Oral Evidence

Taken before the Culture, Media and Sport Committee

on Tuesday 28 June 2011

Members present:

Mr John Whittingdale (Chair)

Dr Thérèse Coffey

Damian Collins

Philip Davies

Louise Mensch

Mr Adrian Sanders

Jim Sheridan

Mr Tom Watson


Examination of Witnesses

Witnesses: Ronan Dunne, CEO, Telefonica O2, Nicholas Blades, Head of Regulatory Affairs, Telefonica O2, Guy Laurence, CEO, Vodafone, and David Rodman, Head of Regulatory Affairs, Vodafone, gave evidence.

Q97 Chair: Good morning, everybody. This is the second session of the Committee’s inquiry into spectrum allocation and I would like to welcome for the first part of session, Ronan Dunne, the Chief Executive of Telefonica O2 and Nicholas Blades, the Head of Regulatory Affairs, together with Guy Laurence, the Chief Executive of Vodafone and David Rodman, who is also Head of Regulatory Affairs. Adrian Sanders is going to start.

Q98 Mr Sanders: Can I ask you, what is the optimum number of mobile operators needed to ensure that UK consumers get the best deals on mobile phones?

Guy Laurence: First of all, I think you need to clarify the term. We have mobile network operators like myself and Telefonica, You also have virtual mobile network operators, people like Tesco or Asda or Lebara or companies like that that offer mobile services to consumers as well, and the way that they do that is by buying wholesale capacity from any one of the mobile network operators. So currently there is about 20 people selling mobile services in a substantive way and together they have about a 7% market share. To answer your question, we have 20 retailers of mobile services today and that creates a healthy market. You could have less but we have 20.

Ronan Dunne: Certainly I would agree. All of the evidence is that the UK is a highly competitive market and the fact that there is active competition in retail services for mobile supports that. So it is not just a question of the number of mobile network operators but the number of people who are providing telecom services.

Q99 Mr Sanders: When it comes to auctioning the spectrum would an unrestricted auction result in fewer operators?

Ronan Dunne: If I start, we support the approach that Ofcom is taking in the spectrum auction consultation in that we don’t believe that there should be an unrestricted or free for all market, so the evidence that Ed Richards gave to this Committee we would agree with. Whether the auction should be used to determine the number of operators, I think the role of the auction is to ensure that those who have a viable business case and those who have an investment case to deliver digital services have an opportunity to acquire the spectrum they need in order to deliver to their customers the exciting new services that will be available from fast mobile broadband.

Q100 Mr Sanders: Can I just get this right? You are saying that you are not in favour of an unrestricted auction?

Ronan Dunne: Correct. We support Ofcom’s proposals about having caps within the overall auction structure and we also-

Q101 Mr Sanders: That is slightly different from your written submission, where your preference was for the spectrum auction to be run without any restrictions.

Ronan Dunne: We wanted a simplification of the auction design and we specifically said that we didn’t believe that there was a need for the floors that were being proposed in the current consultation. What we said was we did support the fact that there should be overall caps and we did put that in our response to Ofcom, and we did also support the combinatorial clock structure of the auction, which also ensured that there were restrictions on strategic bidding. So we absolutely support both of those proposals from Ofcom.

Guy Laurence: I think the key thing is that the number of people who end up with spectrum is not the number of people who end up retailing mobile services. So, as in my previous answer, you have 20 people retailing mobile services, even if you had less people with physical spectrum it would not affect the number of people that then retail mobile. That number could go up or down, depending on the commercial environment.

Q102 Mr Sanders: But the companies that have the spectrum control the price to the smaller operators or the smaller people selling the services at the front end?

Guy Laurence: The market at the moment has 16 people buying substantive amounts of mobile services. I don’t believe that that would change in an environment-

Q103 Mr Sanders: But how many control the actual structure?

Guy Laurence: Well, Ofcom has powers to control the market if any of the operators started abusing that, but there is no evidence that that happens, and it has not happened in other countries either.

Q104 Jim Sheridan: I don’t profess to be an expert on these issues and if you excuse me I have to refer to the research notes that I have been given. Back in the year 2000 both of you lobbied for an auction to create fewer players than the Government was proposing at that time, and I think that is perhaps the position we are still in today. Isn’t your position less about the usefulness of the 900 frequency and more about preventing other operators from getting their hands on the low frequency spectrum and the nice cosy relationship that you have at present?

Guy Laurence: I would welcome an open auction with relatively few rules with as many people bidding as possible. I have no problem with 100 companies entering that auction, so if people want to bid they should bid. I don’t have an objection. I don’t believe that the current auction rules create a level playing field and I think that is an issue, because of the way that they have been designed currently during the consultation process, but I would welcome as many people who want to bid for spectrum to bid for it.

Q105 Jim Sheridan: What do you mean it is not a level playing field?

Guy Laurence: Well, because the way that the auction is designed at the moment is it gives an advantage to Everything Everywhere, who I think appeared here last week, and to Hutchison, who own Three. If we bid for the higher end of the 800 spectrum then we end up with a higher fee as a consequence. It is just the way it is designed at the moment.

Ronan Dunne: Specifically the position on spectrum floors, de facto by setting floors it means that there is less spectrum potentially available for new entrants into the market because the floors mean that certain of the existing operators are essentially guaranteed an allocation of spectrum. We certainly support competition and the UK market has thrived because of the effect of competition and that is an accelerant to innovation. I think all of us are keen that we are in a position to deliver great digital services for our customers by deploying the spectrum that is available in a way that enhances the services available in the UK.

Q106 Jim Sheridan: I am sure my colleagues will explore that further but can I raise a question about broadband, in particular the broadband coverage in Scotland? Can you tell me how extensive your 3G coverage currently is in Scotland? How many sites do you have in Scotland?

Guy Laurence: I don’t know the answer to that. I know my total base station sites but I don’t know the number for Scotland.

Jim Sheridan: You don’t have a breakdown?

Guy Laurence: We are very happy to provide that in writing to you afterwards, absolutely no trouble at all.

Ronan Dunne: Certainly we would be happy to do the same.

Q107 Jim Sheridan: If you were to win the spectrum you say you require, what percentage of the Scottish population would you be able to provide indoor mobile broadband coverage to?

Guy Laurence: I think one of the issues that Ofcom needs to address in the structure of the auction is the coverage obligations. We don’t have an in principle objection to coverage obligations and it needs to be seen as a total package as to what was required in terms of us providing coverage to the more rural areas versus what we have to pay for the spectrum. We have had two sets of coverage obligations placed on us in the 26 years we have been operating and we have met both of those. So I think it is part of the package that Ofcom needs to decide.

Ronan Dunne: Currently the 2G services in the UK are providing indoor coverage to north of 90% of the population, and I think that should certainly be an aspiration. The challenge is as you go into the last 4% or 5% the returns become disproportionately lower and the cost becomes significantly higher. I think as all of us have an investment case, the challenge for us is to balance the need for coverage and the need for capacity. Certainly, as we have seen an explosion of demand for data, particularly in dense urban areas, we also have to make sure that we invest in a balanced way between coverage and overall capacity.

