House of Commons - Broadband - Business, Innovation and Skills Committee

Broadband - Business, Innovation and Skills Committee Contents

4 Next Generation Access

Background

37. Next Generation Access (NGA) is the term given to broadband technologies which will be able to deliver speeds well in excess of the current network; loosely defined as speeds in excess of 20Mbps.[42] At present, the average UK network speed is 4.1Mbps,[43] delivered over copper cables, which have a maximum theoretical network speed of 24Mbps. Technological solutions will be necessary to deliver Next Generation Access, of which at present the four most practical are:

increasing the capacity of existing copper networks, using ASDL 2+ technology;
delivering broadband via satellites;
mobile or wireless delivery of broadband; and
replacing the existing copper lines with a new optical fibre infrastructure.

The majority of debate on NGA has focused on replacing existing copper lines with a new optical fibre infrastructure.[44] The two main methods by which optical fibre can be used to deliver a NGA service are:

Fibre-to-the-cabinet (FTTC): a fibre is run from the local telephone exchange to the telecoms cabinets replacing the existing copper line. The signal is then carried from the cabinet to the home via the existing copper infrastructure. This removes the longest continual length of copper line resulting in a significant increase in speed (up to 40Mbps); and
Fibre-to-the-home (FTTH): a fibre is run from the telephone exchange to the cabinet and from the cabinet to the home. This completely removes the copper from the network providing extremely fast connection speed which could deliver up to 100Mbps.

38. Several companies are already deploying NGA networks in parts of the UK. Virgin Media is delivering a network capable of providing 50Mbps to approximately 50% of homes while BT is conducting trials on its own NGA products ahead of a £1.5 billion investment programme.[45] However, these two networks are likely to provide coverage largely to the same areas. This is because the costs of deployment rise rapidly as population density decreases.[46]

39. The Government does not believe that the market will be able to provide NGA networks to the entire population—those living in rural and remote areas being the most difficult to service. Its assessment is that the market will be able to deliver NGA to between 50% and 66% of the population leaving the remainder unserviced.[47]

40. Digital Britain has labelled the remaining section of the market as the "Final Third" and has proposed a "Final Third Project" to deliver at least 90% coverage by 2017,[48] through public investment. The Department commented that while it welcomed the market-led investment in Next Generation Access, Government intervention may be necessary as "there was no obvious means by which the market, unaided, would serve the final third of the population."[49]

41. The Government has proposed a £1 billion public infrastructure investment programme to fund this roll-out of NGA to 90% of the population. The remaining 10% at present is regarded as being too remote or sparsely populated for it to be economic to deliver NGA to at the current time.[50] The funds will be raised from a 50 pence levy on fixed telecom lines, which we discuss in the next section of our Report.

42. We share the Government's enthusiasm for the swift development of Next Generation Networks and for maximising access to those networks. We believe that the United Kingdom's competitiveness is, to a significant effect, dependent on its telecommunications network. However, we have doubts about aspects of the Government's policies to achieve an objective with which we entirely agree.

The Government's analysis

43. It is the Government's intention that intervention will only occur in those areas which will not be serviced by the market. The Broadband Stakeholder Group,[51] the Government's leading advisory group on broadband, commissioned research into the economics of NGA roll-out, and calculated the cost to businesses of providing NGA access, using fibre-to-the-cabinet (FTTC) technology, to the entire populations.[52] The graph which follows shows this cost in relation to the percentage of population covered.

As the graph illustrates, costs rise rapidly beyond 70%, reflecting the difficulties, and therefore increased cost, of delivery for rural and remote areas.

44. The Broadband Stakeholder Group model is based on two assumptions. First, that the total cost of deployment will remain fixed at £5 billion.[53] Second, that 31% of the population will use the service. Both of these assumptions have been challenged by our witnesses.

