Broadband - Business, Innovation and Skills Committee Contents

Examination of Witnesses (Question Numbers 120-139)


24 NOVEMBER 2009

  Q120  Mr Hoyle: We probably disagree on that, and I do not want to test the Chairman too much, but you have given us a flavour and you have moved a little bit, and that is good to see. Can I take you back to something that I did find interesting. You said the figure was Virgin was 48% but will do a 100% faster speed and I think you said, correct me if I am wrong, of whatever it be that BT is, they are now offering 40%.

  Mr Richards: That is the proposed rollout. They are underway on that.

  Q121  Mr Hoyle: Can I suggest that they are both in the same areas and the fact is the people who are worst served are continually worst served because they are not receiving it first. The same people who have got choice get even greater choice at a faster speed. Are you not worried that all the emphasis is going to the same people permanently? If you really wanted to be exciting you would say, "Don't go to where Virgin is already offering, let's offer it to the rest of the area". What do you do about that? Surely it is defeating your own objective? They are great statistics, but the truth of the matter is it is still only the same people who benefit.

  Mr Richards: I do not think the 40% will exactly mirror the 48%.

  Q122  Mr Hoyle: I do not think it will be far off. I think we both know that, Ed, come on!

  Mr Richards: It will be in the same territory.

  Q123  Mr Hoyle: Because they do not want to lose competition, the market.

  Mr Richards: It will be in the same territory. This was exactly what happened with current generation broadband and then the network extended beyond that. Of course, it tended to start in the same areas because those were the most economically attractive but then it extended. I am not going to deny or contest the kernel of your argument in the sense that what it seems to me you are saying is there is going to be market deployment which has already gone to 48% and it may go beyond that, but will there be a section of the country who may not receive this any time fast and possibly not at all. I think that is highly likely to be the case and that is precisely what lies behind the Government's proposals about the last third broadband levy and that is at the heart of one of the proposals in the Communications Act.

  Mr Hoyle: All I am saying is it would be nice for them to be at the top of the curve rather than at the bottom, but I will leave it at that, Chairman.

  Q124  Chairman: Can I ask you a question about assessing demand for the size of the next generation market. What drives that demand? As some people would say, what is the killer app that requires people to have super-fast broadband universally?

  Mr Richards: If I knew the precise answer to that, Chairman, I would probably be in business. I do not think anybody knows what the killer app is yet and we all wish there was one that was transparently obvious. The killer app on current generation broadband turned out to be surfing the Internet, that is what it was. We were doing it on dial-up, on very low speeds, and there was not a killer app other than people wanted to be able to do that faster and more efficiently. It may be that essentially the killer app for super-fast broadband is the same thing, but the Internet has evolved and is now full of video and audio rich services and, therefore, you need much higher bandwidth. There may be a very interesting public services dimension to it, that is possible, but it would require Government to significantly up its game on the provision, quality and attractiveness of those services, there may be something in that. There may be something around small businesses and business activity. What does a killer app mean? It means because of that service people are willing to pay more money for it in this case. I cannot see any version of that which does not have some form of strong content rich proposition because everything else people can do with what they have got now. It has got to be something that features on-demand video, those sorts of things. Those are the kinds of bundles of services which will attract people to this kind of technology and this kind of service, but precisely what it is and in what form is open to question.

  Q125  Chairman: I take it Ofcom was not consulted by the Government about assessing the size of the next generation market because you cannot know how big it is going to be if you do not know what it is going to be for.

  Mr Richards: No, I do not think we do. I have a strong intuition about it born of thinking about these things over some years and being involved with them over many. I have got a strong intuition that services will emerge, they probably will be things that we do not know about yet, all sorts of innovation in this area, and that will be commercial and public. I do not think we could precisely specify the size of the market at all.

  Q126  Chairman: I am a Tory, I freely confess that, and I have a lot of faith in markets, which may distinguish me from some Members of the Committee, I do not know. It seems to me when the killer app emerges competition will drive the need to invest in infrastructure to provide it. I am very dubious about the need to put public money at this stage for a market we do not know the size of and we do not know what it is for. At the moment, 40% of people are not using the current broadband speeds. Surely digital inclusion is perhaps more important and to get those people on-line and get the advantages of the current generation should be a high priority for public action rather than investing speculatively in the future.

  Mr Richards: Those kinds of choices between public policy priorities are a matter for Parliament and Government to take. There are important alternatives. One is definitely the rollout of super-fast broadband, that is definitely true, and how extensive it is. I think you are right, a second is the take-up of existing broadband. We have got a pretty good knowledge—not perfect but pretty good—of why people do not take up the current generation broadband and there is clearly scope for making progress on that as well as tackling the issues of super-fast broadband.

  Q127  Roger Berry: I am not quite sure I recall the answer to the question about whether Ofcom was consulted in assessing the size of the future generation market. Was Ofcom consulted also on government subsidy and the method of financing?

