Memorandum submitted by Intellect
INTRODUCTION
Intellect is the UK trade association for the
technology industry, which comprises the information and communications
technologies (ICT), electronics manufacturing and design and consumer
electronics (CE) sectors, including defence and space-related
IT. We are formed by 780 Small to Medium-Sized Enterprises
(SMEs) and multinational member companies with interests in these
sectors, and exist solely for their benefit. The industries that
Intellect represents contribute £96 billion to the UK economy,
comprising at least 8% of the UK's GDP and 4% of its total employment.[103]
The issues considered by this inquiry are central to our members,
who include a number of leading Internet Service Providers (ISPs),
as well the majority of UK's leading device manufacturers and
IT Services & Software Providers. Intellect and its predecessors[104]
have promoted the use and spread of broadband internet access
since its invention. We also were instrumental in establishing,
and currently house, the Government's leading advisory group on
Broadband, the Broadband Stakeholder Group. As such, we await
the report of the Business and Enterprise Committee on this topic
with interest.
EXECUTIVE SUMMARY
— The proposed 2Mb/s Universal Service
Commitment (USC) is to be welcomed. However, to realise the true
potential for economic and social benefits that broadband brings
it would need to have been more ambitious. A USC for next generation
broadband (40-50Mb/s) could create 280,000 new jobs for a
year and truly enhance the UK's international competitiveness.
The current state of the public finances make such a USC difficult
to realise. Therefore, legislation that implements the USC should
facilitate a future upgrade of this nature.
— The proposed levy on copper lines is
the best funding mechanism available to support deployment of
next generation broadband to remote areas. It is transparent to
tax-payers, takes pressure off the public finances by being off
the Government's "balance sheet" and the burden on the
public is, in comparison with what citizens are paying for next
generation access in other countries, very light.
— Broadly, the Government's plans to support
next generation access are sensible, proportional and focused
around supporting and incentivising the market's own deployment
plans. The procurement process used access needs to be transparent.
Industry should be engaged with at an early stage in a neutral
environment.
— The current speed offered by ISPs is
affected by factors outside their control, including poor wiring
in people's homes and the manner in which telephone exchanges
are located. There is also no legal/regulatory definition of what
"broadband" actually is, so ISPs are left to define
their own service which confuses consumers. ISPs should ensure
that factors that affect speed which are within their control
are better publicised. Ofcom has already initiated successful
industry lead efforts to ensure this happens.
— Ofcom's current focus on promoting competition
disincentivises industry from investing in communications infrastructure,
as they do not see potential for return on investment. Changing
Ofcom's statutory duties is an appropriate way to address this
problem.
[Is] the target for Universal Access to Broadband
at 2Mb/s by 2012 ambitious enough?
A clear government commitment to ensure access
to broadband is crucial to the future social and economic development
of the UK. Intellect has for some time called for just such a
commitment. A Universal Service Commitment (USC) for broadband
access of 2Mb/s is an important step. At the same time, we believe
that the USC will not, in its current form, enable UK businesses
and consumers to harness the full potential that broadband has
to promote wealth generation in new and innovative ways. As the
Government is already aware, 89% of UK broadband users already
enjoy a 2Mb/s or better broadband service. Many of these users
already find that speeds of 2, 4, 6 or even 8Mb/s speed are
not sufficient to support the applications that they would like
to use their broadband connections for. Ensuring access to 2Mb/s
does not constitute a step change in terms of the broadband speeds
currently enjoyed by the significant majority of consumers and
businesses.
