Examination of Witnesses (Question Numbers
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
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
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
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.