  Mr Richards: We were asked various questions about that in the formulation of policy, but we did what we always do in these circumstances which is offer essentially technical and analytical advice. We certainly did not form the policy, BIS formed the policy and it is their policy. What we do in those circumstances is we tend to answer analytical and technical questions. In a sense, one question which might lie behind this is do we think the market is going to stop at 48 or do we think it is going to go to 100 and I do not think we know the answer to that. I do not think anybody knows the answer to that. I think it is highly likely to go beyond 50, beyond where Virgin is, that is highly likely and I would be willing to back that. Do I think it will go to 100%, I think that is very unlikely.

  Q128  Mr Hoyle: Where do you think it will be?

  Mr Richards: It is very difficult to say.

  Q129  Chairman: You go back to your answer, if you knew you would be in business doing it.

  Mr Richards: It is very difficult to know precisely where. What you can know and work out is you can understand, and this is where our technical advice is quite useful, or I hope it would be, the topography of the network and how that changes. The big uncertainty is the demand-side. I have talked about this bit already. We do not know how much people are willing to pay, how many people are willing to pay, and so on and so forth. There are also some very interesting supply-side factors which we do know a little bit more about. One of those, for example, is how the density of customers in relation to a street cabinet changes. We know roughly that as you get to beyond about 75% of the population, the number of customers per cabinet falls away and that makes the economics of market provision, of commercial deployment, more challenging.

  Q130  Chairman: There are companies out there that want access to the rural and semi-rural ducting. It is the suburbs which most need the services, and one company is trying to do that at present in Cornwall, as you may be aware. Why has Ofcom not opened up access to the duct network in all areas of the UK?

  Mr Richards: Duct access is a very interesting question. When I mentioned earlier in response to Miss Kirkbride I said we were looking at physical unbundling and virtual unbundling. There are two principal examples of physical unbundling. One is the cabinet and the other is ducts. As a matter of fact, we started looking at duct access about a year ago. We floated it to industry and, to be honest, we had a very, very lukewarm response, general lack of interest. Not comprehensively so, but overwhelmingly we had very little interest. Despite that, we thought there was something in it potentially and we were trying to think ahead about it, so we commissioned our own duct survey. We did a survey of BT's ducts concentrating between the metro node and the exchange in order to reveal or expose whether it was possible or not, because a lot of people's views were it was simply impossible. Bear in mind, we are not talking about perfect Parisian sewers here, we are talking about ducts which vary enormously. Some of these so-called ducts are a piece of cable with concrete on top of them so, in other words, it is not a duct at all. In other cases they are in pretty good shape. We did a duct survey and discovered we thought there was something in it. We discovered there were ducts with space in them even though if you wanted to take it from end-to-end some new ducting work would be necessary. The notion that you can just pump it through is not the case. We found some interest in that, we put it in the pubic domain and we started a good dialogue with companies. Prior to all the recent interest in ducts, a few months ago we commissioned a second duct survey which looks at the duct capacity from the exchange and from the cabinet to the home, so the key last bit of access. That is in the field at the moment and we expect to receive that back in January. At that point we will be launching a couple of market reviews and we can decide whether it is an appropriate remedy or not. What has happened in literally the last couple of months is that there seems to have been a surge of interest amongst the companies. That is important to us because it is no good us putting remedies in place if companies are not interested in them.

  Q131  Chairman: That surge of interest makes me suspicious about too much government intervention in the market when industry suddenly changes its mind and ups it gear, but that is another matter. BT are obviously nervous about all this, they say it is fragmentation of their raison d'etre about BT Openreach, a functional separation, there is the infrastructure and you all have equal access. They do not like this and are understandably opposed, and that could be for good or bad reasons. They could be legitimate concerns about the competition model that has served the UK so well or they could be the arguments of monopolists down the ages. They do also say it will lead to fragmentation of their network. Is that a problem? We have fragmentation of so many aspects of our lives. You get different levels of service delivery by different mechanisms in different geographies and different communities already in so many areas. Is that fragmentation of the network a legitimate concern?

  Mr Richards: There are probably two points to make there. The first is back to the issue that Mr Hoyle raised, which is how much do we care about a service of this kind being available in some parts of the country but not in others, and that is a fragmentation issue, and ultimately that is one of those universal service questions which is not in our gift, we should not be making a judgment on that, Parliament should make a judgment on that. How important is this service to the people of the UK as citizens? That is the first fragmentation issue, which is clearly very important. The second is the fragmentation of networks wherever it is being provided. I think BT are very worried about this and they have a serious point in the following respect: what I do not think you want is a situation where you have pockets of different networks all using different interface systems with service providers and with different interconnect arrangements, the consequence of which might be dozens of local monopolies which cannot interconnect. That is not a good outcome. There are ways of dealing with those issues around standardisation of interconnect, interfaces and a more standard approach to business-to-business interfaces as well on the systems side. That is a better way to go than saying because those are challenges, the default position must be to just have a single monopoly provider. That would be a shame. This comes back to your duct access question. If you took that challenge about fragmentation to its logical extreme and said, "We must have no fragmentation" you could not possibly open up the ducts because that necessarily means someone else is putting a cable or a fibre in and that means potentially they will have a different kind of interface. There is a big role for us to play here in terms of facilitation on standards and we are trying to do that. We would rather do that than impose mandatory regulation on dozens of companies. It is an issue which needs very careful attention and we are paying it careful attention, but I do not think it is sufficient for you to argue that, therefore, there must be a single default provider.

