I could raise a limited amount of capital on the London Stock Exchange I would do so and I would be building a dozen satellites at the moment, but I cannot so I will focus on making money out of the capital I have got.

  Dr Whitley: I think some of your questions about concerns over technologies becoming redundant, I guess the history of technology, be it optical, electronic or indeed radio, has been that you should never underestimate the ability of innovation. The economics undoubtedly mean that we are going to have a mixed technology solution to this particular problem. There will be satellite solutions for the sort of areas that have been described to the panel. Where the most economic solution is a hybrid between fibre and copper, so-called fibre-to-cabinet, that technology will not stand still. Although it may be delivering up to 40 megabits today—I think the trial you are conducting is 40 to 50 megabits a second. In our labs we can see 60 megabits per second, and you can anticipate that that will evolve and various techniques will emerge that will allow you to push yet more over that copper. There is of course a risk. Perhaps taking fibre all the way has the attraction that it gives you that greater future-proofing, but the reality of economics needs to come into this, and it is a balance between the economics of the delivery and the capability that gets delivered. We are pretty confident that the mixture of fibre-to-cabinet, fibre-to-premises, which is a big element—25% of the ten million homes we are going to be deploying—will be fibre all the way to the premises. There will be a role for all these technologies.

  Q30  Mr Clapham: If we were to look at Japan and Korea, are there any lessons there that you feel would be beneficial for us to take on board with regard to UK society and the UK economy?

  Mr Paul: I would not single out Japan and Korea; I would say the Netherlands, Sweden, Denmark, et cetera. The areas where there has been earlier availability of high-speed connections, for instance in Sweden, was done on the back of an open-access fibre network. Many Swedish towns—and Stockholm was one of the first but it has gone through to others— decided to build a fibre infrastructure and decided to rent that out to all-comers for whatever purpose they chose. That did stimulate the availability of high-speed services. Everybody was treated equally. There was an investment made, and that stimulated service providers to provide high-speed services over it. In the case of Japan what stimulated that was the access of competitive carriers to NTT's fibre. That was the key of stimulating development in that.

  Q31  Mr Clapham: You say "why choose Japan or Korea?" Is it not true that Japan has put an enormous amount of investment in over a number of years? I can recall, for example, this Committee 14 years ago looking at the Japanese proposal for investment in fibre. That seems to have gone ahead and perhaps is giving support to a very competitive economy as Japan starts to move forward from the recession that has held it back for some years. It is just a feeling that perhaps there are some lessons there.

  Dr Whitley: There are lessons in many markets, but bear in mind that Japan in terms of the OECD stats on broadband penetration lags the UK. I think one needs to be careful when looking at some of these alternative models as to what you are after. Sure, there are countries on the globe that offer higher speeds to certain customers. Where the UK can rightly be proud is in terms of availability, where we are at the top end of most league tables—OECD or G8—and in terms of price and customer choice. The thing that you absolutely get in the UK is a lot of choice in terms of service providers, as is evidenced by this panel, and keenly priced. There will undoubtedly be lessons, and BT and other operators look to these global operations in terms of guiding their own plans. One thing we observe when we look at what has driven deployment globally is that TV services are a common theme amongst all successful super fast broadband deployments, and obviously so because they are the killer act, if you like, at the moment that drives the need for the bandwidth. In the UK we have again a great success in terms of the competitive supply of TV; but of course we have Sky's position and dominance in terms of the killer act in terms of premium sports content. The work Ofcom has done recently in trying to address that bottleneck in the market is very important in terms of driving competition across the entire value chain, not just the supply-side infrastructure elements.

  Q32  Chairman: I think we are beginning to broaden the answer. It is a very interesting answer but we are making rather slow progress.

  Mr Heaney: I think, Mr Luff, you said earlier that Korea had all this capacity but we are basically using it for the same stuff, so I think you have to ask: they have got all this fibre and it did not come free and cost billions of pounds; was that money well spent? Some of it was public money. Was that public money well spent? I think we face that same question today. If we pump all this money into it will it be money well spent? I do not think so at the moment though it may be at some point in the future.

  Chairman: I think Tony will pack on that theme.

  Q33  Mr Wright: In terms of the market is the view that the market should be allowed more time to experiment with supply and demand before the state intervenes; in other words has the Government moved too early on this?

