Broadband - Business, Innovation and Skills Committee Contents

Memorandum submitted by British Sky Broadcasting Group Plc ("Sky")


  1.1  Sky welcomes the opportunity to contribute written evidence to the Business and Enterprise Select Committee's inquiry into Broadband Speeds. Sky operates the most comprehensive multi-channel, multi-platform television service in the UK and Ireland and through our investment in broadband Sky has helped to make the internet affordable and accessible to our 2.2 million broadband customers.

  1.2  We agree that the economic and social benefits of a digitally connected nation are considerable. Communications providers have played a central role in the development of broadband in the UK and will continue to do so based on the fact that they have the commercial incentive, customer relationships and marketing expertise to make broadband accessible and relevant to people's everyday lives. It is therefore unfortunate that in considering the future of communications infrastructure, the Government's Digital Britain Review, paid insufficient attention to the role of the market in driving infrastructure investment.

  1.3  Universal access to current generation broadband and the delivery of fibre to the home require quite different considerations and approaches. Current generation broadband is successfully delivering the applications and services that millions of customers wish to use and pay for. Competition has successfully driven investment in broadband, achieving 99% availability. Now that the limits of demand and supply are known it makes sense for Government to take steps to ensure 100% coverage. Given this, achieving universal access to current generation applications and services through a 2Mbps service commitment will be relatively straight forward and cost effective.

  1.4  However, arguably of greater importance are the 40% of people who have thus far chosen not to take up broadband. The market has driven take-up exclusively, with ISPs competing to offer the most attractive service to customers. Any intervention that reduces the attractiveness of existing services to the benefit of next generation infrastructure is likely to harm take up, with broader economic and social consequences.

  1.5  Delivery of NGA is at a much earlier stage than current generation broadband and the technology, applications and demand are as yet unknown and untested. It is important that the Government allows the market time to experiment with supply and demand in order to understand how and the extent to which it will deliver NGA, just as it did with current generation broadband. Given the potential for premature state intervention to deter commercial incentives and to result in misallocated investment, large-scale public intervention can not be currently justified.

  1.6  Moreover, the Government's proposal to tax telephone lines in order to fund roll out of NGA is flawed and regressive as fails to take into account income or ability to pay. It may also lead to increasing numbers of people abandoning landlines altogether, making it harder to achieve high rates of fibre penetration in the future.

  1.7  At the present time Government would be better focused on helping to improve the economics of roll out and stimulate demand by removing supply-side barriers such as opening up access to ducts and poles and ensuring that processes at a local level are consistent and straightforward.

2.   Is the target for universal access to broadband at a speed of 2Mbps by 2012 ambitious enough?

  2.1  Sky is broadly supportive of the principle behind the Government's universal access objective. Greater access to digital communications, including television, broadband and mobile services, will play a major part in driving the UK's economic performance in the coming years and will bring significant benefits to the whole of society. Nevertheless we believe that universal access to broadband can only be achieved through a dual focus on availability and take up. It is important that the debate about appropriate line speed levels does not overshadow the real challenge of making the internet relevant to all through innovative services and content.


  2.2  Given the current level of consumer demand for high speed applications and broadband technology a 2Mbps universal broadband objective represents an appropriate and achievable public policy objective. For example, other than high definition video no other widely used applications are currently contingent on more than 2Mbps. Furthermore, the 2Mbps commitment can largely be met by relatively cost effective improvements to DSL (for example improvements to in-home wiring), mobile broadband infill and in some places satellite. Raising the target speed would require significantly more expensive solutions, such as fibre to the home, and represent an unnecessary cost burden, particularly as the highly competitive broadband market is already developing solutions which improve broadband speeds over DSL. For example BT recently announced the launch of its speed booster pack, which customers can install to reduce the impact of electrical interference, as well as plans to increase the reach of its fast copper network (ADS 2+), which offers speeds of up to 24Mb per second, over the next two years.