  Chairman: Thank you, that is very clear. We are running up against the clock a bit and we have got one more area of questioning to go.

  Q132  Mr Hoyle: Given the technical difficulties in delivering advertised speeds that reflect the speed actually experienced, what alternative mechanisms has Ofcom considered to inform the consumer?

  Mr Richards: This has been a very interesting period in the last 12 months on this question and it echoes the discussion right at the start of this session. We did not set out to want to get into this area. In fact, on the contrary. In other areas what we have said is we are trying to run a good value for money regulator, we are not trying to employ people for employing people's sake, we are not trying to be big, and if the market or third parties are providing something in the way that consumers need we should not bother doing it. By and large that has been the case for a lot of communication services. What we discovered on broadband speeds was that the market was not able to do it and there was a serious deficit. In a sense, it was a classic market failure. They could not get the information, it was not reliably available, it could not be communicated, and yet it was one of the three critical ways you make a decision on what to take. It was a big decision and I will tell you very straight that we met huge opposition from some of the providers who did not want us to do it.

  Q133  Mr Hoyle: Which ones?

  Mr Richards: I would rather not mention which ones.

  Q134  Mr Hoyle: Why? Name and shame, do not let them off the hook. Let us know who is giving us a good service. Do you want us to have a bad service and not tell us?

  Mr Richards: I would rather not mention it. There was serious opposition to it because I think people knew it would expose what the true situation was and that was not possible with the existing data. We did it in the face of some quite stiff opposition. When we did it we did not know what would happen. We were very interested in it but we did not quite know. What has happened is that piece of research, which is complicated and difficult, has been the single most accessed and downloaded piece of Ofcom work ever. We had a colossal demand. It was downloaded thousands and thousands of times. It has been downloaded thousands of times internationally as well as domestically. I saw the new Chairman of the FCC recently and they are enormously interested in doing something similar in the US. We have had international interest about it. We are not aware of anybody else having done anything like it anywhere in the world. It was a very serious endeavour, it took us seven, eight months to do, but it did expose some really fascinating data about what you were getting rather than what was being advertised and who was closest to what their promised speed was. In my view that was one of the best things we have done for the consumer ever.

  Q135  Mr Hoyle: Who was top of the tree in delivery?

  Mr Richards: Top of the tree in relation to speed delivered in relation to advertised was Virgin Media and then there was a bit of a ranking down from that. I think Virgin delivered about 8Mbps in relation to an advertised 10 and the DSL providers were at differing points. Because we normalised and controlled for things like distance from the exchange so that was not a factor, what determined the ranking of the rest of them was how much they had invested in backhaul, how much they had invested in ADSL2+. Going back to this question about investment, I think this was a good thing for us to have done in relation to consumers for information but what it also did was say who is investing in real speed, where can you get better speeds from. Before that this was all hidden. In a sense, it has repaid those people who have said, "We are going to invest on behalf of the consumer to deliver better speeds".

  Q136  Mr Hoyle: Who is bottom of the tree?

  Mr Richards: I honestly cannot remember but it is published and I will send you a table.

  Q137  Mr Hoyle: Obviously the services customers receive depend on multiple factors, for example the infrastructure operator, service provider or the home infrastructure. How concerned are you about disputes between Openreach and Internet Service Providers over responsibility for service failures? The other thing, of course, is it can sometimes be the equipment as well. You go through these arguments, where do you believe it really ends up?

  Mr Richards: This is a difficult issue and, you are absolutely right, sometimes it is the kit you have bought.

  Q138  Mr Hoyle: That is right, the kit is not up to it.

  Mr Richards: It is not the network's fault. The issue we have had in this area, which is a serious one and which I would say we are getting a range of complaints and concerns about, is Openreach is the core network provider which others take the service from and sometimes it is not clear, if there is a fault or a problem, and it might be the kit, whether it is an Openreach issue or a service provider issue. There is a little bit of disagreement amongst them on that.

  Q139  Mr Hoyle: They both hide behind each other, that is what I seem to find.

  Mr Richards: There is a little bit of that, precisely. Sometimes we get complaints from both parties and Openreach saying, "We have been blamed for this but actually it is nothing to do with us, it is the service provider" and other times the other way around. Generally speaking, what we would like to see is the company with the customer relationship taking as much responsibility for addressing the issues as possible because you are paying them directly.

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