The proposals contained in the Digital Britain
report to move towards broader provision of next Generation access
networks[105]
are particularly timely. It is on this topic that the Government
could have been more ambitious. In particular, Intellect believes
that Digital Britain could have considered whether the introduction
of a USC for next generation access might be feasible and/or possible
in a shorter timeframe than is outlined. There is substantial
research to suggest that the introduction of a USC for next generation
access networks, and facilitating the £5 billion[106]
of additional investment needed to realise it, would lead to the
creation of approximately 280,500 new or retained jobs within
the UK for a year, as per Table 1 below[107].
|
| Job Type | Total Jobs
| Small Business Jobs |
|
| Direct | 76,500 | 22,500
|
| Indirect & Induced | 134,500
| 37,000 |
| Network effect | 69,500 |
34,500 |
| Total Jobs | 280,500 | 94,000
|
|
| | |
Increasing investment in communications infrastructure in
this way would have real and tangible benefits to the UK as a
whole. Inducing the kind of job creation that would reduce unemployment
levels at a time of significant increases will require a more
wide-ranging commitment than the USC contained in Digital Britain.
Evidence suggests that the UK's international competitiveness
would be significantly enhanced by this a more wide-ranging commitment
of this nature. In particular a study recently cited by the Parliamentary
Office for Science and Technology (POST), notes that communications
infrastructure is rated as the third most important factor by
senior executives of international corporations when determining
company location[108].
As we noted in our submissions to Lord Carter during the
drafting of Digital Britain, Intellect's ideal scenario,
and one which we feel would have produced the greatest economic
and social benefit for the UK would require greater ambition than
that displayed. We believe that the Government should have considered
the introduction of a USC for at least 50% of UK homes to be connected
to a next generation access network, within five years, or by
2013, and laid out a policy "roadmap" to connect virtually
100% of homes within seven years, or by 2015. Successful realisation
of such a roadmap would be dependent on adequate incentives for
private sector investment or public sector investment incentives.
It is also important that all possible means for delivery of this
access are considered, and the most appropriate chosen objectively
and appropriately. These means would include "fibre"[109],
wireless and satellite technologies. Without proper reference
to most appropriate delivery method, there is a risk that actually
implementing a USC will be more expensive than it needs to be.[110]
Whilst the Intellect "vision" of a USC is more
ambitious than that expressed in Digital Britain, we do
recognize that, given the current state of the public finances,
a USC for next generation access via a mixture of "fibre"
to the home, satellite and other wireless technologies would be
difficult to realize in the short term. The 2Mb/s USC will provide
an important base-line service, and help to ensure that all UK
citizens will be able to receive, for example, an adequate service
on the BBC i-player and have access to high quality "streamed"
music and video. Universal broadband access will also provide
ISPs and content portals with greater opportunities to monetize
their services, as they will be able to provide more compelling
services to consumers. These improved services will give these
consumers a real alternative to accessing the content they want
through the illegal file-sharing services that are currently in
widespread use.
In conclusion, the existing USC constitutes a positive step
forward. However, there should be scope in future government policy,
and perhaps in the relevant legislation about to go through parliament,
for the terms and specifications of the 2Mb/s USC to be amended
to reflect the need to keep pace with emerging new technologies
and platforms, as well as the broadband capabilities of our major
economic competitors. If any specification remains static, the
social and economic benefits afforded by having a USC in the first
place will degrade. Also, as time goes on, the cost of the technology
necessary to deploy next generation access networks will fall,
thereby making a successful realization of a USC that encompasses
it more likely. Provision needs to be made to facilitate this
in legislative terms.
Is the Government right to propose a levy on copper lines to
fund next generation access?
Intellect believes that the proposed levy on copper lines
is the best mechanism available to ensure that virtually all the
population will enjoy the benefits of being connected to a next
generation access broadband connection. Broadband has been proven
to provide real economic benefits. Government policy should necessarily
seek to ensure that as many citizens as possible have broadband
access that is able to support the applications they wish to use.
As noted elsewhere in this submission, there are also definite,
but indirect, economic and social benefits to promoting deployment
of such networks in the form of substantial job creation.