45. The British Sky Broadcasting Group disputed the assertion that the cost of deployment would remain fixed. It argued that technological innovation could result in the total cost falling:

the cost of roll-out remains uncertain as technology is evolving all the time. In basing its assessment of market reach on BT's cost analysis the Government failed to acknowledge the dynamic nature of the economics of roll-out which are continuing to improve. For example developments in 'micro-trenching' techniques have reduced the average cost of laying fibre dig from £75-£100 per metre to £30-£40 per metre.[54]

46. Regulatory changes also have the potential to reduce the final cost. For example, legislation to allow the sharing of ducts, the deployment of new telegraph poles, and the utilisation of municipal infrastructure all have the potential to drive down costs.[55]

47. The Broadband Stakeholder Group also assumes that the national take up rate will be 31%.[56] However, there is no convincing case provided for this figure. This is of vital importance because the level of demand is key to determining how much of the country the market can reach without Government intervention. There would, for example, be an approximate 40% reduction in the cost of deployment if take-up is increased from the 31% set out by the Broadband Stakeholder Group to 62%.

Demand for NGA: "A killer app?"

48. A "killer app" (killer application) is a term used to refer to any computer program or application which is so necessary or desirable that it will drive forward larger technology. We asked our witnesses if they could identify such an application or programme beyond those which existing broadband could offer, which would drive demand for NGA. Mr Williams, Chief Executive of Avanti Communications, believed that:

Video is the answer. It is all about video. Our customer throughput is doubling every year. Every 12 months the amount of data downloaded doubles. On our own network we see that it's video […] With services like those that BT and the BBC are offering, encouraging consumers to download real TV programmes, that pattern is only going to accelerate.[57]

49. In September 2008, the Government published a review by Francesco Caio,[58] which it had commissioned to examine the barriers to roll-out of next-generation broadband in the United Kingdom. His review "Barriers to Investment in Next Generation Access" (Caio Review)[59] also highlighted television as a major driver for NGA up-take in other countries but warned that the extremely competitive nature of the UK television market—with satellite, cable and digital terrestrial TV—made internet provider TV a less attractive option than in other countries.[60]

50. Dr Timothy Whitley, Group Strategy Director BT Group, was also sceptical about video driving higher demand for NGA services. He pointed out that BBC iPlayer was delivered using only 900-700Kbps, "even to a decent sized television", much less than the speeds of 40-60 Mbps which would be delivered by NGA."[61] He went on to argue:

It is easy to run away with the notion that that there are vast swathes of applications out there right now that need 50 or 100Mbps. There are indeed specific applications, multiple high definition TVs [for example] but they are probably not the things most people are doing today.[62]

51. Supporters of NGA have responded that demand will follow supply and that content cannot develop until NGA is deployed. As Mr Paul, CEO of Vtesse, argued:

We could have had the same conversation in the year 2000 about what people will be doing with the Internet today and I think we would have got it mightily wrong. It is very difficult to say what will be [its applications], but undoubtedly people will find things to do with higher speeds.[63]

52. However, this assertion has not been borne out by evidence from countries which have already deployed NGA, most notably Japan and Korea. The Caio Review examined those markets and found that there was "no correlation between NGA penetration and the sort of content people consume."[64] Dr Whitley from BT also highlighted an example of a telecommunications company in Denmark which no longer advertised their high speed services to customers.[65]

53. The Caio Review contained a similar finding, noting that France Telecom had, as of July 2008, only 14,000 fibre subscribers to its high speed services out of a possible 344,000 connectable homes.[66] The Caio Review also highlighted the fact that there was little evidence of a "substantial pent-up demand" for faster broadband being delivered at higher prices. Moreover, it found evidence which suggested that consumers in other countries continued to prefer low prices for lower speeds, where a choice was available.[67]

54. In its evidence British Sky Broadcasting Group highlighted an unwillingness by consumers to pay for super-fast broadband as an inhibitor to the commercial deployment of NGA:

since Virgin Media launched its 50Mbps service there has only been 3 percentage point rise, year on year, in the proportion of customers taking their 20Mbps or 50Mbps broadband packages and they are continuing to experiment with pricing and services, cutting the cost of the 50Mbps service from £35 to £28, to establish what customers want and how much they are willing to pay for it. [68]

55. There are parallels to be drawn between the roll-out of first generation broadband and that of NGA. The Trade and Industry Select Committee's 2004 inquiry into broadband examined why the take-up of first generation broadband had been slow and found that the competitiveness and keen pricing in the dial-up broadband market was hindering the migration to broadband.[69] Ultimately, broadband take up was spurred by the introduction of price competition into the broadband market and a slower increase in the requirement for faster connections as internet content became more sophisticated.

