Broadband - Business, Innovation and Skills Committee Contents

Memorandum submitted by Department for Business, Innovation and Skills


  The Department for Business, Innovation and Skills supports industry through the Government's active industrial policy designed to increase competitiveness and productivity. The telecommunications industries provide significant support to the UK's economic and social base and provide high value, high quality jobs that tap into our strengths of industrial and academic research and development. Telecommunications are integral to all UK's business functions serving all industrial sectors and to helping to support growth of new businesses and maintain a balanced economy. Through support for the telecommunications sector there will be opportunity for greater innovation in service provision helping deliver consumer benefit in the shape of better service levels and greater choice. The government's Digital Britain report published on 19 June set out a number of new initiatives to build on work to support the emerging digital economy to ensure companies and Britain is well placed to take advantage of opportunities once we come out of recession.


Whether the target for universal access to broadband at a speed of 2Mb/s by 2012 is ambitious enough?

  The Government set out some of its thinking behind the figure of a 2Mbps universal service commitment in the Digital Britain Interim Report in January.

  Our rationale is based on the importance that the internet is assuming in people's everyday life, as a critical support for education, work, engagement with government and leisure. As the Digital Britain Report pointed out, for those households who have it broadband has become an essential utility as important as electricity, gas or voice telephony.

  But of course some homes, and even some businesses, simply cannot get access to a broadband connection because the essential investment in the network has not been carried out. We believe that there is a basic equity point here—with broadband being so important both economically and socially it cannot be considered fair that relatively large portions of the population are denied access simply because of where they live.

  Having reached that conclusion we then needed to consider what exactly it was that we felt everyone should have access to. "Access to the internet" is not a simple complex in terms of technical definition. We looked at a number of different criteria:

  First, at its heart this policy is about access to services. So what are the characteristics of the key services? The universal broadband commitment should give everyone reasonable access to the sorts of services that we see so many people relying on today for economic and social benefit. The table below shows the most common current internet uses and the bandwidth they require.

256 kb/s
512 kb/s1Mb/s 2Mb/s
Basic internet browsingAs before, plus As before, plusAs before, plus
Instant MessagingBasic video streaming iPlayerDownload music album in 5 mins
EmailTele-healthSecondLife Long-form video (MPEG4)
VoIPFaster internet browsing P2P file-sharingVideo conferencing via TV
Online radioFast internet browsing
Basic video callDownload audio CD in 10 mins
Network storage & backup "Near-VHS" PC conf call

  At 2Mbps users could download a music album in around five minutes; access long form video at a decent quality and use video conferencing. These services go beyond the minimum requirements of web browsing, email and iPlayer use, but are among those becoming expected by broadband users. Any lower level of service would be likely not to match up to what is becoming typical internet use, particularly projecting ahead three to four years.

  Critically, we want to ensure that everyone can have access to public services online and, for instance, can benefit from education opportunities and other economic opportunities. None of this is particularly bandwidth hungry at the present time. Indeed the services we identified requiring the greatest bandwidths are video-conferencing and audio-visual services such as iplayer. Clearly all these services are desirable, but it would be difficult to see eg HD audio visual streaming as a critical service that everyone needs to have access to.

  Second we need to consider the costs of delivering relevant services. The minimum desired level of service needed to be balanced against the cost involved in securing it. Each escalation of the minimum level of service would have two effects: firstly, it would bring more homes into the scope of the USC scheme, the table below shows the number of households currently able to obtain speeds between 256k and 2mbps and second the technical solutions required to deliver universality might be more expensive as different approaches might be needed in some areas in order to deliver speeds significantly higher than 2Mbps. The reason that the market has not tackled this problem is that they do not consider it commercially viable to do so.

Level of coverage
256 KB/s 512Kb/s1Mb/s 2Mb/ss
Availability99%98.5% 97.9%93%
Approx. unserved households250,000 370,000510,0001,750,00

  Some consumers will be able to improve their connection speed through fixing home wiring issues on their own initiative, whilst the market will also extend 2Mbps reach to some homes through existing plans for network build.

