Broadband - Business, Innovation and Skills Committee Contents

Examination of Witnesses (Question Numbers 105-119)


24 NOVEMBER 2009

  Chairman: Mr Richards, welcome. You are a regular before this Committee and today you are working particularly hard. I think you are going to the DCMS Committee immediately after you finish with us, so we must let you leave punctually. We are seeing you next week for our regular annual joint session on the role of Ofcom in general, so we will have a second bite of the cherry next week. We are grateful to you for coming and for the thoughtful memorandum, as always, Ofcom has provided.

Q105 Miss Kirkbride: The British market for broadband is very competitive, but some might say that it is focused more on price rather than on performance. Would you agree with that?

  Mr Richards: I think hitherto that has been the case, that is right. That observation was precisely what lay behind our move to do some original research on speeds. When we look at this question, you can see very quickly from your own experience, you do not have to do great reams of market research to work out that people essentially make a choice about broadband on three criteria: is it available, "what is the availability to me?"; secondly, how much does it cost; and, thirdly, what speed is it? Everybody could very easily find out the answers to the first two questions by the website or making a phone call, but the third, speed, which was a crucial dimension of choice, was not really available in a transparent and objective form. It was available in the form of the "up to" advertised speeds, but we started receiving complaints, concerns, that the "up to" advertised speeds were not necessarily accurate and people were having direct experience of the limitations. We looked into the provision of information in this area and discovered very quickly that it was very difficult to produce objective information. Indeed, such objective information was not available and, therefore, we took a big decision to do some very difficult original research and we published that earlier this year.

  Q106  Miss Kirkbride: Do you think it is a regulatory failure that we have relatively poor investment in broadband services in terms of the speed that they are offering?

  Mr Richards: In terms of the investment profile, I do not think it is at all. The regulator and the regulatory framework has a part to play in the level of investment and the overall speeds, clearly that is the case, and if you wish to talk about that more I am very happy to do so. Let us start from where we were. Current generation broadband performance in the UK, both competition and basic speeds, and availability, if you take those together, is as good as almost anywhere in the world. The challenge now is to move to super-fast broadband, next generation broadband, and that is going to happen in different countries at different speeds. You have to accept that is going to be the case because in some countries they have decided to put a lot of government money behind it, and if you do that it is going to happen a lot faster. In other countries they have opted for monopoly provision and you tend to get faster deployment if that is the case, but I would argue that you will pay a penalty in relation to that in the long-term because of the loss of competition. What we have done is set a clear framework as a starting point and what we are discovering is that the companies that have to do the investment, because of course we do not do any investment, that have to make the decision to invest with their shareholders' money, are working out how they can do that and make a return. We cannot wish that into reality, it is driven by a number of factors, and the most important factor is people's willingness to pay for it and what combination of services can be offered and how that relates to people's willingness to pay. The current generation broadband market is very competitive so you have to offer something which is better than that in order for people to pay more. If people do not pay more you are not going to make a return on investment. What we now see is a deployment of 50Mbps by Virgin Media and that covers the whole of their footprint, which is about 48% of the country, we see a commitment from BT to deploy up to 40% and we would expect that to go further in due course; and we see other companies now expressing varying but significant interest, certainly in their conversations with us, in how they enter the super-fast broadband market. The regulatory framework needs to be part of that and needs to move with it and adapt to the interest, but we cannot click our fingers and say, "There will be super-fast broadband", companies have to make decisions to invest.

  Q107  Miss Kirkbride: So you are seeing the demand for next generation broadband is there because there has been a feeling of is the market going to do it, do they feel there is sufficient custom there and is it really going to happen. You are quite optimistic from what you have just said?

  Mr Richards: I am very optimistic that it will happen. I do not think I would want to promise a certain level of super-fast broadband in a certain timescale because the companies investing are working out what will work and the underlying costs and whether they can make that cheaper and, therefore, make deployment faster and more extensive and how people, consumers, small businesses, homes will respond in terms of their willingness to pay and it is terribly important. If there was a business case that was clear and obvious I think it would be happening tomorrow, but it is quite a challenging proposition. We have to remember that it is very different from current generation broadband. Current generation broadband was built off the copper network that has been in the ground for decades. This is a new investment, it is a risky investment, and it is being made in a context of uncertain demand and that is always more challenging, but we are underway, progress is being made. There is a clear commitment from us to focus on this issue and make sure the regulatory framework is clear. We have done a lot of work on that in the last 18 months and 2010 will be a very important year in embedding those principles and the work that we have done into detailed regulatory remedies.

