Memorandum submitted by TalkTalk Group
This is TalkTalk Group's (TTG) response to the
Business and Enterprise Select Committee inquiry regarding broadband
speeds and NGA.
TalkTalk Group provides about 25% of the UK's
broadband connectionswe serve over 4 million residential
and business broadband customers under the TalkTalk, AOL, Tiscali,
Opal and Pipex brands. We are the UK's biggest local loop unbundler
and operate the UK's largest next generation network (NGN). TalkTalk
Group is owned by Carphone Warehouse plc.
The questions that the Select Committee are
considering will have a profound effect on our customers and our
The main issue we raise in our response is the
serious flaws in the 50p levy proposal. It will delay NGA roll-out,
crowd out private investment, waste public money on something
that is a 'luxury' and be funded by a regressive and grossly unfair
tax which will deter broadband uptake.
If there are any questions regarding this
submission please contact Andrew Heaney (HeaneyA@cpwplc.com or
1. Is the target for universal access to
Broadband at a speed of 22MB/S by 2012 ambitious enough?
The nub of this question is whether spending
£200 million of public funds (to increase speeds further
than the market will go unaided) is a good use of this moneyis
it proportionate, is it worth it, is it good value for money?
Further, should the speed target be higher? Should more be spent?
Although the government hasn't provided much
evidence to support its position in the Digital Britain report
(DBR) we believe that it is a good use of public funds. The main
reasons for this view are below
For some customers this universal access
initiative will allow them to upgrade from no broadband availability
or just a few hundred kbps to 2Mbps or more. This will make a
material difference to consumers' experience and allow them to
enjoy "basic" services such as iPlayer and public e-services
that they would not have been able to benefit from otherwise.
It appears likely to be at a reasonable/proportionate
cost of around £100 per home connected.
It is quite clear that the market will
not deliver this speed improvement without public funds/subsidy.
The roll-out of broadband has plateaued and further roll-out is
Therefore, there is little risk that this money will "crowd
out" private sector investment or be wasted by being spent
on something the private sector would have done itself.
It acts to level the experience in different
areas of the country thus addressing certain social equity issues.
Since the cost is not levied on existing
customers it will not distort competition, discourage broadband
take-up or be a regressive and unfair tax (unlike the 50 pence
tax, see below).
The proposal has had its critics who claim it
is not ambitious enough. In fact what they are implying is that
more money should be spent to achieve higher speeds. These critics
have not presented any argument or evidence to suggest that additional
spend will deliver additional net benefits. We think that extra
public funds are likely to deliver diminishing benefits since
additional speed upgrades are (today) unnecessary and will increase
the risk that the public funds will crowd out private investment
and/or be wasted.
It is also important to recognise that this
2Mbps target is a world-leading standard. No other major economy
has either such extensive coverage today let alone a commitment
to deliver 2Mbps universally. Other countries may have more NGA
in some areas but lack the extensive coverage we enjoy.
Therefore, we see 2Mbps a sensible first step
We also see a need to review the target in future to ensure it
2. Is the Government right to propose a levy
on copper lines to fund next generation access?
The answer to this question is in our view a
very clear no.
The £40 per household tax to create
a £1billion+ fund
is an ill-conceived idea. It was, we understand, a last minute
addition to the DBR added when it became apparent that the Treasury
was unwilling to provide any funding and against a backdrop of
a Government keen to announce a big new idea.
The DBR report contains almost no justification
or reasoning for the tax. We think that was because none was done.
If the Government had properly assessed the proposal it would
have come to the conclusion that such a scheme has no place in
a modern Western economy. Equally concerning is the approach of
the Government which has effectively suppressed any proper public
scrutiny of the tax (by classifying the levy as a tax-raising).
Therefore, the 50 pence tax is in our view a
very poor policy both in terms of process and proposal. There
are a number of basic but very serious flaws in its plan.
First, by committing to a subsidy at
this early and premature stage (before it is known how far the
private sector will reach) the fund will deter private sector
investment. There will be two negative effects:
Firstly, some private investment will
be postponed with operators delaying the network roll-out so that
they tap into public funding.
Secondly, as a result much of the public
money will not create new investment but be simply wasted funding
projects that were going to happen anyway.
The proposals are also inconsistent with the
European Commission's guidelines for state aid for NGA roll-out
which clearly highlight the need to ensure that public funds are
only used in areas where the private sector will not go.
Second, there is no evidence provided
(we think there is none) to demonstrate that ploughing £1 billion
of public money to modestly upgrade speeds from fast to superfast
for about 1 million relatively rich rural customers is a
good use of public money.