  However, less savvy consumers may require help with identifying the source of their wiring problem and resolving it. Other households will only receive 2Mbps if there are network upgrades that would not be delivered under normal commercial conditions.

  Our investigation, primarily with Ofcom and BT, of the likely cost of filling in "notspots" suggested that 2Mbps was likely to be affordable with available government funds, private investment and leveraged other regional investment. The table below shows where intervention could take place.

  Thirdly we considered average speeds currently prevalent in the UK. The average domestic connection is estimated by Ofcom at the time was 3.6Mbps (now 4.1Mbps) and some 85% of households have access to speeds of 2Mpbs or faster. The point here is to provide an acceptable floor, not to try to equalise all internet connections at some average level. A USC set much below 2Mpbs would risk not delivering adequate connectivity. A USC set much above 2Mpbs would require a comprehensive network upgrade. It is important in this context not to look at the USC in isolation, but to also consider the final third fund which aims to bring high speed broadband to as much of the population as possible.

  We therefore took the judgment that a government intervention to ensure 2Mbps universal service represented good value for money and delivery of a service that was in line with user expectations.

  We are aware that other countries around the world are carrying out their own analysis of the issue and setting out their own universal service ambitions. We believe the UK's ambition compares favorably with comparable other countries.

  The France Numerique plan set out plans for a 512Kbps universal service; Finland committed in December 2008 to a 1Mbps universal service by 2010 as a stepping stone to a much more ambitious 100Mbps by 2015. Germany has likewise committed to a 1Mbps universal service.

  We are of course aware of developments in Japan and Korea, where the Governments are reported to be ensuring much greater bandwidths. We continue to monitor developments in the Far East, but would note the very different demographic and industrial policy conditions in which these commitments are made.

  Finally, the 2Mbps commitment needs to be placed in the context of our overall broadband policy. Our Universal Service Commitment at 2Mbps is a baseline figure aimed at providing a minimum service level for broadband consumers. We are also taking steps to support rollout of much faster broadband services to the vast majority of homes in the UK. We believe this is a better indication of ambition.

Is the Government right to propose a levy on copper lines to fund next generation access?

  The Government set out in the Digital Britain Final Report its decision to support investment in Next Generation broadband. In this, we said that while the market-led investment in Next Generation broadband was welcome, there was no obvious means by which the market, unaided, would serve the final third of the population. We therefore proposed a Final Third Project to deliver at least 90% coverage by 2017.

  The costs of investment in next generation broadband is significantly more than was required to provide first generation because there is a much greater requirement for replacement of the physical infrastructure. The UK Government, in common with other National Governments regards the communications infrastructure as having increasing importance to the economic and social fabric of our society.

  Whilst the market has moved to deliver NGA to those geographic areas where potential commercial returns are highest; where population density is high and where the likelihood of competition at the infrastructure level leading to operation efficient market operation is acceptable there would be no requirement for Government for intervention. This currently represents around 50% of the market.

  For areas where population density is low and the commercial investment case is weak, where even if there were 100% take-up of broadband, the commercial return would be insufficient to justify the original investment to deliver NGA into the final 30% of the market within the next 10 years through commercial investment alone. The Government believes that it is necessary to incentivise market investments by making available a fund to increase the attractiveness to commercial investors of extending NGA into the final third.

  The cost of investment remains high and in order to incentivise the investment necessary to bring NGA to the final third, particularly at a time when the economic outlook continues to prove challenging, it was decided that the preferred option would be to impose a modest levy on fixed lines to raise the additional revenue required to make up the NGA fund.

  We were conscious of the need to pitch the levy at a level which neither disrupted the competitive balance in the market to a great degree nor put an undue burden on bill payers. We said in the Final Report that there would be exemptions for low income households. Additionally, the costs to households of telecoms services has been falling over a period of many years.