Whilst the introduction of a levy to fund any given measure
or infrastructure project, be it the 2012 Olympics or the
London Cross Rail project, will always be a matter for public
debate, Intellect views the proposed levy as the best possible
means for facilitating what is a laudable goal. The comparison
here to Cross Rail is particularly prescient. There was a prolonged
public debate prior to the approval of this project. Through this
approval, the Government has rightly set a precedent that the
funding of major infrastructure projects can be effectively facilitated
through a levy mechanism. As the Committee will be aware, Cross
Rail is mainly funded by a levy on London council tax-payers.
Extensive research has shown that Cross Rail will have particularly
marked indirect benefits to the wider economy in terms of expanded
labour market catchments, improved job matching and better facilitation
of business to business interactions[111].
In a similar way to Cross Rail, expanding access to next generation
broadband networks will improve information flows and open new
way s of organising economic activity and collaboration. These
effects, both the transport and broadband infrastructure sense,
are referred to by economists as "agglomeration". The
evidence used in making a case for Cross Rail to be funded by
a levy mechanism is equally applicable to any similar assessment
of whether to fund access to next generation networks through
the same mechanism.
Secondly, given the current state of the public finances,
we would suggest that funding the delivery of widespread access
to Next Generation Broadband through a levy system, rather than
general taxation, will ensure that a significant potential burden
to the Government's "balance sheet" will be removed
at a stroke. Using a levy system, the Government's commitment
to assisting such investment can be realised without unduly burdening
the public purse at time that it is under particular strain.
Thirdly, use of a levy system (and the payment of its proceeds
into the "Next Generation Fund" or NGF) will ensure
that spending on next generation access networks is transparent
from a taxpayer perspective. In the long term, contributors to
the NGF will be able to directly see the benefits of their paying
a levy, and know for certain exactly what the revenue raised under
it is going towards. This kind of direct relationship between
financial contribution and definitive results is attractive to
taxpayers, and will ensure that there is a clear link between
taxes raised and direct benefits to UK citizens.
We also believe that the actual burden to consumers of paying
the proposed levy is relatively small, especially in comparison
with that proposed elsewhere. Australia, for example, will require
a net contribution of over £1,300 per household to deliver
its recently-announced USC commitment[112]
for next generation access networks. In comparison, UK households
with one copper line will be required to contribute £6 per
year to the proposed next generation fund. This is less than the
cost of two pints of beer bought at a pub, equivalent to a quarter
of an average "tank" of petrol, or the cost of six pints
of milk. The burden this places on UK copper line users should
then be balanced against fact that the levy would provide sufficient
funds to incentivise investment in Next Generation Access broadband
in many areas that would otherwise face that a wait of indeterminate
length, or never receive it. The direct and indirect benefits
to residents of these areas will far outweigh the £6 per
year, per line, levy payment that is proposed.
Will the Government's plans for next generation access work?
The role of government in the broadband market should revolve
around optimisation of the market deployment of next generation
access networks in as timely and efficient manner as possible.
As with all government interventions, it is difficult to strike
the right balance in pursuing this role. Whilst Government could
perhaps have been more ambitious in terms of the characteristics
(or features) of its proposed USC for broadband access, principally
by linking it to provision of next generation access networks
in the short term, we believe that the mechanism (via the Next
Generation Fund, or NGF) that has actually been outlined for realising
next generation access broadband to the vast majority of UK citizens
is balanced, well proportioned and workable. The analysis in Digital
Britain of how a government can effectively support the market
in this area is sound.
As Digital Britain notes, the market already has well
developed plans to deploy next generation access to approximately
50% of the UK population where clear returns on the necessary
investment are evidently possible. The role for government in
this process is, therefore, to incentivise the market to deploy
such services where the business case for doing so is not clear.
The establishment of the NGF and the direct link between it and
a levy on copper lines is, as stated above, the most appropriate
and proportionate way to facilitate this.