We believe that it will be a poor use of public
funds. Yes, it will allow better services for the lucky few since
they will be able to may be enjoy HD versions of IPTV channels
in their kitchen and drawing room at the same time. But is it
right for public money to be spent on such "luxuries"
at a cost of about £1,000
per home using this publicly funded superfast broadband?
Third, even if this were shown to not
crowd out private investment and be a good use of public money
(which it clearly has not been shown), there remains the question
of whether taxing customers of fixed copper lines is the right
mechanism to raise the funds. The answer to that question is almost
certainly noit is grossly unfair and makes economic non-sense:
This taxation approach is regressive
since it takes no account of ability to pay.
Fixed lines are disproportionately relied
upon by the poor and elderly who are the least likely to want
broadband or superfast broadband services.
It will effectively result in the urban
poor subsidising the rural rich (the rural rich who will be the
ones most likely to be able to pay the premium for the superfast
It will increase phone prices driving
over 100,000 homes
off fixed lines and broadband services (working against the Government's
aim to encourage broadband uptake).
It will distort competitionsince
the proposal is that mobile networks/customers will not contribute
to the tax.
Fourth, we believe the Government's reasoning
that historically low telecoms prices make the tax "fair"
is fallacious. In the Digital Britain report they said:
Against that background [of low prices], the
Government believes that it is right to share a small part of
This is wrong from moral, economic and factual
It is, we believe, morally unacceptable
to tax a citizen since they have enjoyed low prices in the past.
It is the Government's job to promote competition and low prices
not claw back the gains consumers enjoy.
Economically the assessment of whether
a policy is proportionate should depend not on historic prices
but what prices would have been in the future (ie the right counterfactual).
Factually, since this tax is imposed
on phone lines the relevant price to look at is line rental and
in fact the line rental price has been consistently rising.
The last area where we have concern with the
plan is the way the Government has not allowed any proper public
scrutiny of its plans (by including the tax measure in the Finance
Bill which is not consulted on). Given the unfairness and serious
flaws with this tax the lack of consultation is extremely worrying.
This Business and Enterprise Select Committee inquiry is perhaps
the closest formal route available to influence Government policy.
We sincerely hope that the Committee clearly feeds back its view
on the Government proposal.
We should point out that since the tax will
be passed on directly in higher prices this has relatively limited
commercial impact on us.
The reason for our strong aversion to this approach is the damage
it will do to our customers and UK citizens more broadly. Given
the lack of consultation on this tax, over the coming months we
will be encouraging our customers to raise their views of this
tax with the Government and MPs.
3. Will the Government's plans for next generation
The DBR includes a range of initiatives across
broadband including universal access, the 50p tax, Spectrum, passive
infrastructure audit and coordination of local schemes.
As we outlined above there are some good aspects
(universal access) and some seriously flawed ones (the 50p levy).
There is though two other implicit aspects of the plan that are
worthy of comment.
The first is the sensible exclusion of any "sweetheart"
deal with BT to try and get BT to roll-out NGA further or faster
in return for reduced regulation (and by implication reduced competition).
A "sweetheart" deal was done in the UK in the early
days of broadband and local loop unbundling in 2000 where
BT was effectively protected from competition in return for committing
to rolling out broadband. The consequence of this was very little
effective competition for years and a relatively low take-up of
broadband. It is an approach used in other countries in Europe
and Asia. We applaud the Government for not caving into pressure
for this type of approach.
The second was the lack of a coherent implementation
plan for enabling private investment by BT and others through
tackling some of the barriers to efficient roll-out. There are
a number of these such as:
the business rates system which creates
competitive distortions and uncertainty/risk (given the likely
rates cost is so unclear). It may also result in a large and excessive
additional cost burden thus deterring roll-out;
the lack of a wholesale bitstream product
from Openreach that allows other operators to innovate and differentiate
their service. Without this there will not be the investment needed
to drive out these new services; and
a clearer plan to ensure access to "passive
infrastructure" such as ducts and dark fibre which would
lower overall costs and increase efficient investment.
The Government needs a plan to ensure that these
issues are tackled.
4. Does current regulation strike the right
balance between ensuring fair competition and encouraging investment
in next generation networks?
The idea that investment can only be achieved
by reducing competition is, we believe, a fallacy.
Efficient investment can be achieved without
compromising competition. In fact more investment can be achieved
with more competition. For instance, the support of local loop
unbundling (LLU) through various Ofcom regulation in 2004-05,
led to a huge increase in investment and far greater competition.
In the NGA world efficient investment and competition
can be simultaneously ensured by allowing BT price flexibility
on its wholesale product as well as ensuring that there are opportunities
for others to invest through ensuring passive infrastructure is
fairly available. Ofcom has done the first of these (thereby ensuring
that there is no disincentive for BT to invest) though and is
still working through the second.