  2.3  Universal access to any speed of broadband will be meaningless unless people wish to make use of it. Around four in 10 households today do not yet have broadband, and the evidence is that for a majority of these it is because they do not see the relevance to their lives of having access to the internet at home. In comparison to the 40% of households who chose not to take broadband, less than 1% cannot get broadband at all, and only a few percentage points receive less than 2Mbps.

  2.4  It is therefore important that the drive towards universal access does not focus solely on delivering 100% availability at the expense of the continuing expansion of take-up. The market has been central to driving broadband take-up in the UK with ISPs competing to offer the most attractive service to customers and there is every indication that this will continue to be the case as long as the right conditions are in place.

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


  3.1  Sky has a proven track record of successfully harnessing technology to provide our customers with the innovative services they want and we therefore recognise the exciting potential that next generation broadband offers. Nevertheless we believe that the proposed tax to fund NGA roll out is flawed and regressive. It effectively penalises the one consistent driver of technological progress, namely the consumer, whose demand for services will ultimately drive the development of high-speed broadband. It also ignores the extent to which the communications market is already developing and competing to meet their needs.

  3.2  The premise behind the tax is flawed on a number of levels:

    — In proposing a tax on landlines the Government has failed to recognise the reality behind the overall fall in the cost of telephony for consumers. While competition has driven down the price of call charges, line rental prices—to which the tax would apply, have consistently risen over time. For example BT's line rental charge increased from £10.50 in April 08 to £11.25 in April 2009.

    — Furthermore, there is a risk that intervention in such as fast changing sector could result in unforeseen consequences and distortions. For example, the tax may drive more people away from fixed line telephony altogether making it harder to achieve widespread access to fibre as landline use becomes redundant. The Committee may wish to examine the trend in the USA where reports have suggested that around 700,000 people a month are abandoning their fixed line altogether and analysts estimate that 25% of households rely entirely on mobile phones. According to Ofcom, in the UK 12% of the population already do not have a fixed line and have come to rely on and expect mobile telephony to deliver what they want.

    — As a flat tax it is hugely unfair as it takes no account of income or ability to pay. Fixed lines are disproportionately relied upon by the poor and the elderly who are also least likely to want fibre in future. As a further consequence any such tax is likely to undermine take up amongst the very groups that the Government have sought to prioritise.

  3.3  Given that it is an unfair and regressive tax we believe that we should be transparent with our customers and in the event it being introduced we will split out the additional cost of the tax in their bills.

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

  4.1  Sky does not believe that there is enough clarity over the likely extent of market provision of NGA to know whether large-scale public intervention is justified. As such, we support the conclusion of the Caio Review that for now there is no clear market failure warranting public intervention in the provision of NGA infrastructure.

  4.2  The Government has already concluded where the market cannot and will not deliver NGA. This is somewhat premature considering the fact that vigorous competition between communications providers has resulted in the successful delivery of current generation broadband and is already stimulating market experimentation with next generation technology and applications. The Government has based its plans on an assumption that NGA will only reach two-thirds of the country but while the market is at such an early stage of development it is impossible to reliably gauge where the limit lies. For example:

    — Levels of demand are unknown while suppliers experiment with levels of demand, services and price points. For example, 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.

    — Similarly 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. The supply-side measures highlighted in the Digital Britain report, such as enabling delivery of fibre over poles, could also have a major impact on the costs and extent of market roll out.

  4.3  The actual limit of market reach will come where revenue and cost lines cross and as fibre is deployed over the coming months and years we will learn more about what people want and how to best to deliver it. Given there has been no major change in the applications used in countries where fibre infrastructure already exists there is no evidence that it will be economically disadvantageous to allow the experimentation process to happen. Indeed, it is likely that there will be greater benefit in using the knowledge and experience gained from market experimentation to ensure that the most cost effective, future proof, technologies are used in future fibre investments.