Guy Laurence: One other point I think is worth adding here is that it is not just about buying spectrum with a coverage obligation. There is another part to this equation, which is we have to have BT run fibre into those areas as well because at the end of the day our base stations connect to a fibre link or should connect to a fibre link. If we don’t have that it means we have to move to alternative technologies, which are very expensive to operate. Therefore you have to see this as a package of us having spectrum and the ability to invest and, secondly, BT doing their part, which they do intend to do, I hasten to add, in order to run fibre into the rural areas as well. We can put up a base station but if it can’t talk to anything then it doesn’t work.

Q108 Jim Sheridan: Just finally, the consumers will be glued to their television sets trying to find out when the new iPhone 5 will become available. Any comment?

Guy Laurence: No comment.

Jim Sheridan: No? Not even just a hint?

Ronan Dunne: No.

Q109 Mr Watson: I have a number of technical questions later but just to build on what my colleague Mr Sheridan said, and just to let you know what I am trying to get out of you, I want you to justify to me that you are not abusing your market dominance with some of the lines of questions I am going to give you later today. Mr Laurence, you gave a very clear answer to my colleague there; you said there should be 100 mobile network operators in the market. Mr Dunne, can you tell me how many you think should be in the market?

Ronan Dunne: As I mentioned earlier, I think we have the most competitive market in Europe for mobile services and by most people’s recognition one of the most competitive markets in-

Q110 Mr Watson: Should it be five, four, three or two?

Ronan Dunne: It is not a function of the number of mobile networks; it is a function of the effectiveness of competition in the market, which is defined by innovation, the number of people providing retail services, as well as the availability of capacity within the overall networks to be able to sell that capacity to customers. So it is not simply a question of the number of mobile network operators.

Q111 Mr Watson: Do you not think you have a responsibility to make sure there is an appropriate number in the market then?

Ronan Dunne: We have a responsibility to ensure that we give great services to our customers and effectively compete, and we have a track record in evidence of doing that. That is why the UK is at the forefront of innovation in the mobile space.

Q112 Mr Watson: You announced a rather innovative and, if I can say, quite brilliant collaboration with two of your partners a couple of weeks ago to create mobile payments. Can I ask why you didn’t ask the fourth operator in? Isn’t that going to squeeze them out of the market?

Ronan Dunne: No, on the contrary. In fact the establishment of that vehicle in the UK will accelerate the deployment of mobile payment and mobile advertising services.

Q113 Mr Watson: It will for you two and Everything Everywhere but if that becomes the model, the standard way that people make payments, are you not going to squeeze out the smaller guys?

Ronan Dunne: On the contrary, the proposal that we have made, and subject to the approvals for it, will mean that every operator, whether they are a mobile network operator or a virtual network operator, will be able to contract with that business on exactly the same terms as I will and so it will be an accelerant to the marketplace for mobile payments.

Q114 Mr Watson: So you would expect that other operators can licence your IP?

Ronan Dunne: What they can be is they can be customers on exactly the same terms as I can be. Also retailers can be customers or banks can be customers of that.

Q115 Mr Watson: Would it not be better to let them join the consortium?

Ronan Dunne: What we did was we took those people who had established businesses in that area and we decided to come together and try to create some commonality and what we did was we looked at those people who were already operating in this space and we worked together to create some commonality of standards.

Q116 Mr Watson: So if Three wrote to you and said, "Can we join?" you would let them in?

Ronan Dunne: At the moment what we have is we have people who have existing businesses in this area-

Q117 Mr Watson: No, I understand your point, but if someone else wanted to join the consortium so that you could get an industry-wide standard, would you let them join?

Ronan Dunne: They can all operate on that standard based on being customers, everybody.

Q118 Mr Watson: But would you let them join? Could you just answer my question, would you allow them to join your consortium?

Ronan Dunne: At this time it is our proposal to go forward with-

Mr Watson: Just say yes or no.

Ronan Dunne: -the three operators; whether Three or, for example, one of the banks who have also expressed interest in being members would join at some time in the future. The key at the moment is speed, though, and that is the reason why I want to focus on that, because there are other operators outside of our marketplace, people like Google, people like Facebook, people like Apple, who want to deliver these services, and I think it is important for the UK that we create a platform that means that UK businesses can compete with other international businesses in serving those new innovative services to UK customers.

Q119 Mr Watson: Just on that specific point, Google and Apple are creating mobile payment systems?

Ronan Dunne: Correct, yes. They already involved in the US and they expect to launch their services at the back end of this year in the US, and they anticipate launching into the UK in the spring of next year. So speed is of the essence to make sure that UK PLC has its fair chance.

Q120 Chair: Will they be using mobile devices?

Ronan Dunne: They will, and they will be using their own proprietary services on top of the mobile devices, whereas we will have a more open standard. That is the aspiration of the proposal that we announced two weeks ago.

Q121 Louise Mensch: Just briefly, I am interested in the apparent difference, if I have this right, in the approach to this auction of Telefonica O2 and Vodafone. If I am correct, Telefonica O2 is saying that you do not object to most of the restrictions that Ofcom wishes to impose on the auction except the restriction for the floor. So, as a matter of fact, your company would wish more people to be able to buy spectrum as distinct from being retail, secondary purchase as a spectrum from an operator. You want more people to be able to come in and buy spectrum but you are otherwise happy with the restrictions.

On the contrary, Vodafone, however, wishes to push for an unrestricted auction. Despite what you have repeatedly said about retail providers who would presumably buy spectrum from the big operators, you are unconcerned that an unrestricted auction would provide fewer owners of spectrum in the United Kingdom, which is diametrically opposed to Vodafone’s position. Is that correct? It is a pretty fundamental question, and it is a pretty fundamental approach to the auction that Telefonica O2 accepts the restrictions, objecting only to the floor restriction, which will therefore enable more people to go in and purchase spectrum itself, is that correct?

Ronan Dunne: That is correct. We are happy with-

Q122 Louise Mensch: But your position at Vodafone is to the contrary, you wish for an unrestricted auction and, although you have made much play of the fact that retail people can buy spectrum off you and enter the market in a retail way, you are unconcerned by the restrictions on ownership of spectrum itself that would presumably inevitably follow from an unrestricted spectrum auction?

Guy Laurence: I think the key thing is if 100 companies want to enter the auction, I believe they should be able to do it. If they do not enter the auction and they still want to provide mobile services they can buy them through wholesalers.

Q123 Louise Mensch: Forgive me, but the point of the restrictions is to enable smaller players, because there are artificial restrictions on the spectrum purchase to be able to compete with the big boys. If you take away those restrictions, it is immaterial how many people enter the market. If they don’t have the resources, they won’t be able to compete to buy the spectrum. Is it not factually the case that removing restrictions on the auction would involve fewer owners of spectrum at the end of it?

Guy Laurence: First of all, I am not sure that is the case. I don’t think anyone knows until you have an auction and you have invited people to bid. But I think if people like Google or Facebook wanted to bid for spectrum they have more than the wherewithal to do it, as do a number of other corporations. The key point though is if they choose not to or they can’t do because they do not have the economic resources to do it, they can still buy wholesale capacity from us afterwards.