  Q108  Miss Kirkbride: The Government is intending to amend the Communications Act to include the promotion of infrastructure investment as part of your remit. Is that not something that is there already, in which case what difference is this going to make?

  Mr Richards: Our overarching duty, as you all know, is to serve the interests of consumers and citizens. What Parliament did when it set us up was to then ask us in doing that to have a series of specific duties but also to have regard for a certain number of things, and one of the areas we have to have regard for in making those decisions is investment and innovation. We also have to have regard for the availability and use of high speed data networks which, in a sense, is broadband and super-fast broadband. The notion that we do not concern ourselves with investment and infrastructure is obviously not the case; we do do that. The proposal to give us a clearer duty to promote investment in infrastructure will change the emphasis. It will elevate it somewhat and, therefore, change the emphasis for us when we make decisions. As you all know, we are fundamentally nothing other than a creature of statute so what we do follows from what Parliament decides our duties are, so a change of that kind is obviously significant for us. As soon as it is passed by Parliament in whatever final form we would go away and say, "How has our framework changed? What are we being asked now to do? How do we now do it?" That question is an extremely important issue.

  Miss Kirkbride: Is there anything that springs to mind as to the difference it might make? Are there any practical observations you can make?

  Q109  Chairman: I am quite puzzled because your existing remit does require you to encourage investment and innovation. I do not know whether we are dancing on the head of a pin here or a substantial difference is being made.

  Mr Richards: It is a matter of emphasis. At the moment we have "regard" for investment in innovation and if you changed it to a "duty to promote" it is a matter of emphasis and that will be one of the things that emerges in the parliamentary debate, what does it actually mean.

  Q110  Chairman: What difference does it make in practice?

  Mr Richards: What we always do in these circumstances is look at our duties, assess the duties and assess how we make a decision in line with meeting those duties. We would be saying has the emphasis we are required to place upon promotion of investment as opposed to having regard for it changed. Clearly if Parliament made that change it would have changed in some form, but to what degree is a matter for debate. To be honest, I think what would happen is we would make a judgment on that in relation to any specific detailed regulatory decision, which is obviously the form of implementation that we get into, and I suspect at some point in the process someone, a third party of some kind, will probably challenge us and say either we had excessively interpreted Parliament's intention or we had insufficiently interpreted it, and that would probably be contested in a merits-based appeal. That is what I would expect to happen. That would be examined and the appeals tribunal would decide. Clearly if there was a change of that kind, we would not be saying, "It's irrelevant" because Parliament has decided to change the wording and that has a significance for us, so we would have to assess the significance behind it and the clear implication of this particular case would be the emphasis required for us to place upon promotion of investment as opposed to having regard for it would have changed.

  Q111  Miss Kirkbride: Local Loop Unbundling was brought in by Ofcom because, understandably, you could not see enough competition in the original infrastructure. Do you think that has changed in any way over the last few years?

  Mr Richards: The introduction of it, broadly speaking, has been very successful. It has certainly exceeded our expectations. When we originally made those changes, firstly there was not a total absence of competition but it was extremely minimal, the availability of broadband was very, very limited and the speeds were risible. Since then we have travelled a long way. When we originally proposed it we only expected about one and a half million lines to be unbundled and we are now in excess of 6 million. It has been against that original measure that we set.

  Q112  Miss Kirkbride: Why do you think it has been so successful?

  Mr Richards: I think it is one of those things that has snowballed. You can model the economics of these things and predict what will happen, but you never get it quite right. In this case, what happened was that we expected one or two players, a couple of new companies to come into the market, but in one or two cases we had no idea they would come in. The one best example of that is Carphone Warehouse who were a completely new entrant to the market. They were a retailer of mobile phones on the high street and they saw the opportunity and took a decision. We absolutely did not predict that. They have driven the process, along with Sky, Orange, Tiscali, O2 and others. Of course, what has happened is they have got into a competitive process which has taken it further than we ever expected. It has been successful and I think it has set a benchmark which is a great challenge for us because it has set a benchmark that the British consumer now expects to see. It expects to see rising speeds, a better quality of service, better value for money and availability, choice between providers. That is the benchmark that, like it or not, we have set ourselves as a country for super-fast broadband and that will not happen overnight, that will take some years, but we have to have the ambition to reach the same sort of model of competition, choice and investment in the next decade.