  The Ofcom Communications Market Report 2009 suggested average household spend on telecoms services in 2008 was £65.01, down from £68.84 in 2007. The average amount spent on internet services was down from £11.37 to £10.71, while the average amount spent on fixed voice was reduced from £23.49 to £22.26. This continues a trend of broadly similar reductions since 2005.

  In other words, for an average household which subscribes to either fixed line telephony or internet services or both, a 50p levy would be less than the decrease in prices for fixed line services.

  We are still in discussion with stakeholders about the fine details of how the levy will operate and may modify the scheme in light of this consultation.

Will the Government's plans for next generation access work?

  Provided the levy is established in 2010, and we are able to implement our plan of allowing the Network Design and Procurement Group to begin the process of identifying areas for support speedily, we believe Next Generation broadband investment will be forthcoming in the Final Third.

  In turn, we hope this will stimulate investment not only in dense urban areas but in the suburban areas in between, as companies seek to establish networks of scale and present a national proposition.

  Taking account of the above methodology we believe that a well designed and structured procurement programme will encourage development of bids, which deliver infrastructure improvements. We intend to consult shortly on the issues raised by the proposed final third fund, such as how to define the final third, how to ensure that it incentivises rather than squeezing out investment and other issues such as how to ensure competition in the high speed broadband market.

If companies are providing the speed of access which they promise to consumers?

  The Government and UK telecoms Regulator have discussed this issue extensively with operators over recent years and were pleased that Ofcom were able to agree with the majority of providers the introduction of a voluntary code of practice, which aims to provide consumers with better information about the 'real' speed they will experience at the point of sale. That is to say when a customer orders broadband from a service provider a line test takes place and the result is relayed to the customer, so that they are aware of the service level they can realistically expect to receive.

  The nature of DSL broadband will always leave scope for some dissatisfaction, because it remains subject to a number of technical variations at any given location, the most common being that the longer the line length, or the further the customer is from the telephone exchange the less speed and potential reliability of the service. This is simply the laws of physics at work. If however, customers feel that they have genuine grievances there are processes in place to accommodate complaints, the first recourse would obviously be to their respective service provider, but if that does not lead to a satisfactory outcome, then Ofcom and an the Office of the telecoms adjudicator would be well placed to take forward and respond and resolve complaints.

The extent to which current regulation strikes the right balance between ensuring fair competition and encouraging investment in next generation networks

  The balance between investment in networks and competition at a service level is one that has been considered by governments and regulatory agencies across Europe and beyond. At its baldest, the trade-off is expressed in terms of whether it would be appropriate to allow a national incumbent to re-establish a monopoly service in exchange for a major upgrade to the broadband infrastructure. This will very seldom be attractive, for obvious reasons. The challenge therefore is how to deliver investment in a way that will allow for competition that serves the interests of consumers.

  The UK broadband market is one of the most competitive in the world. Following the Strategic Review of Telecoms, functional separation of BT Group and Ofcom's application of regulations on local loop unbundling, consumers enjoy low prices and a choice of providers. Added to this is the substantial competitive pressure from the cable network and mobile networks. We have seen successive upgrades in the level of service across different technologies, with speeds in the copper network accelerating from 512Kbps to up to 24Mbps today. All of this is valuable progress, the benefits of which we do not wish to throw away.

  It is for Ofcom to provide the Committee with more details of its plans for regulating next generation networks. The Government is though responsible for setting the statutory framework in which Ofcom operates. We set out in the Digital Britain Report our plans to amend the Communications Act 2003 to make the promotion of investment in communications infrastructure one of Ofcom's principal duties alongside the promotion of competition.

  We believe that giving equal prominence to these two objectives is appropriate in the context of a telecoms policy which seeks to deliver an upgrade to the nation's infrastructure, in contrast to a policy which essentially sought to provide competitive access to a legacy asset in the form of the copper network. We not anticipate that this will result in a dramatic shift in regulatory strategy on the part of Ofcom, but in the medium to long term it should provide the right basis for a sustainable balance between investment and competition.

23 September 2009

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Prepared 23 February 2010