Q124 Louise Mensch: Yes, you have made that very clear, but smaller players will not be able to enter the market without the restrictions that Ofcom proposes. That is a fact, is it not? They may be able to be secondary purchases of spectrum and provide retail services but they will not be able to own spectrum. I am fascinated by-you have the two big boys in the room here-the differing approaches that your companies are taking. It is the case, is it not, that fewer small companies will be able to, in practical terms, own any spectrum if you take away the auction restrictions?

Guy Laurence: Smaller players, by virtue of the fact they may have less financial resources, may not be able to buy spectrum but it does not stop them competing in the mobile market. So we have wholesale players now with 30,000 customers who are competing in the marketplace for a particular segment and do not need to own spectrum.

Q125 Louise Mensch: It does not concern you as Vodafone to hear Telefonica O2 saying that their only objection is to the floor? They are encouraging smaller companies to come in and buy by objecting only to the floor and yet your company wants a free for all.

David Rodman: I think we have a very similar position; we object to the floors but not the total cap on spectrum. But keep in mind that we can only buy a third of the spectrum each, so even together if we bought the full third there would still be spectrum left over for other operators.

Louise Mensch: Thank you.

Q126 Dr Coffey: Just going through your evidence-I am thinking particularly of Mr Dunne but Mr Laurence can comment as well-you talk a lot about how you feel the rules amount to state aid of this potential new bidding spectrum, whereas some other people have suggested that the decision to liberalise your 900 MHz licences are effectively state aid. Do you have a comment on that?

Ronan Dunne: If I take the question of the liberalisation of the 900 spectrum first. Currently Telefonica has some 25 million customers in the UK and per customer we have the smallest amount of spectrum of any operator. So in absolute terms we have approximately half the spectrum that, say, Everything Everywhere, who are the largest operator in the market, have and half the spectrum-

Q127 Dr Coffey: Is that before or after the divestment?

Ronan Dunne: That is before, but even after a divestment we would still have less spectrum, and we have half the amount of spectrum in 3G. So Ofcom undertook a market review and satisfied itself that there was no problem with the liberalisation of the 900 spectrum as it would not give rise to a distortion of competition in the market. In practice, what we found is that because we have the smallest amount of spectrum per customer we are, in some respects, competitively constrained and what we have been doing since the beginning of the year is in those dense urban areas where we have suffered some network congestion, we have been managing that congestion to give a better customer experience by using, in limited areas, the 900 spectrum. The other thing to remember is we didn’t get additional spectrum; we have 25 million customers who use the 2G network and we have moved a small proportion of our 900 spectrum from 2G to 3G because we have to continue to serve all of our existing customers with 2G services.

Q128 Dr Coffey: So I can see here that you have about 33 bits.

Ronan Dunne: Correct, in total 33.

Dr Coffey: You have got 17, 5.8 and 10 and Vodafone has a bit more in the 2100. The reason I am going on about state aid is there are suggestions in the market that both your companies are prepared to take this to judicial review and effectively frustrate the auction. Can you give an undertaking that you won’t?

Ronan Dunne: The first thing to say on that is the very nature of this process is it is a consultation process and we are actively engaged in the consultation with Ofcom. As I mentioned earlier, as the operator with the least spectrum per customer it is in my interests for the auction to happen sooner rather than later because I am physically constrained in competing in the market because of that limitation. We have taken extensive efforts to enhance technology and innovate in the way we build our networks to try to be more efficient in the spectrum we have but we still need more spectrum. So we have no desire to frustrate the timeline. In fact, we have actively engaged and continue to actively engage with Ofcom on the consultation to ensure that the auction happens as soon as possible and ideally on the planned timetable.

Dr Coffey: Thank you, Mr Dunne. Mr Laurence.

Guy Laurence: We also have no interest in frustrating the auction process. We do want a fair auction but we have no interest in frustrating the process. We are not a litigious company. In the last eight years we have backed Ofcom on 10 occasions on appeals. We have had actions against Ofcom only twice and out of those one we won and one is still running.

Q129 Dr Coffey: So just thinking ahead, each of you have the opportunity to bid for 1.8 MHz from Everything Everywhere when they divest, but does your duopoly on the sub-1 GHz spectrum create an unfair advantage? I suggested last week perhaps, given you already have the 900 MHz, I recognise there are technical difficulties in moving your 2G customers off that in order to liberalise it for broadband but the opportunity is there. Is there any reason why, in fact, we should just say, "Actually, Vodafone and O2, you already have 900, you shouldn’t be bidding for 800"?

Ronan Dunne: I think there are two points. The first one, as you readily identify, Ofcom’s own numbers suggest that it would cost me £900 million to clear the 2G spectrum to use it for 3G and I still would not have anywhere to put my 2G customers, because eight-odd years after the launch of 3G services still the majority of people in the UK use 2G as their predominant and virtually everyone in the UK uses 2G services as part of the overall. So that is the first thing to say. The second thing, as you again rightly recognised, is that 900 spectrum is not a direct substitute for 800 for a number of reasons. One is there are relatively few operators around Europe, in fact three out of 100, who have more than 10 MHz holding of 900 spectrum. So there is no current expectation that full speed LTE will be deliverable on 900. So even if I could theoretically clear the 900 spectrum, both the cost of that being uneconomic and find somewhere to move my customers to, 900 would not give me a comparable high speed LTE offering to 800 MHz spectrum. So the reality is that I need to have access to both capacity overall, because I have the least spectrum, and I need to be able to compete so I should be in a position to bid in the auction for that mix of spectrum that would give me the capacity I need and allow me to compete with similar speed services.

Guy Laurence: A very thorough answer. The only thing I would say is that I do not believe that we have an advantage having 900. If I take Orange, by 2002 they had managed to get more customer numbers than anybody else in the market. If I look at the current market today, and I take Hutchison again, the owner of Three, they sell as many iPhones every week as anyone else does in the marketplace. So if they were disadvantaged how could Orange become so big, and how could Hutchison sell as many iPhones as everybody else?

Q130 Dr Coffey: I have a rural constituency, obviously the lower megahertz is more beneficial in that we don’t have great coverage at all, a lot of not-spots, and I recognise LTE plus, or whatever the phraseology, that 900 may not be the same as 4G but there has not been any attempt, in my view, to really accelerate that in rural areas. So one of the lines I will be taking on this is to say how can we maximise coverage for rural areas using the 800 MHz, and at the moment we don’t necessarily see that in the countryside today. That is why.

Ronan Dunne: To go back to one of the points that was made earlier, I think one of the criticalities for rural coverage is not just the availability of spectrum but it is the ability to connect cell sites to fibre backhaul. Currently the passive access consultation that is going on does not contemplate that access being available for backhaul for mobile services; it is only for retail services. The second thing is, and I am sure if my mailbox is anything like your mailbox, the ability to build capacity in rural areas is a contentious issue, because certainly my mailbox is very mixed between people who are writing to me asking for increased coverage and those writing to me saying they don’t want a mast built in their area. So access to suitable sites, access to appropriate backhaul and the economics in the rural areas, perhaps in co-operation with local authorities and with local communities to bring the economics of provision in rural areas to a sensible place.

Dr Coffey: Thank you for that. I think we are coming on to infrastructure later but thank you for that initial answer.

