House of Commons - Business, Innovation and Skills Committee

Broadband - Business, Innovation and Skills Committee Contents

Memorandum submitted by TalkTalk Group

INTRODUCTION

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 connections—we 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 business.

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 07979 657965)

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 money—is 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.

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— 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 .[153] We also see a need to review the target in future to ensure it remain appropriate.

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[154] 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[155] 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[156] 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[157] 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 no—it is grossly unfair and makes economic non-sense:

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— 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 broadband).

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— It will distort competition—since 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 that saving … (DBR §57)

This is wrong from moral, economic and factual perspectives.

— 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.[160] 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.[161] 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 access work?

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 below.

The Government has proposed to amend the Communications Act to "make the promotion of investment in communications infrastructure one of Ofcom's principal duties".[162] 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[163] to fund/accelerate its NGA plans—indeed BT itself pushed for such a scheme.[164]

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 sector.[165]

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.

September 2009

151 Assuming that the £200 million fund upgrades 10% or 2 million broadband homes (based on 20 million total broadband). Back

152 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

153 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

154 50p per month over about 7 years (=£42 per home) across 27 million households. Back

155 http://ec.europa.eu/competition/state_aid/legislation/guidelines_broadband_en.pdf Back

156 The likely uplift is from an average of about 4Mbps to about 20Mbps on FTTC. Back

157 £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

158 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

159 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 customers). Back

160 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

161 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