  Mr Heaney: I would say absolutely. Wind back to 2000 and 2001 everybody said, "Do you know, this fancy first generation broadband will only get to 40 or 50% of the country"; but as BT said earlier, it has reached of its own volition 99%. It is very difficult to sit here with a crystal ball today and work out how far it will go. Will it reach a half, two-thirds, 80% or 90%? When we started rolling out our network everybody said, "You might cover 30%" but we will cover by next year about 90% of the country. It is far too early to say where the market will go, and that is why it is so dangerous to put in public intervention now because that will chill out and slow down private investment and might swap out what was going to be spent by private investors, and that money will be taken by public—so it is far too early.

  Mr Paul: The reason why we are doing real trials is to get to the bottom of the real numbers. That does highlight some specific barriers, which we can go on to later. It highlights also real costs in upgrading speeds to people in Hatt. There is very little that can be done without changing the existing infrastructure for the people living in Hatt. Investment has to be made and the case has to be made for that investment.

  Dr Whitley: I think the words of caution around what would be the limit that the market can deliver are fair, but I do think the parallel with broadband is slightly misplace, in the sense that the economic challenge associated with uplifting the access network, uplifting 90,000 street cabinets in the UK albeit taking fibre into 25 million premises in the UK, is of a significantly larger scale than the engineering task that was associated with broadband. Even though you can debate whether it would be 60, 70 or 80% that the market delivers commercially over time, I think you can say now it is likely that there will be portions of the UK that will either have to wait a long time or will not get super fast broadband. In that context, starting to generate a fund and think very carefully about the application of that—because I take the point that there is a potential for the fund to frustrate commercial deployment, which would clearly be a bad use of public money, so a lot of discretion and care needs to be taken in deciding upon the areas and the mechanism—but we genuinely support the idea that injecting some public money in this area that is so critical to the UK is appropriate.

  Mr Williams: I think the market will deliver using one technology or another. I think of the analogy of the telecoms industry in the 1990s. For my sins, I was a banker in the 1990s financing the cable companies at that time. We all thought that if we raised enough money we could build the cable franchises out to everybody in the country. What actually happened is that it was simply too expensive and too slow to build fibre everywhere. Sky stepped in and within a few short years dominated the TV market with a satellite with the right technology for the right application. The market will eventually deliver super fast broadband to every home in the UK. The Government's question, I think, is not whether it will or when it wants everyone to have it. Some Government intervention could speed up uptake, particularly for low-income households; but if the Government simply wants to let the market deliver, it will eventually.

  Q34  Mr Wright: We have got to move on apace and will probably come back on this particular one. You mentioned the percentage uptake on the next generation: is it a wild guess or is there real knowledge within the industry about what the percentage of the next generation will be?

  Mr Heaney: To a degree it is a wild guess. I think cable has got to about 50%. BT's current funds—you think it will get to about 40%, within the 50% but actually there may be something—it is going to be north of 50% but anywhere between 50 and 90% in the next five to seven years.

  Q35  Mr Wright: Really a wild guess then.

  Mr Heaney: I think so, yes.

  Mr Paul: These things are not linear. There is an element of binary. Again, I come back to the position in Hatt. If you solve the problem in Hatt with fibre-to-cabinet, then whether you choose therefore to provide 5, 10, 15 or 20 megabits, there is actually very little cost difference. One of the characteristics of telecoms that is misunderstood or not fully appreciated is that if you go up a technology step you can provide a significant more amount of capacity for very little additional cost. What happens is that people who have an interest in constraining the availability of bandwidth come up with tariffs to try to persuade you to spend more for a little increase in capacity, where the actual model and the underlying costs do not behave in that way. In the case of again Hatt, they cannot get 2Mbs reliably at the moment because the lines are too long. The sensible technical remedy for that is to do fibre-to-cabinet. When you do that, there is very, very little cost difference between five and 25 megabits; it is simply a commercial one about how you structure the tariff itself. One has to be very careful about speeds. There is very little difference in cost with Virgin Media between providing on the existing cable network once they have made an investment between 25 and 50 megabits. It is a commercial issue of constraining that, and whether somebody is willing to pay more; but it is not a technical one and it is not a reflection of the underlying costs.

  Dr Whitley: The commercial issue is whether or not there is a sufficient paying demand to justify what then becomes a very significant capital expenditure in deploying street cabinets, and that is the barrier.

  Q36  Mr Hoyle: Can I take you up on that point quickly, Mr Whitley? Presumably, the people nearer to your exchange are the ones that get the best speeds; the ones who are always furthest away from the exchange will always get the worst deal. What can you do to ensure that that does not happen?

