Broadband - Business, Innovation and Skills Committee Contents

Memorandum submitted by CBI

  The CBI believes that Britain's future competitiveness will depend on its ability to develop a world-class digital infrastructure that promotes the fast and easy flow of ideas and information. We have strongly supported the creation of a government vision to facilitate the move to an advanced digital economy.

  In this response we argue that:

    — It is vital that Britain has a strategy for the deployment of advanced digital communications.

    — Broadband deployment should be market-led, with government acting as an enabler.

    — To achieve a fully digital Britain, focusing on supply only is not sufficient. The Government has a vital role to play in stimulating greater demand for ICT services, and must be ambitious about it.

Question 1:   Whether the target for universal access for broadband at speed of 2MB/s by 2012 is ambitious enough?

  1.  The Government's Digital Britain (DB) proposals set out a vision of how the UK can move to a fully digital economy. The Government's ambition is for every household in the UK to have broadband access at speeds of at least 2Mbps by 2012, provided through a mixture of fixed, wireless and satellite technologies. Government is also looking to achieve a greater roll-out of high speed broadband (25Mbps or more) to cover 90% of the UK population by 2017.

  2.  The rollout of broadband in the UK over the last decade has been a success with the market delivering services of at least 2Mbps to between 85 and 90% of premises. Moreover around 99% of premises can currently receive some level of internet connection even if it does not reach a speed of 2Mbs.

  3.  The average speed currently experienced by consumers in the UK is 4.1Mbs per second [40] which makes the USC speed of at least 2Mbps below the average at which most of the UK households operate, but still among the most ambitious commitments in Europe. France is pursuing a similar goal but at a significantly lower speed (512Kbps) and Germany is focusing on next generation broadband and targeting a more selective group of users (50Mbps to 75% of the population by 2014), but has not committed to universal coverage of broadband services. A relatively small number of countries have proposed more ambitious universal commitments such as Finland which has proposed 100Mbps by 2014 as part of a long-term strategy started in 2004. [41]

  4.  The extensive roll out of current generation broadband in the UK means that the business case for further deployment to the 10%-15% (approximately) of premises that do not currently receive 2Mbs is weak. There is therefore a genuine issue about how to ensure those that do not receive any broadband, or have a connection speed of below 2Mbs, have the ability to be part of a digital Britain.

  5.  Given the current state of the public finances, the CBI believes that government should not allocate significant new public money for broadband delivery. Using a combination of funds released from the digital switchover and some of the already announced Strategic Investment Fund enables the Government to extend digital inclusion without committing significant new public funds. The Government should now act quickly to clarify the rules for the universal service commitment and to agree the release the funds from the digital switchover programme with the BBC so that providers can begin delivering this commitment. Importantly the Government should set out a service objective on a technology neutral basis to enable the private sector to determine the optimal technology to meet the Government's ambition. This is likely to vary depending on the geography of the area in question.

  6.  The USC is designed to ensure that everyone has the ability to participate in a digital Britain. Therefore it is necessary to address issues of take-up of internet services as well as access. The Government is placing a great emphasis on infrastructure roll-out for approximately 10-15% of premises and an equal level of focus must be given to the 25% (approximately) of households that can receive already receive internet access of at least 2Mbs but choose not to take it up. The work of the Digital Inclusion Champion, the focus on ICT skills, and improving the confidence of internet users will be very important to making this agenda a success.

Question 2:   Is the Government right to propose a levy on copper lines to fund next generation access?

  7.  The majority of funding for next generation access should be provided by the private sector. It is important to recognise that significant private sector investment plans for next generation broadband that would cover about 50% of the UK population have already been announced. By July 2009 Virgin Media had deployed fibre-based broadband of up to 50Mbs to 12.5 million homes and is piloting speeds of 200Mbit/s. BT has announced a £1.5 billion investment to make super-fast broadband available to 40% of the UK by 2012. Research from the Broadband Stakeholder Group (BSG) shows that the market could, over time, extend these services to cover approximately 60% of UK households. The primary role of government and regulators must be to promote this private sector investment through an appropriate regulatory framework.

  8.  However, the remainder of the UK population, above the 60% population threshold, is the hardest to reach and will prove the most costly. The cost of extending high speed broadband to cover all UK premises is estimated to be around £5 billion for Fibre-To-The-Cabinet (FTTC), or £29 billion for Fibre-To-The-Home (FTTH).[42] Based on this analysis of the significant capital expenditure required together with the uncertainty about the level of demand for high speed broadband makes purely private sector rollout to 90% of premises look challenging in the medium term.