Q131 Chair: I am tempted to say to you that on the conflict within your mailbox, welcome to our world, particularly since quite often the two different complaints will come from the same person.

Can I just clarify, Mr Dunne, when you said that you had less spectrum per customer than any of your competitors and that therefore you were very anxious to acquire more, is it principally to allow you to extend coverage or what other benefits would you be able to provide if you got that?

Ronan Dunne: Again, it will be a combination of coverage and capacity. We have seen about a doubling every six months or so of data demand in the UK. So there is a clear demand for data services as devices get better and as coverage and capacity increases. So it will be a blend of coverage and a blend of capacity. We do anticipate rolling out coverage in rural areas but we have to recognise that rural will have to be balanced with the urban areas where there is a lot of congestion potentially on the network. So we have both aspirations but it would be balancing the investment on an annual basis, which currently runs we are investing about £500 million a year on a balance of capacity and coverage.

Q132 Chair: When you say capacity, do you mean download speeds?

Ronan Dunne: It is the number of people who can be on the network at the same time, and I am no engineer but capacity and speed are two sides of the same coin. So as more people come on to a cell site the average speed available reduces. As you build capacity it either gives higher speed for those that are on or gives the opportunity for more people to be on the cell at the same time.

Q133 Chair: Are you finding that your customers are now suffering from lack of available capacity?

Ronan Dunne: Our ability to grow is constrained by our limits on our overall spectrum and there are two ways to increase your capacity: extra spectrum and more cell sites. More cell sites is very, very challenging because of the previously mentioned planning and other restrictions that we have.

Chair: I see. I think Mr Watson has some technical questions for you.

Q134 Mr Watson: Well, sort of. Slightly idiot questions, I suspect. How many customers do you need to stick a new mast up, to make it worth your while?

Ronan Dunne: A really good question and unfortunately there is not a simple answer. The cost of a cell site can be anything from less than £100,000 to multiples of that, depending on whether or not there is ready access to backhaul, depending on site rentals and so on. It can be significantly different so it will vary from place to place.

Q135 Mr Watson: When you come to siting a mast, you must look at centres of population, presumably?

Ronan Dunne: Yes.

Mr Watson: There must be a rule of thumb head of population you work off, isn’t there, more or less?

Ronan Dunne: As I say, it really is that different. If we had to dig a trench to connect a new cell site it might be £350,000, in which case we would need maybe 10,000 people using that cell site. Normally, if there are a few thousand people who will be served by a cell site the economics will be there or thereabouts, but it is genuinely distinctly different between one cell site and another because of things like backhaul and rent.

Q136 Mr Watson: So if you decide a couple of thousand people living in a village, it is not worth our while sticking this mast up, what is to stop you letting someone else do that? Can you help the village put their own mast up? I know this might be an idiot question to you; there is obviously a million reasons you are going to tell me why you don’t do it, but isn’t there a fairness argument that you can just work with a village and help them help you?

Ronan Dunne: We absolutely support innovative solutions and co-operations. We publicly applauded the trial that Everything Everywhere and BT are doing in Cornwall at the moment. We have active dialogue with BDUK. I personally have engaged in dialogue with Rory Stewart to look at the Penrith and The Borders areas. So we all have an aspiration to find a viable solution, which would involve communities and an operator working together, and also sharing the infrastructure between other operators to try to bring the economics to a point that they work. So, I agree.

Q137 Mr Watson: Rory Stewart has a point though, hasn’t he, that you are not really leading on it? Do you have any innovative examples where you might be working with rural areas?

Guy Laurence: We have a technology called femtocell. It is about the size of a hardback book; it is like the router you have for your broadband at home. What this does is it plugs into your broadband, if you have broadband, and then it gives you 5-bar coverage inside your house. We have been very successful with that solution. It is not just for rural, it is also for basement flats, high rise flats, that kind of thing as well, but it does work well in rural where there is broadband. Where there is not broadband, which is the next level of the problem, if you like, what we are experimenting with at the moment is a thing called an open femtocell, so instead of being restricted to just the phones in your house it can apply to, say, a whole area of a village. Currently this is not a commercial offering. We have not commercialised it yet. We have two trials running in West Berks, one in East Garston and I forget the name of the other village, where we have put these small microcells into the local pub. One is on top of a telephone box, which is slightly ironic, and we are seeking to put one in the church. As a combination of using a number of these very small cells it may allow us to provide mobile coverage to small villages such as the one I described.

So that is a piece of innovation that has only come into the market. We have only had a sure signal roughly a year and a half, I would say, but it is making substantial difference to people who have broadband, number one, and if we can commercialise it to get it to an open femtocell structure it will benefit a lot more people.

Q138 Mr Watson: I think he is a bit ahead of you there, Mr Dunne. Is there anything you can learn from him on that?

Ronan Dunne: We have also trialled femto. As Guy rightly points out, it only solves the problem where you have a broadband connection in the first place and in most of the areas we are talking about where we have a challenge on rural broadband there isn’t any broadband in the first instance. So innovative solutions like satellite will be an essential part, but also working in co-operation. Vodafone and ourselves have a co-operation where we build networks together and that helps to reduce the unit cost of delivering a new cell site, so that is also part of the equation of bringing the economics to a point where we can put more cells into rural areas if there is a demand from the local community.

Q139 Mr Watson: Thank you. Can I just take you back to spectrum? I think I am right in saying that in your submissions both companies possess chunks of 900, 1,800 and 2,100 spectrum; is that right? Would it be unfair of me to say that it is just a load of special pleading for you asking for more of this stuff?

Ronan Dunne: On the contrary, as I mentioned earlier, we have the largest number of customers being served per unit, so on the face of it we are the most efficient user of spectrum, which is a scarce resource, in the marketplace. We also, on the recent Ofcom data, have the lowest level of complaints for our services. So, on the face of it we are delivering a good service to customers and we have a restriction based on the amount of spectrum on how much we can deliver in the way of new services or grow our business. I think we are an efficient user of a scarce resource at the moment.

Q140 Mr Watson: The reason you both want more, you give slightly different reasons, I think. Tell me if I am characterising this incorrectly, because your colleague at Everything Everywhere was a bit stuck when I started asking these questions last week, but I think, Vodafone, you are saying you want more spectrum because-I think you guys call it refarm, which is essentially upgrading the 2G to 3G services. Refarm, is that a technical term everyone uses?

Guy Laurence: Refarming, yes.

Mr Watson: Refarming, yes. Mr Rodman, you said that refarming is very, very difficult and yet you guys upgraded quite quickly. In fact you guys said you were delighted and thrilled that you had managed to refarm your services in London. Is that just because your engineers are better than their engineers or is there a reason for that?

Ronan Dunne: As I mentioned earlier, we have only refarmed a small proportion of our 2G. To refarm the whole lot on Ofcom’s own data would cost about £900 million and be extremely complex. So there is only a limited opportunity for refarming of existing spectrum.

Q141 Mr Watson: But you have done that in London. Presumably that is your biggest market area, is it?

Ronan Dunne: It means that in London, on a subset of the sites in London we have deployed U900 but only on a subset of the overall sites.

Q142 Mr Watson: So even though you were thrilled, it was not that big a deal?

