Memorandum submitted by British Sky Broadcasting
Group Plc ("Sky")
1. INTRODUCTION/OVERVIEW
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.
SPEED
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.
TAKE UP
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?
IT'S
AN UNFAIR,
REGRESSIVE TAX
THAT WILL
HAVE UNFORESEEN
CONSEQUENCES
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.
THE ROLE
FOR GOVERNMENT
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?
BROADBAND SPEEDS
ARE DEPENDENT
ON A NUMBER
OF DIFFERENT
FACTORS
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.
THE NEED
FOR TRANSPARENCY
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 sky.com 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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