However, there are forms of "bad"
regulation that might be aimed at encouraging investment and do
so to the detriment of competition. The "sweetheart"
deal described above is one example.
Though the Government's main proposals do not
include these forms of "bad" regulation, we are concerned
that one of their proposals might provide a "loophole"
for these types of bad regulation to be introduced. We explain
The Government has proposed to amend the Communications
Act to "make the promotion of investment in communications
infrastructure one of Ofcom's principal duties".
Previously BIS officials and others have suggested a regulatory
change that could result from this new duty was a scheme to allow
BT to raise the price of its copper lines
to fund/accelerate its NGA plansindeed BT itself pushed
for such a scheme.
Such a scheme would be a disaster for UK telecoms
and customers. In many respect this would be similar to the tax
proposals taxing existing customers to pay for roll-out. However,
this would be much more damaging since it would gift the tax revenue
to BT only resulting in a re-monopolisation of much of the telecoms
Subsequently, BIS have rolled back from this
position saying that the new duty is simply there to provide Ofcom
more 'confidence' to promote investment alongside the needs of
competition. Yet they have not been able to provide any tangible
example of where Ofcom have taken a poor decision in the past
(Ofcom have to ensure investment to ensure the consumer interest
duty is met).
Whilst we are comforted by the more recent clarification,
we remain concerned that this new duty, in the wrong hands, could
be used to unnecessarily compromise competition in the fallacious
pursuit of more investment.
5. Are Companies providing the speed of access
which they promise to consumers?
At a simple level the answer to this question
is yes, in a strictly technical sense ISPs do provide the speeds
they promise. ISPs typically promise speeds of "up to"
8 Mbps and they deliver that. However, what ISPs deliver
clearly does not meet customer expectations in some cases and
results in dissatisfaction.
TalkTalk, along with other ISPs has and will
continue to work with Ofcom and other groups to ensure that expectations
are better met. In fact, TalkTalk were the first ISP to provide
speed estimates at point-of-sale long before Ofcom voluntary code
resulted in other ISPs doing the same.
The reality of the situation is that predicting
speeds is difficult and we cannot give accurate predictions due
to a range of factors outside our control or knowledge such as
the physical characteristics of the line (length, capacitance),
home wiring and several other technical factors. However, we remain
wholly committed to better meeting consumers expectations.
151 Assuming that the £200 million fund upgrades
10% or 2 million broadband homes (based on 20 million total broadband). Back
There will be other initiatives to improve speed such as use of
iPlate and improvement in line quality (use of 6dB rule and SIN5xx)
that will happen without public funding. It is important that
these are not deterred/delayed by the introduction of this new
public funding. Back
There are of course issues in implementation such as how to ensure
efficiency and maximum value for money, reasonable future-proofing
and open access/competition. We are confident that these can be
successfully designed into the approach by the NDPG. Back
50p per month over about 7 years (=£42 per home)
across 27 million households. Back
The likely uplift is from an average of about 4Mbps to about 20Mbps
on FTTC. Back
£1 billion will improve speeds for about 25% of country
(funds will not cover whole of "final third"). This
equates to about 1 million customers - 20 million homes x 25%
x 25% uptake (which is what BT is predicting). Back
About 700,000 customers on social telephony schemes will
be exempt (see DBR §57). The 700,000 is estimated based
on 60% of the 1.1 million customers on BT's Light User Scheme
are eligible (see Ofcom's Review of the Universal Service Obligation:
Statement §§4.3 and 4.4). Back
50 pence price rise on voice/broadband package costing ~£15 per
month represents a 3% price rise. Assuming a -0.2 elasticity
(which is at the low end of estimates) this will result in a 0.6%
fall in demand which is 120,000 homes (20 million voice/broadband
The lack of consultation is even more odd in light of the substantial
public consultation on other (and relatively smaller) aspects
of Digital Britain. Back
Since the cost rise will apply equally to all operators it is
almost certain the tax will be passed through in higher prices.
If the tax was ever introduced to ensure full transparency we
would show the tax as a separate line item on each bill. Back
DBR §67. Back
Through raising the local loop unbundling and WLR prices. Back
A BT spokesman said to Telegraph: "If we are prevented
from making a fair return on our copper network, it may force
us to reconsider whether to go ahead with the roll-out of fibre
Such a scheme would also, in reality, increase the incentive to
remain on copper (where returns were high) and it is likely that
BT would use the extra funds to pay additional dividends or pay
off its pension fund deficit rather than invest in NGA (unless
the NGA investment was anyway worth investing in, in which case
they would have invested in it. Back