  9.  The Government proposes to bridge this gap through the creation of a Next Generation Fund financed by a 50p levy on each copper line. It is estimated that this could generate around £150 million per year or around £1billion over seven years[43] to support wider roll-out of high speed broadband beyond what the market is expected to provide. [44]

  10.  Given the condition of the public finances, the CBI believes that this not the right time to invest significant new public monies in high speed broadband so the Government was right to not make an unfunded commitment in the Digital Britain report.

  11.  If the Government decides that some intervention is necessary to extend the roll-out of high speed broadband further and/or faster than the market would deliver on its own, then it is right to look for creative solutions as to how this could be funded.

  12.  It is not possible at the current time to conclude whether or not the 50p per month levy is the right solution as there is insufficient detail as to how it will operate in practice. Issues such the impact on business consumers of telecoms, and how the proceeds of any levy would be used to support private investment in a way that avoids market distortions, have not yet been fully articulated.

  13.  Finally, the Government must be careful to only intervene in areas where commercial investment is unlikely in the foreseeable future. This is particularly difficult as it is currently unclear how the market and technologies will develop up to 2017. The Government should take every necessary step to ensure that it does not intervene in areas where investment could be led by the private sector, or that it does not benefit one type of technology over another, hence distorting the market artificially. In this context the Government has a difficult choice to make about which households to start rolling out to first. 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. Full consultation with industry in order to understand the economics of their investment decisions will be necessary to judge where intervention is most appropriate.

Question 3:   Will the Government's plans for Next Generation Access plans work?

  14.  Having a world-class digital infrastructure is essential for the future of UK competitiveness. But there are key uncertainties about the future of high speed broadband; for instance, doubts remain about the levels of demand, and how the supply side will evolve in the future. But even in these circumstances NGA is starting to become a reality with significant private sector investment plans as outlined above.

  15.  The primary role of government is to create the right environment to encourage this private sector investment through a certain and supportive regulatory framework for next generation broadband. The market for superfast broadband is still in its infancy, and there is a real danger that investment will be delayed or stagnated if regulation is inappropriate. In particular regulation must be technology neutral. Favouring certain technologies would be to the detriment of long-term benefits for consumers, so we believe that it should be left to the market to determine how best to deliver the services that consumers demand.

  16.  In addition to focusing on the supply side the Government can contribute to making the plans for high speed broadband a success by setting out an ambitious vision for the way this technology will be used. Ultimately, the success of the DB initiative will hinge on how advanced ICT infrastructure is used by businesses and consumers. NGA deployment will enable a range of applications, from flexible working to telemedicine, which rely on consistent levels of high quality service provision. Yet uncertainty over the level of demand for these services has been one of the key restraints holding back investment in NGA.

  17.  The CBI believes that the Government has a key role in stimulating demand for high speed broadband. Firstly, it can use its significant buying power as the largest single UK customer to stimulate demand for NGA. By committing to purchase high speed broadband from the private sector, government can help to make the economics of these substantial infrastructure investments work. Advanced ICT infrastructure can increase efficiency and quality in public service delivery and make available new services and applications to citizens.

  18.  We were pleased to see the role of ICT in public service provision recognised in the DB proposals through a Digital Switchover of Public Services Programme. This is a positive step forward and the Government should build on it by being ambitious about how both current and next generation broadband technologies can be used in a range of areas.

  19.  With high speed broadband the health service can, for example, provide online GP consultations, and there could be a greater role for remote monitoring of offenders and the establishment of virtual courts in the criminal justice system. All of this would help deliver greater value for the taxpayer.

  20.  Advanced ICT infrastructure can also be an important part of the solution to major public policy challenges. It will play a big part in the shift to a low carbon economy, for instance through developments in smart metering, or by reducing the demands on our crowded transport networks by enabling people to work at home.

  21.  Secondly, the Government can provide thought leadership and profile for some of the innovative products and services that businesses can offer with high speed broadband. Finally, addressing deficiencies in digital skills and building confidence in the online environment should be of paramount importance for a government concerned with making digital Britain accessible for all.

Question 4:   Are companies providing the speed of access which they promise to consumers?

  22.  Ofcom's recent analysis of actual broadband speeds experienced by consumers was the first large-scale study of its kind that we are aware of anywhere in the world. The findings show that the mismatch between maximum advertised speeds and those experienced by customers is an issue in the broadband market. This has gained relevance in recent years as demand grows for increasingly higher speeds and is a potential indicator of the attractiveness of high speed broadband for consumers. Industry has taken steps to address these issues by signing up to a code of practice on the advertising of broadband speeds and by making higher speeds available at decreasing relative prices.