The proposals for a delivery body, the Network Design &
Procurement Group (NDPG), that is at "arms length" from
government but clearly accountable to it, is the best tool for
facilitating this kind of government intervention. The NDPG will
be an integral element in delivery both a USC of 2Mb/s and effective
use of the NGF. However, there is currently considerable ambiguity
over the actual processes that will be followed by the NDPG to
procure the capacity, equipment and services to deliver next generation
access to the "final third". In order to mitigate this
ambiguity, immediate efforts should be made to ensure as wider
community of stakeholders from both the private and public sector
are involved in the process of formulating specifications for
the necessary tenders.
Intellect, in partnership with the Cabinet Office and National
Audit Office, has successfully assisted 28 government departments
and non-departmental agencies with similar procurement processes
in the past three years within a technology and commercially neutral
environment. We can foresee significant difficulties with the
effective deployment of next generation access networks to the
"final third" if clear and transparent processes for
engagement with industry at pre-tender stage are not used. Ultimately,
it will be industry that will have to develop and marshal the
capabilities and resources that will make next generation access
a reality for as many UK citizens as possible. Early industry
engagement is therefore key. Harnessing representative but neutral
industry expertise will ensure that next generation access networks
can be effectively delivered as Digital Britain outlines
and that, in the long term, links with the commercial interests
that will deliver it are successfully and effectively maintained.
Whilst we understand that the procurement process that will follow
the establishment of the next generation fund will be for the
NDPG, and not government, to formulate, we do believe that the
Government should be considering how to harness best practice
in this area at an early stage.
The Government also envisages that wireless, or mobile, technology
will play an important role in terms of ensuring that UK homes
have access to next generation networks. As they correctly state,
existing mobile networks are unlikely to deliver the level of
capacity needed to enable homes to use mobile broadband in order
to access next generation access. Future technologies such as
LTE[113] or WiMax[114]
are practical alternatives to these networks but potential operators
of networks using this technology are currently constrained by
the lack of availability of suitable radio spectrum[115]
in order to deploy them. Whilst the Government has committed to
ensuring such availability, Digital Britain effectively
envisions that sufficient spectrum will not be made available
until the summer of 2010 at the earliest. In our view, this
is too late for wireless mobile broadband to make a substantial
contribution to realising the 2Mb/s USC. We also believe that
such a schedule may affect the availability of mobile broadband
to the consumers in the long term unless more radio spectrum is
released as soon as possible. We note that Government has made
efforts to address this issue through the Independent Spectrum
Broker (ISB) process. If mobile broadband is to make a substantial
contribution towards the delivery of access to next generation
networks and universal broadband, issues around adequate radio
spectrum need to be resolved at the earliest opportunity.
[Are] companies providing the speed of access they promise
to consumers?
Currently, it is the responsibility of each individual ISP
to define what the "broadband" service it offers actually
consists of. This definition is to a large extent dependent on
the service that the ISP is able to provide and sell to their
customers. As a result, the current offering, the form of speed,
provided by most ISPs is deliberately not very prescriptive. This
is not because ISPs market their products in a way that is misleading,
as some media reports appear to insinuate. ISPs openly acknowledge
that despite their best efforts, it is often difficult to provide
the speed noted in their service description. Hence the common
and prominent use of the term "Up to". As the Government
correctly notes, there are currently 1.9 million UK homes that
cannot possibly receive the broadband speeds that may have been
noted in the descriptions of services offered by their ISP's because
the wiring in their homes is dysfunctional. There are also at
least 500,000 homes that are too far away from an exchange
and using a "copper" wire connection, which in turn
leads to it being difficult if not impossible to provide a speed
that an ISP might wish to. Many of these homes are in rural areas
where telephone exchanges are less numerous than in more densely
populated areas. Both of these issues will be resolved by, respectively,
a systematic campaign (including active assistance from government)
to re-wire the homes concerned and more widespread deployment
of alternative access platforms to Next Generation Access Networks
and (such as satellite and wireless) in rural areas. The latter
of these actions is specifically addressed by Digital Britain.