56. The evidence we have heard suggests that there is no pent-up pressure for super-fast broadband from consumers, due both to a lack of new applications and an unwillingness to pay higher bills for internet access. We do not believe that the Government has yet made the case for intervening in the market to provide NGA access to consumers who already receive a reasonable quality of service. Furthermore, we conclude that achieving a universal service of 2Mbps should be the priority.

When to intervene: Pre-empting the market?

57. A number of our witnesses aired concerns that there was a risk that the Government could act, or intervene, too early; and that the introduction of a public subsidy could "freeze out" private sector investment. TalkTalk believed that early intervention could result in some private investment being postponed:

with operators delaying the network roll-out so that they tap into public funding […] as a result much of the public money will not create new investment but be simply wasted funding projects that were going to happen anyway.[70]

This point was echoed by British Sky Broadcasting which argued that until there was greater clarity over the likely extent of market provision of NGA, it was difficult to assess whether large-scale public intervention was justified.[71] Furthermore, BT, while supporting the principle of using public money to assist the market, remained of the view that "there are many questions as to how and when".[72]

58. The uncertainty among broadband suppliers seems at odds with the Government's assessment that the market will not deliver beyond the 50% to 66% level without intervention. When he came before us, Stephen Timms, Minister for Digital Britain, stated:

we do have to do some hard headed economic analysis […] There is a judgment here, I agree with you, and our judgment is that it is not acceptable to end up with only two-thirds of the country having services to which others are already getting access.[73]

59. It seems that NGA roll-out will be economically challenging and that currently there is little indication of what the level of demand for NGA will be. However, both Vtesse and BT are conducting trials in areas which are considered to be at the economic margins of the market.[74] Consequently, in a relatively short period of time there will be market data available which will be able to demonstrate the viability of providing NGA to communities in rural areas. This will enable both the Government and the market to judge the economic and social case for NGA roll-out.

60. Mr Richards, Chief Executive of Ofcom, made the argument against early intervention very succinctly, arguing that while intervention will be necessary at some point, the market was still experimenting:

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.[75]

We believe that this, coupled with the uncertainties that surround customer demand for NGA, means that the Government should resist the temptation to intervene until the market's capacity to deliver this service becomes more clear.

61. We accept the analysis that, given the current public policy framework, an entirely market-driven approach to NGA roll-out is unlikely to deliver NGA to every home. Therefore, if there is to be near-universal access to NGA, changes to public policy or some form of Government intervention will be necessary. Changes in public policy—for example to allow competitor access to BT's ducts, or to the rating of fibre optic networks—might prompt the market to deliver, and technology itself is changing rapidly. Whether this is the right time to intervene with public money and what form this intervention should take remains an open question.

62. Premature intervention by the Government in the NGA market could prove unnecessarily costly. We believe it would be unwise for the Government to intervene until the market has established what it is capable of delivering by itself, something the telecommunications companies are still in the process of doing. Fifty percent of the United Kingdom already has potential access to high speed broadband and that proportion will grow as investment increases and technologies develop. These processes could accelerate if they are provided with an appropriate public policy framework.

Where to intervene: starting at the extremes

63. The Government has already indicated that it intends to use its NGA fund to roll-out broadband in areas where it is not economically viable for the market alone to provide a service. However, the Government will have to decide on which part of the "Final Third" should be targeted first. The options available are either:

the most populated areas, which would benefit more people in the short term but run the risk of freezing out private sector investment; or,
the least accessible, which would benefit fewer people but avoid the risk of interfering in the market.