  Dr Whitley: That is broadly speaking true—technically that is true—although the way that maps demographically is quite interesting. For example, if you look at the average speed to a suburban customer versus the average speed to a rural customer, rural fares are slightly better largely because of the make-up of rural towns. They are often very small communities with an exchange in the middle and everybody is quite close to it and performance is pretty good. With big suburban locations, there has been a lot of extension of suburbia and that means you get a lot of developments on the edge of towns that are a long way from the exchange. Technically we see that when we look at a profile of the speed our customers get. With fibre-to-cabinet we essentially move the electronics closer to the customer, and that means the average speed most people get—we think the average speed for the deployment at the moment will be on average about 30 megabits per second with some customers getting significantly more. One of the interesting things we are doing is to try and get away from the totality of this variability is to put in a minimum guaranteed speed. If we look at the ten million homes that Open Reach Division will be launching, there will be a guaranteed minimum speed below which that will not fall. The technology will allow us to do that, so it is trying to remove some of the variability that has been a complication and a frustration within the broadband market as it is currently configured.

  Q37  Mr Wright: On the question of the 50p levy, bearing in mind that everybody will pay the levy so the lower income groups will be particularly penalised in this area, will the next generation access be affordable to all groups?

  Dr Whitley: At the moment we do not know what the pricing will be. I obviously cannot speak for the communication providers that will buy Open Reach's product. I can speak for BT Retail, so in terms of our own broadband products we have not announced what our pricing will be, but I would hope that it would be very, very competitive. We know that today our entry level products are about £7.50 per month, and then the £20 mark, which is by international comparison very, very good value for money. I would hope that in the fullness of time we will be offering super fast broadband products around that sort of area, but it is early days in terms of our commercial pricing.

  Mr Williams: The answer is "no". I think telecoms is like any other product. The company providing it has to make a commercial return on its capital, and if you are offering a much, much better service that involves much, much deeper capital expenditures, of course the price has to rise. Right now there are plenty of low-income families that cannot afford broadband or mobile phones or other products in similar price points. It is inevitable that as telecommunications services become more complex the prices will rise. I am personally persuaded that there is a telecom boom coming because communications service providers are now charging per megabyte of data downloaded, and the consumer is downloading a doubling volume of megabytes of data year on year. So telecoms companies are going to be making much more money in the future, but that is commensurate with the amount of capex they have to invest. It is for the Government to decide whether it feels the need to address what it sees as a market failure in providing access to telecoms services to low-income groups.

  Mr Heaney: The reality is—and, God forbid, I hope the tax does not go through—everybody will be paying the tax aside the very, very lowest incomes and people on a very basic service, about half a million people. They will be paying a tax to allow the relatively richer people to take this service, because we know the people who take broadband today and the people who pay premium prices for the better broadband today are the richer ones. The reality of this tax is that everybody will pay for a relatively richer group in society to have what today is, frankly, not an essential service and probably a bit of a luxury. That seems unjust in today's society.

  Q38  Mr Wright: Is the Final Third fund large enough to meet the Government's commitment, and if not what do you think the shortfall will be, bearing in mind that it is expected to raise somewhere in the region of £1 billion? Do you think that will be enough over the period of seven years?

  Mr Paul: I will tell you round about Christmas and the New Year. The reason for doing the trials in Cornwall is to answer exactly that question because there is a series of imponderables about the likely take-up. Our trials in Cornwall are in two phases. One is technical, and that is, is it possible to deliver the cable TV-like experience over the final piece of copper; and the second question is, what is the likely take-up? It is the take-up and the penetration that justifies whether or not the investment will make a reasonable return or is completely underwater.

  Q39  Mr Wright: So just build it on that.

  Mr Heaney: We do not know how far the private sector is going to go, and therefore it is impossible to say what an extra £1 billion would do and how far it would get.

  Mr Williams: The answer from me is "yes". Satellite is the cheapest way of delivering super fast broadband in rural areas, and we have been asked to work on a project by the Department for Business to tell them how much money is required to deliver a universal service commitment then NGA to two million homes, and for about half a billion pounds we can do that for two million homes; so if the Government wanted to intervene it could do so. It is enough.

  Dr Whitley: Certainly over the period of time it is proposed to be struck it is a material amount of money, and certainly the aspiration laid out in the report is not out of kilter with that amount of money, although of course take-up is an absolutely pivotal part of any investment in terms of rich reward, but unless demand just is not there then it certainly looks a credible proposition.

  Mr Paul: I can give you—

  Chairman: You have already had one bash at the answer and we are running quite short of time.

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