  Q113  Miss Kirkbride: How are you going to do that?

  Mr Richards: I think that is back to the core decisions around the regulatory framework for super-fast broadband where we have made some big decisions, such as offering BT pricing freedom down to the wholesale level and that allows them to make a risky investment and make a return, but doing that alongside making sure there is scope for competition and making sure that some of the companies that have invested in unbundling are able to take their businesses and competition forward into super-fast broadband. One of the things we have tried to make very, very clear, at least from the regulatory perspective, and there is obviously a huge role for Government here as well, is that we think the UK can have both investment and competition and we do not need to create a false choice between the two. To be honest, my view is I think the danger of creating a false choice between the two is I just do not think the British consumer would tolerate it. They are used to real choice in their communications providers now, particularly on broadband, and the notion you would go back from that would not be tolerated by people.

  Q114  Miss Kirkbride: Is it going to be the same model for fibre as it has been for copper?

  Mr Richards: No, I do not think it can be because the copper network was established, it was depreciated, it was decades old. You cannot pretend that fibre is going to be the same. I think we had a very good understanding of where competition on the copper network could work and that is one of the reasons I think unbundling succeeded in the end. With fibre, it is a new investment, people have got to make those new decisions and I do not think we yet know, and I do not think the companies know, exactly what the best balance between competition and investment is. For example, we could see what we would call physical unbundling, that is remedies and access around ducts or dark fibre or in the cabinets that you see on your street corner. There is probably some scope for that and we may talk about it in due course, but we may have alongside that what we call virtual unbundling, which is where there is a wholesale service which has the electronics on it carrying the data which other service providers might take as well. Where the balance lies between those two in a fibre world, I do not think we yet know. I am certain it will vary according to where you are in the country. The more urban you are, the more densely populated the area, the more likely some of that physical unbundling will work. The more rural you are, the less likely it will work. That is what we are exploring at the moment. I know everybody has a sense of great anticipation about super-fast broadband, and I know everybody would like us to be piling into this and for there to be super-fast broadband across the whole of the UK tomorrow, as it were, and we would like that too, but experience has taught me in this area that it takes time for the mix of institutions and organisations, a range of different companies, government regulator, to explore the different options and levers and to make their decisions which finally unfold in an investment and a model of competition. It does not happen overnight because nobody knows precisely what the right answer is.

  Q115  Mr Oaten: It does not happen overnight in this country, but is there any evidence that it happens quicker in other countries? Are we slower at doing this than some of the others and, if so, why?

  Mr Richards: If you want it to happen very, very fast overnight you have got to spend government money on it, it is as simple as that, because that is the only certainty you can have. In every other case you have some sort of regulatory framework but, crucially, a company of some kind has got to make a decision to spend its money and that does not happen as quickly.

  Q116  Mr Oaten: You were implying that it is by its nature something which takes a long time, but what you have just said is that it can be done quicker if there is government money put in.

  Mr Richards: It is always quicker if government spends money, of course, because you can just start spending the money, but sometimes that takes a long time as well. That is the easier route in a sense. Let me track back slightly. We are not in a bad place on this. The notion that the UK is miles behind on this is not right. Firstly, our current generation broadband, as I said, is extremely good. Of course, it can be better and there is an upgrade going now into 75% of the underlying BT network which will raise the speeds to what is called ADSL2+ which will create a maximum at 24Mbps. That has been pushed forward alongside all the competition. Secondly, in terms of super-fast broadband, Virgin has already rolled out its DOCSIS 3 network across its entire network and that is available to nearly half the country already. That is 50Mbps. People seem to ignore this, but that is a fact. You can go and buy it tomorrow if you are in a cable area, it is already there. BT has made a commitment to roll out its network up to 40% and it is moving forward and underway.

  Q117  Mr Oaten: It was not really about where we are, it was where we are in comparison to other countries. Are we behind or ahead?