  23.  The availability of fast and reliable broadband provision is also very important for business users and it is crucial that they have full information about the speeds they can expect. Research from Ofcom shows that business spent nearly £14 billion on telecoms services in 2008.[45] This expenditure is growing as businesses increase their reliance on telecommunications to engage with consumers, gain efficiencies, and improve productivity. We are disappointed that Ofcom's study on broadband speeds overlooked businesses users and would encourage further research on business' experience of broadband speeds.

  24.  As the importance of high speed communications grows, cross-country broadband speed comparisons become commonplace. The UK average speed of 4.1Mbs is often compared unfavourably with other jurisdictions such as Japan and South Korea given the relatively high headline speeds of around 100Mbs per second advertised by ISPs in those countries. However, it is important that the data used in these studies is comparable. The UK study performed by Ofcom was the first major study to measure experienced speeds and Ofcom has made a significant step by publicly advertising these real speeds and establishing a code for broadband speed advertising. We now urge other countries to follow the example. Within this context, we welcome the European Commission's plans to test the quality of broadband speeds across Europe and believe that future cross country broadband speed analysis should be based on comparable indicators.

Question 5:   To what extent does current regulation strike the right balance between ensuring fair competition and encouraging investment in next generation networks?

  25.  The DB review includes proposals to extend Ofcom's duties to include a requirement to promote investments (where feasible) alongside the existing duty to promote competition in the telecoms market. This recommendation is designed to reflect concerns that the regulator in the UK has focused exclusively on promoting competition rather than encouraging investment in communications infrastructure in the UK.

  26.  In the context of Next Generation Access, the balance between promoting investment and maintaining competition is particularly delicate given the high level of investment needed and the uncertainty about the levels of demand. But the tensions between investment and competition are not pertinent solely to the broadband market. The need to secure long-term investment is an issue faced by all regulators, particularly in sectors where there has been a recent move towards more competitive models of service delivery, such as energy markets.

  27.  The CBI believes that companies should be allowed to make a fair return on risky investments, and it is clear that the economics around NGA are far from certain. But this objective should not be to the detriment of promoting open access and a competitive broadband market. The UK broadband market is currently one of the most competitive and dynamic in the world and this competition has resulted in significant benefits to consumers. It provides a great spur to innovation and investment in telecoms as companies seek to offer the best deals and cutting edge services for consumers. It is therefore important to safeguard a competitive communications market through a technology neutral regulatory framework that supports investment whilst maintaining competition.

  28.  In order to achieve this, regulators should think more creatively about innovative forms of risk-sharing. Previous CBI papers have suggested[46] that vertical investment partnerships in NGA between service providers and operators are often preferable to horizontal ones between operators, because they allow a much broader range of investors to enter the market. For instance, in higher density areas joint venture partners might consist of a network operator and a media provider, in a medium density area between a network operator and a large retail outlet, and in a low density area between a network operator and a highway provider. This would facilitate the transition to a fully competitive broadband market.

  29.  In its role as a promoter of investment and gatekeeper of competition in the broadband market,[47] it is now more important than ever that Ofcom gives consideration to how risk-sharing partnerships might emerge and how the regulatory principles may need to adapt to encourage innovation in this area.

Question 6:   Any other views stakeholders think the Committee should be aware of?

  30.  The CBI believes that if the UK is to build future competitiveness as a global leader, it will require a world class digital infrastructure. Prompt investment in digital infrastructures, the right regulatory framework and government action to stimulate demand will be key steps for reaching this ambition. Meeting all of these objectives simultaneously will require commitment and vision from government.

  31.  The CBI has supported the publication of the Digital Britain report as a significant first step. It is vital for industry that government delivers a vision for digital economy, and provides the certainty that is necessary for private investment to thrive. In addition, government has an important role to play in fostering the demand that will encourage market-led investment in digital infrastructures. Next generation broadband can play a major role in transforming the delivery of public services, enabling the shift to a low carbon economy and promoting a more inclusive society. But in order to achieve these goals, the government must work to build confidence and understanding of the digital environment.

  32.  These goals are intrinsically medium to long term. It is therefore important that politicians from across the political spectrum have a clearly articulated vision that they are committed to in order to give the private sector the confidence to plan ahead and to make the necessary investments to make Digital Britain a reality.

September 2009

40   "UK broadband speeds 2009: Consumers' experience of fixed-line broadband performance"</mdef > Back

41   Finland's National Broadband Strategy: Back

42   BSG report (2008) The costs of deploying fibre-based next-generation broadband infrastructure,com_docman/task,doc_view/gid,1036/Itemid,63/ Back

43 Back

44   BSG comments on Next Generation Fund in Digital Britain : Back

45   Ofcom (2009) Communications Market Report, p. 236: Back

46   CBI submission to Ofcom consultation on Next Generation Access, December 2008:$file/20081201-CBI-Ofcom-Next-Generation-Access.pdf Back

47 Back

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