The former is only alluded to and should be actively considered
by Government as a means of allowing ISPs to provision the level
of service they would like to give to their customers.
The situation is further complicated by the fact that there
is currently no generally agreed definition of what the term 'broadband'
actually means in the UK, certainly not in a legal or regulatory
sense. As noted above, ISPs are generally free to establish their
own definitions to match the level of service they are able to
provide. Therefore, the definition used is inherently linked to
the "speed" of access that can be delivered. A number
of communications regulators around the world have recognized
this problem and are re-opening the debate over the definition
of the term "broadband", most notably the Federal Communications
Commission in the US.[116]
It is very difficult to answer the question of whether ISPs are
providing the speeds that they "promise" to consumers
without having a firmer definition to reference. This debate is
especially applicable in the context of the proposed USC for 2Mb/s
broadband access. It will be difficult to know whether the proposed
USC is being realized without a firmer definition of what it actually
constitutes. Our members have anticipated the discussions that
might result and are currently formulating an agreed industry
definition of what a 2Mb/s broadband service should mean in a
UK context. We will be presenting it to the Government and the
NDPG in an effort to resolve this issue.
Whilst there are a number of factors that are outside of
a given ISPs control, there are of course specific actions that
can be taken to ensure their customers have a better understanding
of what speed they should expect. These actions generally revolve
around clear information on factors that affect broadband speeds
that are within the control of ISPs and influence the speed their
customers will receive. Experts generally agree that there are
two such factors: "traffic management"[117]
and "contention ratio".[118]
Potential customers need to be made aware of a given ISPs policy
on these issues. Ofcom have already made significant efforts to
ensure that consumers can access comprehensive and easily understandable
information on them. These measures include their "Broadband
Speed Code of Best Practice", launched in December 2008.
Intellect supports these initiatives, and believes that similar
industry-led approaches on such issues will be most effective
in addressing these issues in the long-term.
Current regulation and the balance between fair competition
and encouraging investment in next generation networks
We note that this issue is currently being considered by
the Department for Business, Innovation and Skills and have made
our views on this issue known in our response to the appropriate
consultation.
Intellect fully recognizes the need to promote competition
between telecommunications operators and ensure that market entry
is facilitated. We believe that Ofcom has fulfilled this function
particularly well since its creation in 2003. However, the highly
complex regulatory regime that the digital communications sector
is currently subject to poses a significant barrier for investment
in next generation access on the part of existing operators of
fixed, mobile and satellite networks. Much of this regulation
is rightly focused on ensuring that consumers enjoy the benefits
of low priced services. This kind of regulation has led to the
UK enjoying the second lowest prices for broadband in Western
Europe. More broadly, the price of communication services available
in the UK has fallen by 5% since 2004. Household spend on them
has also been slowing for three years consecutively.[119]
While these trends have undoubtedly been beneficial for consumers
in the short term, they may actively harm their interests in the
long term. Put simply, regulation that forces prices down[120]
for consumers also disincentivises network operators to invest
in next generation access networks. As with any other business
decision, there must be a clear prospect of a return on investment
for operators if they are to take decision to spend. Operators
such as BT and Virgin Media already have plans to roll out Next
Generation Access to 48% of UK citizens. Assuming that economic
projections over future fibre deployment[121]
are accurate, and that effective use of other platforms such as
satellite and wireless is assured, this level of access will rise
to around the "two-thirds" level in the near future.
The need for government intervention to ensure roll-out of NGA
to the "final third" is to a certain extent due to the
fact the balance of regulation between fair competition and encouraging
investment is currently tilted towards the former.
There is also a need to ensure that the regulator (as well
as the regulated), is clearly focused on creating the right environment
for investment in next generation access networks. It is in this
context that Intellect wholeheartedly endorses the concept proposed
within Digital Britain of amending the Communications Act
(2003) and providing Ofcom with an additional principal statutory
duty to promote investment in the UK's communications infrastructure.
