Examination of Witnesses (Question Numbers
120-139)
MR ED
RICHARDS
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 knowledgenot
perfect but pretty goodof 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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