Examination of Witnesses (Question Numbers
20-39)
MR ANDREW
HEANEY, MR
AIDAN PAUL,
DR TIMOTHY
WHITLEY AND
MR DAVID
WILLIAMS
2 NOVEMBER 2009
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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