Ronan Dunne: As we acknowledged, because of our success in the market, we had a potential capacity constraint. By doing that we have been able to rebalance the capacity between 2G and 3G in London and in dense urban areas. So we are happy that we can give a better service to customers.

Guy Laurence: If I may, I think you have to separate immediate congestion problems on networks in a specific small part of one town from refarming the whole of the country. If I can give you an example: if you imagine a block of flats and let’s say it is 25 storeys and let’s say 23 storeys are full of residents and you need to refurbish that block of flats, then to move the inhabitants up a floor so that you can then clear it and then refurbish it, if you only have two floors free, is incredibly difficult. If you only have to take one inhabitant and move them to another flat just to do one flat is very easy, so you have to separate the one flat from the block of flats.

Mr Watson: That is very clear. Thank you.

Guy Laurence: Sorry, I wasn’t trying to be condescending; I was just trying to help.

Q143 Mr Watson: I just want to quiz you a bit more, if I can. If I can go to O2, I am right in thinking that you-because it is this low frequency stuff that is like the magical dust for your industry, we now begin to understand, or think we do. You have 2x17.5 MHz of the 900 spectrum but effectively, am I right in thinking, you can only use 2x10 of that? Would that be an adequate characterisation?

Ronan Dunne: Correct.

Mr Watson: So are you going to sell the other stuff?

Ronan Dunne: Two parts. We will need for the foreseeable future to provide 2G services, so we need to retain a proportion of our spectrum to provide 2G services. Theoretically we could refarm up to 10 but we have only currently refarmed five in certain areas. So we will always have a need for that spectrum to continue to provide 2G services. What we need to get is access to additional spectrum because everything we refarm is just simply taking it from our 2G services and reducing the capacity of 2G services to provide it on 3G, and while 3G is more efficient we still are not increasing our absolute amount of spectrum. That is why we need to be able, in the auction, to acquire more spectrum to give us more capacity.

Q144 Mr Watson: I am a layman so it must be very frustrating for you, I know, because you are running this company and then you have a load of politicians who ask you questions about your customers, but it doesn’t strike me that you are making a very compelling case for providing the very best broadband in Europe if you are shilly-shallying around. Why can you not invest quicker to get Scotland covered on the 3G network, for example? It strikes me that you are dragging your feet a little bit.

Ronan Dunne: We are currently investing more than £500 million a year, so over the last 11 years we have invested more than £10 billion in infrastructure in the UK. We are a major, major investor but we do have to balance the requirements of capacity in an urban area with coverage in rural areas. So we have to, like anyone else, allocate the scarce resource of capital in the way that gives the broadest experience to the broadest number of customers, and that is what we are trying to do.

Q145 Mr Watson: I am sorry to keep labouring this but poor old Mr Sheridan here, your customers in Scotland, they read the paper every day, they see you are spending £4 million sponsoring the England rugby team and they see that you have just upgraded your network to 3G in London and that you are thrilled about it but no one in Scotland is getting that kind of service. What do you think they think about that?

Ronan Dunne: Again, we have extensive coverage: on 2G we are over 99% and mid-80% coverage on 3G. We absolutely support the aspiration to have wider coverage and that is why innovations like working with Vodafone to reduce the overall cost to deploy network is helping us to increase our capacity. But again, like any business, we have to balance the demands of urban customers who are using up the capacity at a faster rate with our rural customers who are looking for coverage.

Mr Watson: I am done for now, thank you.

Q146 Damian Collins: Just following on from my colleague Mr Watson’s questions, in essence your priority as a business, Mr Dunne, and Mr Laurence as well, is investing in meeting the growing demand in urban areas instead of investing in broadening coverage because that is where the market is?

Ronan Dunne: Again, we have to strike a balance and Guy, I am sure, will comment, but as I mentioned earlier getting sites in rural areas, getting access to backhaul in rural areas is significantly more difficult than it is in urban areas, so it is not simply a question of we want to prefer urban areas to rural areas. It is meaningfully more difficult for us to deploy in rural areas because of the lack of available sites and the lack of fast backhaul. Those are real operational difficulties for us.

Q147 Damian Collins: But what I do not get, Mr Dunne, is a sense that you are driving the coverage issue. You say there are issues there, and I think we can understand what those issue might be, but is your priority as a business saying, "What we are going to do is we are going to try and resolve these problems where they exist and that is the priority, what we really want to do is expand coverage"? I don’t really get a sense of that. What I get a sense of is you say there is a balance to be struck and at the moment that balance tips in favour of expanding your service in the profitable urban areas and not doing very much more in terms of coverage or doing a much more limited amount in terms of expanding coverage.

Ronan Dunne: It is not that it is one versus the other. We have increased, and we continue to increase, our 3G coverage. We don’t object to in principle having a coverage obligation in the format of the spectrum options. So it is not that we believe that there is not a case for expanding rural coverage and we are investing in expanding our coverage. As I say, it is just a question of allocating our resources and the practicalities that there is a significant part of the country that doesn’t today, and won’t in the foreseeable future, have access to fibre for backhaul. So even if I built a site you still would not get high speed mobile broadband services in those areas.

Q148 Damian Collins: I just want to be clear on some of the details. Sorry, Mr Laurence, do you want to come in first?

Guy Laurence: We have a slightly different answer because, of course, we are investing in complementary technologies such as femto and Sure Signal. We are also investing in all the customer support systems that are required when you move customers on to the more advanced phones such as smartphones. So, for instance, our brand new store design, which is specifically designed to help people with new kinds of phones, the first one we opened was in Edinburgh. So we are investing in Scotland heavily. However, where I do agree with Mr Dunne is that if you have a small village in the middle of nowhere and BT can’t run the fibre in there is not much that we can do about it. There are some technologies available but they are exceedingly expense and therefore the faster we can encourage and work with BT to run the fibre in so we will get a solution for rural faster.

Q149 Damian Collins: Forgive me for being slightly colloquial in this question; I am a Member of Parliament so it is the nature of the beast. As a customer, when I moved to my new home in constituency I had to move from Vodafone to O2 because there was no Vodafone signal and a weak O2 one. That is somewhere that would have BT fibre. In a community like that, if Elham Parish Council wrote to you and said, "We would like to have a mast here. There may have been objections in the past but we would like one now because the coverage is very poor" what happens? How does a company like yours respond to that sort of request from a community that might tick a lot of the right boxes in terms of the size of community, it might be a bit small, but the size, the location, some of the back support you would need? How would you, as a big company, engage with a community like that?

Ronan Dunne: We would absolutely actively engage. It is in our interests, because all of our customers, the very nature of mobile services is that our customers expect to have coverage wherever they go. So it is not just about serving individual communities, it is also about when people are out and about that they can also get coverage. So it is in our interests where there is an appetite in a local community to actively engage with them to deliver that service and find the most economic way of doing it, whether it is to be using public land, whether it is to get an improved rental agreement, whether it is to work with Vodafone so that we can share the costs of building the site. So we actively do engage all the time with local communities doing exactly that.

Guy Laurence: Ours is exactly the same. Recently in West Berks to do this trial I just talked about earlier, we engaged with the local MP and also with Nick Carter, who runs West Berks Council. I rang both of them and said, "Look, you need to help me out, we need to cut through the red tape if we are going to put this in" and we did it within a relatively short period of time and now we have the trial up and running.