  4.4  While industry is in this developmental phase, public intervention in the market—or even the possibility of it—could chill private investment. There is a real danger that the deployment of public money could distort incentives and be wasted by funding investment that would otherwise be made by the private sector. Furthermore, experience also suggests that as soon as subsidy is introduced it becomes self-fulfilling as investment decisions are made on the basis of what the state will pay for. The large investments that underpin the vigorous competition between value based telecoms and LLU operators on service and price has only been possible on the back of a stable regulatory and political framework and as such any unwarranted or premature government intervention in NGA is likely to undermine future market confidence to invest.


  4.5  The economics of market roll out will be helped enormously by removing the supply-side factors which currently discourage investment. The current consultation on the relaxation of regulation on the deployment of NGA via overhead lines is a helpful step and the Government should also continue to look at the other factors which could stimulate further investment such as providing business rate certainty for fibre assets.

  4.6  Initiatives at a regional and local level will also help improve the economics and reach of NGA. As the Digital Britain report highlights there are a growing number of local authorities who, in conjunction with their Regional Development Agency, are developing plans to facilitate NGA in their areas. For example councils in Sheffield, Barnsley and Rotherham have come together with Yorkshire Forward to create the South Yorkshire Digital Region through which they intend to deliver FTTC. A plethora of other local authorities and regions, including Cornwall, Bristol and Birmingham are also are also using seed-corn funds from UK and EU grants to develop NGA projects. Government can further support these developments by ensuring that an appropriate level of standardisation exists in order to ensure that planning and tendering processes are as consistent and efficient possible. For example the creation of standard tendering templates and best practice guidance will help to simplify and speed up tendering and delivery times. Similarly the aggregation of local demand, particularly from organisations such as schools, hospitals and doctors will also help the development of local projects.

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


  5.1  Variations in broadband speeds occur as a result of a number of factors, some but not all of which are within the purview of operators. Speeds are very much dependent on the technology used, for example DSL line speeds can be affected by line length and in-home wiring as well as contention and throttling within the ISP's network. Cable speeds can also be affected by contention and throttling, as well as line sharing.


  5.2  Sky recognises that accurate information on speed is an important part of helping consumers to make better, more informed decisions about broadband packages. We are fully supportive of Ofcom's voluntary broadband speeds Code of Practice and we aim to be open with customers and tell them in advance of purchase what speed they can expect to receive with Sky, as well as providing them with the opportunity to check line speeds via at any time. We also believe that in the interest of consistency all providers, including cable, should be included within Ofcom's Code of Practice where they have to inform customers at the point of sale of likely speeds.

  5.3  Nevertheless while speed represents an important factor which influences customer choice, customers also highlight the importance of receiving a stable, reliable service in line with their expectations. For that reason Sky does not traffic manage speeds on the Sky network and we believe that this is differentiates us from other provides, including BT and Virgin Media.

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

  6.1  The level of investment by communications providers in broadband today highlights the effectiveness of competition as a driver of investment. It is for this reason that we do not understand why the Government has proposed giving Ofcom the additional primary duty to promote efficient investment in infrastructure. We believe that there is a danger that it might lead to Ofcom taking decisions that are not in the interests of consumers or effective competition.

  6.2  The proposal is based on what we believe to be an unproven premise that competition in broadband, as a result of LLU, has been so effective it has driven down profit margins to such an extent that no money is now left for investment in infrastructure for the future. There is in fact no evidence that this is what has happened. Virgin Media and BT have both made very significant investments in NGA networks, in spite of very uncertain demand and at a combined cost of over £1.5 billion. Sky itself is investing in its own Next Generation Network and voice network. While regulation will be required to address the fact that there is unlikely to be competition at the infrastructure level of the NGA market, as duplication of fibre networks would be deemed commercially uneconomic, where competition is possible, in the downstream NGA market, it will drive quality, innovation and lower prices to the benefit of consumers, just as it has in the current generation of networks. As such the most likely outcome is that the new duties will detrimentally skew regulation and result in consumers paying higher prices and unfairly benefit incumbent operators at the expense of recent entrants

2 October 2009

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