We have consistently called for appropriate incentivisation of
this kind of investment, and are pleased to see that such calls
have been heeded. There is a direct link between ensuring that
consumers interests are paramount in the provision of communications
services, and ensuring that they have access to as broad a range
of innovative and beneficial services as possible. The degree
to which UK citizens can access and benefit from such services
is dependent on the level of investment that is afforded to communications
infrastructure that can support them. Ofcom rightly employs a
decision=making process that is based on the statutory duties
afforded to it, and consistently references these in the publicly
available statements and consultations that it produces. We believe
that adding an explicit and additional statutory duty of this
nature will give Ofcom greater latitude to consider the potential
impacts of its decisions on both the interests of consumers and
suppliers of communications services. These interests are not
mutually exclusive. Such recognition can only improve the effectiveness
of Ofcom as a regulatory body.
September 2009
103
Digital Britain Report Impact Assessment. Back
104
Intellect was formed in 2002 as a result of a merger between
the Computer Software & Services Association (CSSA) and the
Federation of Electronics Industries (FEI). Our full title is
"Information Technology, Telecommunications & Electronics
Association". Back
105
"Next Generation Access Networks" is a term used to
describe the communications infrastructure necessary to deliver
"Super-fast" Broadband, or broadband internet access
of a speed of up 40-50 Mb/s. Back
106
The cost of delivery of a 50 Mb/s service to a significant
number of UK homes has been estimated at between £5-30bn,
depending on the technical solution deployed, by the Broadband
Stakeholder Group. Back
107
London School of Economics/ITIF Report: The UKs Digital Road
to Recovery (2009). Back
108
Cushman & Wakefield, European Cities Monitor ( 2007). Back
109
'Fibre' or fibreoptic cable is a glass or plastic fibre that
carries light along its length. A fibre optic cable connection
inside a home is necessary in order to provision "super-fast"
broadband speeds through Next Generation Access Networks. Back
110
There are already instances of remote areas of the UK (eg remote
islands off Scotland) connected to the internet via satellite,
as to connect to the interest via terrestrial means would not
be cost effective even if subsidised. Back
111
The Eddington Transport Study. December 2006. The case for action:
Sir Rod Eddington's advice to Government. Back
112
Broadband Stakeholder Group. Back
113
LTE (Long Term Evolution) is the last step toward the 4th generation
of radio technologies designed to increase the capacity and speed
of mobile telephone networks. Where the current generation of
mobile telecommunication networks are collectively known as 3G
(for "third generation"), LTE is marketed as 4G. Back
114
A wireless internet technology that provides internet access of
up to 3 Mb/s. The range is greater than that afforded by
standard home wireless connections, which rely on a cable connection
in the home to function. Back
115
Radio spectrum facilities the use of specific radio transmission
technologies. Radio Spectrum is a finite resource, typically Government
regulated in most developed countries and in some cases sold or
licensed to operators of private radio transmission systems, eg
mobile phone networks. Back
116
Federal Communications Commission Seeks Targeted Comments on Defining
Broadband" Public Notice £1 GN Docket Nos. 09-47,
09-51, 09-137. Back
117
One user downloading large amounts of data over a long period
affects broadband speed received by another. ISPs commonly monitor
their networks and occasionally moderate the speed of such users
during peak time internet use periods. Back
118
Once a broadband signal leaves your home it joins a 'pipe' connecting
neighbours and others to the internet. The greater the number
of people that are using this 'pipe', the slower the speed can
become. This is often why consumers see their broadband connection
slow down during peak usage times. A higher broadband contention
ratio means more users potentially sharing your connection, thus
a slower connection. An ISP is able to determine what contention
ratio is used in a given area. Back
119
The Digital Britain Report. Back
120
Ofcom directly regulates the prices paid by consumers to access
consumer networks as a means of encouraging them to cut costs. Back
121
Broadband Stakeholder Group. Back
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