Q150 Damian Collins: Mr Dunne, in the written evidence submitted by your company, although you just said you did not have an in principle objection to coverage obligations, in paragraph 25 it suggest that you think it would have a distorting effect on competition and potentially restrict new entrants from entering the market because of the coverage obligations. Which new entrants were you thinking of?

Ronan Dunne: I was not thinking of a specifically identified entity, but the fact is that for a new entrant to have coverage obligations means that the rollout cost to them may be prohibitive for them to bid for the spectrum. The other thing is that if you have coverage obligations people will factor into what they bid for that spectrum, the cost, the additional costs associated with that coverage obligation, but they will also have the benefit of that spectrum available to them in urban areas straight away. They are getting a discount for covering rural areas that allows them to have coverage on a national basis, so they may be subsidising rural versus urban coverage.

Q151 Damian Collins: I think it is quite an important point if you are saying that you think there are people who might enter the market who won’t because of the coverage obligations. Could you give us an illustration of who that might be?

Nicholas Blades: I think it is just an economic observation and it is something we think policymakers need to just bear in mind that there is an attractiveness from your perspective of recommending a coverage obligation but when you are coming to your conclusions on that you need to bear in mind that it may have this effect on new entrants. The auction will determine whether anyone turns up to bid. The more restrictions and the more costs you place on bidders the less likely you are to have people turn up.

Q152 Damian Collins: That to me sounds theoretical, but in terms of practical policy, is this a real threat or not? If this is theoretically possible, but in reality there is no other big entrant which might come in, therefore it is not a threat that I should worry about as a decision-maker or policymaker. That is what I am trying to get to the bottom of here, because it is quite a big sort of claim to make.

Nicholas Blades: Certainly it is not our concern whether people come in to compete. As Mr Laurence said, the auction should encourage people to turn up and I think it was just flagging the issue that it is not a complete free ride having a coverage obligation from a policy perspective. There is a downside and the downside potentially is that there might be fewer people turning up at the auction.

Q153 Damian Collins: Just to be clear, I am assuming both Telefonica and Vodafone would be happy to bid for licences if there was a 98% coverage requirement? Yes?

Guy Laurence: We have to look at the total package of how much it is all going to cost. If we get 98% coverage, good, we get more customers and we get more revenue and all the rest of it, so I would like to see us get to a stage where there is 98% coverage, but there is a total package as to how much it all costs at the end of the day and part of that will be whether BT-and sorry to harp on about it-come to the table with what they need to provide, because if we are forced to provide 98% and we have to use things like IP microwave and other technologies it is a much higher cost to us. So I think you have to view this as a national infrastructure play, where a number of parties need to come together. So the spectrum is one component. You obviously need enough players of a certain size with the muscle to then go and build these networks because they are not trivial things to build and they obviously need to maintain them, and then you need other players such as BT to complete the party. I think that is the best way to-

Q154 Damian Collins: I think is it a very valid point that you make. It is certainly one I think I would take on board, and certainly when we had Ofcom in recently we did talk about BT’s fibre networks and the expansion or access to those. But I just want to be clear that if a 98% coverage requirement was set then-I appreciate there is a cost involved-as far as you are concerned it could be delivered, you could deliver against it?

Guy Laurence: Physically it could be delivered, yes.

David Rodman: There is a sting in the tail in bidding for the lot with the coverage obligation for both Vodafone and O2 in that every pound we bid for that lot comes back and bites us in the form of higher spectrum fees. So there is a bit of a double whammy for us on that coverage obligation.

Q155 Damian Collins: We heard last week from Mr Watson’s questioning that Everything Everywhere is set to make a profit of several hundred million pounds from the sale of spectrum. Do you think profits like that should be ringfenced for investment in the UK infrastructure?

David Rodman: I don’t have a particular opinion on it, to be honest. I don’t know that Everything Everywhere is going to make a profit on what they sell or how they are going to put it through the books or anything. I would not describe it as an area I am competent to comment on.

Q156 Damian Collins: Again we are discussing other theoretical arguments that have been put forward. If companies like yours are in a position where they can make substantial profits from selling on, by being required to sell on areas of spectrum they have previously bought and, taking into account the purchase price and the licensing fees they might have paid, they are still going to make a substantial profit at the end of it, do you think there would be a case for saying those profits should be reinvested by that company or by some institution into the network as that is something that those companies are potentially making quite a lot of money out of but it is not necessarily money they have earned?

Guy Laurence: You are probably into a moral issue, which is probably something that Parliament should consider rather than businessmen.

Q157 Damian Collins: I am asking the wrong person. I am sorry to ask you a moral question. Finally, in our session last week Arqiva suggested there could be a 99% coverage obligation, where you effectively go for total coverage. What do you think, from your point of view, the costs are associated with going for one of these high coverage numbers? There seem to be various different views that people have. It was suggested to us last week that it could be in the region of £200 million and beyond, setting a coverage target, so the difference between, say, going from 95% to 98%. I wonder what your view was on the likely cost of making a step like that.

Guy Laurence: From 95% to 98% would be about £200 million in our case, to get from where we are today. You are talking about indoor coverage?

Damian Collins: Yes.

Guy Laurence: So to get from where we today to 95% would cost about another £200 million.

Ronan Dunne: I think those are in the right ballpark. As I have said, it is about not only building out of the sites, but the availability of sites and of high speed transmission as well. So those are critical components. It won’t just be our investment, because there will also be an investment requirement for others as well.

Q158 Damian Collins: Thank you for that. It is certainly interesting to me to get your view on that figure and I do take on board what you say about it is not something you are entirely in control of, although obviously there is a big role that you can play.

Guy Laurence: Just to be clear, those are the capital costs. You have the opex to go on top of that. On the 98% figure you have about another £140 million a year in terms of opex to then run it, because once you build it you have to operate it. So you are talking about £540 million in total to get to 98%, in our case.

Ronan Dunne: Again, similar numbers, yes.

Q159 Chair: Can I probe a little further? You opposed the Ofcom coverage obligation by arguing that competition will deliver greater coverage. How great a competitive advantage over your competitors do you seriously think it gives you if you are able to offer that little bit more coverage in the most remote rural areas?

Ronan Dunne: We, in our submission, accepted that there can be a case for a coverage obligation and what we said was that we expected that competition would get you there, and the debate might be does the coverage obligation get you there faster. This goes back to a point I made earlier that it is not just about serving those people who are residents in rural areas. Many of those areas are areas for tourism and other things and ubiquitous coverage is an aspiration of all of our customers, so we have an interest not just for those customers who are located there permanently but for the wider customer base to have as much ubiquitous coverage as we can because that creates a great user experience and means that the take up and adoption of digital services will be higher. So there is an economic attractiveness to us ultimately to build out more and more of the geography.

Q160 Chair: When you are saying to me, "You should be an O2 customer, not a Vodafone customer" how big a part of your pitch would you see the extent of your coverage being? Do you think that is as important as saying, "I am not going to charge you as much"?