This dilemma was noted by the CBI:

The hardest to reach premises are the most unlikely to be served by the market but will also be the most expensive and will therefore consume more of the fund per household. Alternatively starting with the households that it is most cost effective to serve could cover areas which the market could be more likely to reach over time.[76]

64. When we asked the Minister for a view on these two options he replied:

We have not indicated that yet. That will […] be an early task for the procurement group that is being set up. We have simply said that we think the priority should be those who do not have an adequate service at the moment. How beyond that the priorities are set will be a matter for them to determine and a very important judgment for them to make.[77]

65. It should also be noted that there may be a conflict with European law. TalkTalk believe that any early commitment by the Government could represent a breach of the European Commission's guidelines for State Aid.[78] That said, it believed that starting the investment in the least economic areas could ease those concerns, as EU State Aid guidelines "highlight the need to ensure that public funds are only used in areas where the private sector will not go."[79] Such a decision would also minimise the risk of public investment distorting the market. These are also the areas which are likely to have a poor quality of service at the moment, and so will benefit the most from an improved service.

66. We believe that if public intervention is to occur then where it begins geographically is of critical importance. We recommend that the Government act cautiously in any intervention it may make, and that any such intervention should be in areas where the private sector is least likely to venture. This would allow the market time to assess the economic case for further roll-out beyond 66%, decrease the chance of private investment being crowded out and decrease the possibility of contravening EU state aid rules.

How to intervene: the importance of neutrality

67. How the Government should intervene, in terms of technology, is a balancing act. It is difficult to be prescriptive, because the technical solutions will need to be tailored to each community's needs. However there are two points which the Government will need to bear in mind.

68. The first is that while our Report has focused on NGA provision through the installation of fibre optic cable, this will not always be the correct solution. In areas where the distance between the exchange and the cabinet is relatively short (2.5km or less) then the use of ASDL 2+ technology, which increases the performance of the original copper wires to as high as 24Mbps may be better. Similarly, the Government should not ignore the possibility of using satellite technology to deliver broadband to the most remote areas where even with a government subsidy the cost of deploying fibre optic cable would be prohibitive. While currently this only provides a top speed of 10Mbps it would represent a significant improvement to remote areas which have extremely poor, or no, internet access. Any procurement process that the Government embarks upon must be technologically neutral, utilising the most appropriate solution in each particular case.

69. Secondly, in cases where fibre optical cable is the preferred solution, it must be possible for all operators to use the infrastructure, to ensure effective competition and a lower price for consumers.

70. While optical fibre may often be the correct technology to deploy in the delivery of NGA, the Government must not lose sight of alternatives which are already able to deliver results. The speed of technological development in this industry is fast, and solutions which appear to be too costly or complex today may quickly become the most appropriate option in the near future. We believe, therefore, that technological neutrality should be a cornerstone of any Government intervention. Furthermore, we recommend that any Government-funded infrastructure should be able to support services offered by multiple internet service providers. If not, it runs the risk of establishing local monopolies.

42 Virgin Media's super-fast broadband packages start at 20Mps. Back

43 Ofcom, UK Broadband Speed 2009, July 2009, p 8 Back

44 Department for Business, Innovation and Skills, Digital Britain, July 2009, p 60 Back

45 Department for Business, Innovation and Skills, Digital Britain, July 2009, p 60 Back

46 Department for Business, Innovation and Skills, Digital Britain, July 2009, p 65 Back

47 Department for Business, Innovation and Skills, Digital Britain, July 2009, p 64 Back

48 Department for Business, Innovation and Skills, Digital Britain, July 2009, p 64 Back

49 Ev 43 Back

50 Department for Business, Innovation and Skills, Digital Britain, July 2009, p 64 Back

51 The Group provides a neutral forum for organisations across the converging broadband value-chain to discuss and resolve key policy, regulatory and commercial issues, with the ultimate aim of helping to create a strong and competitive UK knowledge economy. www.broadbanduk.org. Back

52 Broadband Stakeholder Group, The cost of deploying fibre based next generation broadband infrastructure: Final Report, 2008, p 8 Back

53 Broadband Stakeholder Group, The cost of deploying fibre based next generation broadband infrastructure: Final Report, 2008 Back