  Mr Richards: I was just coming to that. If you take the OECD, the European Union and so on, some countries are further ahead, some countries are further behind. The countries that are a long way ahead tend to be South Korea, Hong Kong, Singapore; those countries. What you have in those countries is a combination of two things: very strong government support and/or extremely dense populations. The economics of doing this are enormously improved where you have large numbers of people living in multi-dwelling units. You put one fibre in and you have captured 300, 500 or 1,000 people. Our topography is not like that, our geography is not like that, it is much more difficult in the UK. In those small densely populated Asian countries the economics work far better. In other countries people are experimenting with different things and we see different drivers taking place. Let us think about the US where what has happened is the telcos have done quite a lot of investment, but they have done it in direct response to cable companies who put the money in in competition. The difference there is that cable companies in the US have about a 99% reach, so the telcos have no choice. We are in a good position relative to other European countries because we have got a cable company that has done it with at least a 48% or 50% reach. In the US, it is essentially a two-player market and one has forced the other. That has a cost to it, which is essentially you have a choice between two players in the US and if you do not like the telco you go to the cable company, but if you do not like either of them you have got a big problem. We have got a much wider range of choice. We are not right at the front and we are definitely not right at the back. If you look at actual delivery in relation to Virgin and BT's plans, you can do a chart of this, which we would be happy to provide to you, which is essentially current deployment and then you can overlay on to that planned deployment and compare the two. We are not as far forward as we would all like to be but we are certainly not at the back of the pack either.

  Q118  Mr Hoyle: Just taking up what you said at the beginning to Julie when, quite rightly, you said Virgin has got about 48% through the cable. The problem is you went on to say that cable is now delivering to that 48%. Are you not worried that the fact is they still only have 48%, people can only reach cable in 48% of the population, it is not growing so, therefore, what we are doing is ensuring those people who already have the benefit get even greater benefits at the expense of those who never got the original benefit of cable? That is the first point because I think that is quite interesting. The other point is, rightly, you said if we are slower we have more competition and if we are faster we have less competition. What makes you think it is better to be slower and have more competition than to be faster and have less competition but still have competition in the market? I am intrigued by that because surely the objective is to get there quicker rather than slower, yet what you are doing is slowing down the market but ensuring there is competition. Usually when we get to the end there is less competition because people buy each other out, so what have you gained, apart from being slower?

  Mr Richards: Very interesting questions. The 48% cable, it is true that it is unlikely they will build out much further, but it is worth saying that they are exploring that and whether they can extend their footprint. I do know someone who is expecting to be cabled up quite soon, but I would accept that—

  Q119  Mr Hoyle: There is a shock, they have not offered me that service! What is the difference?

  Mr Richards: It is at the margins. That is where we are. If the economics worked for them to roll out to 60, 70 or 80% I would hope they would do that, but the economics are very challenging and they obviously targeted the areas which were most attractive. I do not think we can anticipate it will go further. The relationship with the 50% that is not covered is a positive one because the lesson of current generation broadband was cable started and forced BT and others to respond. People forget this little piece of interesting history, which is that when current generation broadband began there was a point at the start where BT under the previous, previous regime said, "Nobody's interested in it, nobody wants it" and cable got on with it and did it, surged ahead, and at one point I think they had 85/90% of the market. That is what spurred BT and others to respond. It may be that is exactly what happens with super-fast broadband. What then happens is that the network providers with ubiquitous coverage, in that case BT and the companies with access to their network, respond and it then goes beyond 48%. What you hope is that that 48% provides a stimulus which then allows a wider diffusion of the technology over time. That is how I think that will play out. Whether that goes to 99 or 100% is another question, and I am sure we will come on to that. In terms of trade-offs on competition and investment, I probably over-stated it. We would much prefer to see it as a positive relationship and that the trade-off is generally speaking positive and not mutually exclusive. The reason I put it somewhat in those terms is because I think there are examples, not here and not ones that I would recommend, where that kind of trade-off has been manufactured or created. There is one well-known European example where the proposal was to give an incumbent essentially a regulatory holiday, so no regulation at all, in exchange for a big rollout. In those circumstances, you are saying, "You rollout and essentially we will give you regulation free for a to-be-determined period". What you are doing with that sort of pact is essentially saying, "Give me a fast rollout and I'll promise you no competition". I think that kind of proposal is a very dangerous step which people will pay for very heavily in the longer term. It is not something which I think is credible. Interestingly enough, I do not think it is consistent with European law in any case.

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