Ronan Dunne: I think it is a significant factor. That is why we enjoy a significant market share in Scotland, which was referred to earlier. We have significant coverage in Scotland. For each customer, it will be one element of the choice they make as to which provider they use but there also will be factors like the services that are available, which also means it is not just coverage but when we talked earlier if we have spectrum that does not allow to compete at the same speed that may be as significant a factor in a customer choosing which network as it would be whether there is coverage in the first place.

Guy Laurence: Two things. First of all, just to your question, I said £540 million for 98%; it is actually 99% coverage. Apologies for that. To the question you posed, I would probably answer the same as Mr Dunne: I think it depends on the individual customer. If you are student living in London then whether you have coverage in a small village in West Berks is not a big concern to you, to be quite frank, and therefore if you are trying to attract that kind of customer it does not play into their, what we call, consideration set when they are making the purchase. But as a national company that provides national coverage then we would seek to have as wide a coverage as we can. You have seen, I think, in past years, and even recently in fact, some of the network operators advertising that they have the widest coverage or the deepest coverage or whichever word they choose to use.

Q161 Jim Sheridan: A brief supplementary about the issue of rural areas. I think you said earlier you had a mixed mailbag with people who want increased access but equally so you have a number of objections. What are those objections based on? Is it the fear of health risks or is it the landscape, or are you trying your best to try and get a better service into the rural areas, or is it just a matter of priority, "Our competitors aren’t doing it so we don’t need to do it"?

Ronan Dunne: We are actively trying to increase our coverage and the responses in our mailbag have been mixed. There is some that it is an objection in principle, that they just don’t want a mast; in others it is a debate about a particular location and whether or not there is a better location. It tends to be, I suspect, the same mix that you get in your own mailbags.

Q162 Chair: We could spend a great deal of time on mobile phone masts, but that is a whole other inquiry. The two competitors who are not here today suggested to us quite strongly that to extend rural coverage into the most remote areas you really need to have access to sub-1 GHz spectrum. Do you accept that?

Ronan Dunne: I think if you were starting with a green field, sub-1 GHz spectrum, low frequency spectrum, the signal covers a wider distance, but when you have already built a network grid, as all of the operators have, and as Mr Laurence identified earlier, the operators who do not have sub-1 GHz have been very, very effective national competitors already-once you have built an extensive cell site grid, the difference between the low frequency spectrum and the high frequency spectrum is not nearly as significant. The second factor is that some of the existing operators who do not have low frequency spectrum have sufficient spectrum available to them already, that is they have 2x20 MHz of spectrum in their existing holding, which means that they are in a position to deliver LTE services sooner than the 800 spectrum will be available. So probably the first availability of LTE services will be from those who have 2x20 MHz of 1800 spectrum.

Q163 Chair: So are you saying that because they have quite a lot of base stations already, this argument they are advancing doesn’t really help at all?

Ronan Dunne: It significantly reduces the economic advantage of having the low frequency spectrum. The low frequency spectrum still has some benefits for in building coverage but the general point of building a network is an 1800 network will have more cell sites than a 900 but if you have already built an 1800 network then you have those sites anyway.

Guy Laurence: I think this is a key point. The last part of what Mr Dunne mentioned, though, is that in the case of Everything Everywhere, even after they have divested their spectrum obligation they still have a considerable quantity of spectrum, I think more than any other operator I can think of in Europe. If I go back to my analogy of the flat, if I may, they have a 50-storey flat and it is only 30 storeys full, so if they need to move those inhabitants around they have 20 free storeys to move them to, which means technically, and very simplistically, they can switch on 4G faster than I can. That is why I have to buy 800 spectrum because I can’t do it because I only have my two floors of freedom to go on.

Chair: But your floors are luxury penthouses; theirs are rather downmarket, shabby ones.

Guy Laurence: I think the empty floors can be anywhere in the building, but as you wish. But this is a key point. It is interesting that you call us the big boys. Everything Everywhere is the largest operator; they are the big boys. They are nearly one and half times bigger than me, just to be clear, and they have this 50-storey block of flats, they have only occupied 30 floors, they can move the inhabitants around easily and they can move on to 4G easier than I can. I have to buy spectrum because I don’t have the ability to refarm my existing 900 spectrum fast enough to compete with them. They could be in the market 2013; it could take me nine years to reach the same point where I have the same amount of refarm spectrum and people using 4G.

Q164 Chair: Taking the two of you together, both of you essentially are arguing that this is a spurious argument being put forward by Everything Everywhere that you have this huge advantage because you have the sub-1 GHz and they don’t?

Nicholas Blades: If I can quote Ofcom. Ofcom said in its advice to the Government, "Liberalising 900 and 1800 spectrum in the hands of existing licensees is likely to benefit consumers and is unlikely to result in material distortion of competition that requires further action to be taken." So it has been looked at for six years, 2,000 pages of consultation. I think we have gone over the subject and, to be honest-

Mr Watson: With respect we haven’t yet though.

Nicholas Blades: No, I know you haven’t but as an industry it has been done to death.

Q165 Chair: We have touched on the fact that masts are unpopular, and certainly every Member of Parliament would bear that out, and we have also discussed the fact of Everything Everywhere having made a lot of investment, lots of different base stations. To what extent is extending coverage really going to be of benefit if we could have greater sharing of infrastructure by the operators?

Ronan Dunne: I think the evidence is already there. There are effectively two network sharing arrangements in the UK: Cornerstone, which is the agreement between Vodafone and Telefonica, and MBNL, which is between Everything Everywhere and Three. I think all of the operators in the market recognise that efficiency in the deployment of infrastructure is a good thing because it reduces the impact on the environment of new cell sites, but it also reduces the cost to deliver, which increases those areas that are economically viable to put coverage into. So I think it is an essential element of delivery of services for customers going forward.

Guy Laurence: I would agree with that and I would also say that you start to see that with 4G as well. For instance, in Germany where we already have 4G Live, we have agreed with the Government to collaborate with other operators in rural areas and to build rural areas first.

Q166 Chair: If you both agree it is so important, why has it not happened? Why has it not happened and why do we not have much more sharing of infrastructure than we do at the moment?

Guy Laurence: We have more sharing of infrastructure in this country than virtually any other European country because the competitive dynamics here are so tough that the margins that we enjoy are much lower than any other European market. So the fact that you have Everything Everywhere and Hutchison together and the fact that we have a co-operation agreement on building steel masts is a substantial amount of co-operation and unusual.

Q167 Chair: Why could you not, particularly in a remote area, have one mast and have all four of you use it?

Guy Laurence: We do not have an in principle objection to that, to be quite frank. If I could split the costs four ways instead of two ways I would do it, and if we can get BT to run the cable in then we can fire it up and make it work.

Ronan Dunne: I would have no objection at all to sharing infrastructure like that.

Q168 Chair: But you are saying it is essential, you are saying that you have no objection to doing it and yet, even though you say we are ahead of other countries, there is still, it appears-you don’t share with the other two companies that were here last week. Why have you not just got together and reached an agreement?

Ronan Dunne: There is a natural logic. As we referred to earlier, we built out our original networks on 900 MHz spectrum so our footprints are more similar than those who built a grid on 1800. So there is more efficiency in sharing between Vodafone and Telefonica O2 and that is why we have because there is more overlap on our cell site grids. So the way the UK is working is the optimised pattern; those with 1,800 and higher frequency are co-operating together and those who built their grids out on 900 are co-operating together. As Mr Laurence said, we are further advanced than virtually any country in Europe on sharing.

Guy Laurence: We did have an agreement with France Telecom to try and combine our two networks using our 900 and their 1800 grid and, to be quite frank, it didn’t work. So we had a good run at it for about 18 months, I guess, and the technical issues just got too big versus the benefits we would derive and therefore, at the end of the day, we cancelled the agreement. That was three years ago.

Q169 Chair: But you would in the future expect to see much more sharing?

Ronan Dunne: For pure new sites being built in rural areas, certainly we have absolutely no objection to as many operators as possible being on the sites to bring the cost down.

Q170 Damian Collins: Just following on on that, I have been very interested in your answers to those questions so far. If the Government set a higher coverage target, said they wanted 98% coverage, in reality is that how it will be delivered, not put all the obligations on one provider but that it would be shared among a number of people to help meet that target and that you as companies would find your own solution to making that work?

Guy Laurence: That is how it works in Germany, so that is an example that is live, if you like. You get certain inflection points in the industry where new technologies come in and more spectrum is available. I think the Government has an opportunity then to look at what it wants from the granting of those new licences and if it deems that rural coverage is the No. 1 priority it can use that in the rules for the auctions. What it needs to be very careful to do, though, if that is your core objective is to make sure that that is what comes across in the spectrum auction and not this series of rules that give Hutchison and Everything Everywhere a leg up, which is currently the way that these rules are written.

Q171 Damian Collins: If that was the case then, although you said for the 99% coverage you were looking at effectively about £140 million, the likelihood is that a company that made that type of investment would recoup some of that investment by selling access to that extended infrastructure to other companies. Would that be the case?

Ronan Dunne: But also they would have to correspondingly share the revenues as well, so it works on both sides of the equation. They may get a reduction in their costs but the revenues they might enjoy are also reduced because they would then take probably their natural share of that particular market. So it works on both sides of the equation.

Q172 Damian Collins: But what I am trying to get at is if that is how it develops, the chances are the cost of delivering it might be slightly lower than has been suggested?

Ronan Dunne: It is certainly highly probable that people would be looking to share in rural areas as much as possible.

Q173 Mr Watson: I think Thérèse picked up on this earlier: you are concerned that the auction rules constitute illegal state aid. Just for the purpose of the Committee, is that the view of Vodafone?

Guy Laurence: I am not a lawyer so I am not going to say it is illegal state aid. What I would say is the current way that the rules are described I think gives both Hutchison and Everything Everywhere an unfair advantage.

Q174 Mr Watson: Would your lawyers say that they think it is illegal state aid?

Guy Laurence: I have not asked them that question.

Q175 Mr Watson: Would you mind asking them and letting us know afterwards? I am just trying find out whether you agree with 02.

Guy Laurence: I think whether it is illegal state aid or not, the question is is it a fair auction in the way it is currently configured and the answer I think in both cases is no.

Mr Watson: You are sounding like the politician though. I just want to know whether-

Guy Laurence: I am not a lawyer, sorry.

Q176 Mr Watson: Don’t worry, do it afterwards. You probably know where I am going next, if you read the transcript of last week, but I couldn’t help having a little wry smile when I read Vodafone’s submission. You went to great pains to explain that a spectrum fee is not a tax, and I definitely don’t want to get into the tax issue with you guys but can I ask what you paid for your 900 and your 1800 spectrum?

Guy Laurence: My total spectrum costs per year are £346 million.

Q177 Mr Watson: That is your licence fee but when it was allocated can I ask what you paid for it?

Guy Laurence: Sorry, for which?

Mr Watson: For the 900 and the 1800.

Guy Laurence: £25,000.

Ronan Dunne: We paid £4 billion for our 3G licence and paid a similar amount for our 2G.

Q178 Mr Watson: So again you probably know where I am going, I am not very good at my sums, if you saw last week, but since then you have probably paid, since it was allocated in 1998, just over £200 million in AIP; would that be a broad figure?

Guy Laurence: I am not sure of the maths but the AIP is a subset of our spectrum costs, just to be clear. Our spectrum costs are £346 million a year, per year.

Q179 Mr Watson: So you have AIP and what is the additional bit?

Guy Laurence: For the 3G we paid £5.9 billion and, to give you an idea, that cost is not paid off in our books until 2022. We have paid off less than half of that cost. I guess you could think of the AIP as the council tax but the big ticket issue is your mortgage. The mortgage we have to pay is on what we paid the Government for 3G, and that is £5.9 billion.

Q180 Mr Watson: I love the mortgage-flat thing. That actually does work for me. Let me go a bit further. Do you know how that would compare to what you both paid for the equivalent spectrum, the 800 MHz spectrum, in the German auction?

Guy Laurence: I think we paid about a billion but we would have to-

Q181 Mr Watson: Let me help you. I went to Google, so it might be wrong, but it said that you paid €1.42 billion and that Telefonica paid €1.38 billion. That is probably broadly right?

Ronan Dunne: That sounds right, yes.

Q182 Mr Watson: Effectively, you are sort of paying about £16 million a year for your UK spectrum. Does that mean that you think that your British spectrum is worth less than German spectrum?

Guy Laurence: No, because that is the point, we are not paying that figure. We are paying £346 million a year in spectrum costs. It is £6.5 million a week we pay in spectrum fees and we put some of the money upfront, which is an advantage to the Government. You have the money upfront and then we pay a licence fee on the AIP, but just because you have money upfront does not mean to say I don’t have to then expense that through my books, and that will take me until 2022.

Q183 Mr Watson: I think I have to draw that out. Perhaps we could follow that up in writing, but essentially what I am trying to get to is to make the point that you seem to be paying a lot more for spectrum in Germany than you are in the UK. Would you dispute that?

Guy Laurence: Yes.

Q184 Mr Watson: Would you dispute that?

Ronan Dunne: Yes, because, in fact, we are about to go into a spectrum auction where we will be charged an amount, depending on the outcome of the auction, which is similar to what has happened in Germany.

Q185 Mr Watson: When Ed Richards is saying to our Committee that you should be paying a multiple of what you currently pay, is he right?

Guy Laurence: You are the expert on AIP. Why don’t you explain the history of this, because I think it is worth knowing?

Q186 Mr Watson: Before you hand over to your regulatory god, can you just tell me whether you think Ed Richards is right?

Guy Laurence: The AIP was set up; I can’t remember the acronym. It is-

David Rodman: Administrative incentive pricing.

Guy Laurence: It was set up to pay for the Monopolies and Mergers Commission. It was then changed in 1997, I think-was it 1997?-and we started then paying a fee that was greater than the recovery of the cost of the Monopolies and Mergers Commission. Then in 2005 Ofcom looked at it again and saw no reason to increase it. If Ofcom wants to look at it again in 2011 and, using the same methodology, wishes to increase it, that is a debate I am very happy to have with Ofcom. To have it linked to the auction in a somewhat arbitrary way I don’t think is fair.

Q187 Mr Watson: That is a clear point. Can I just go back, though? Do you think Ed Richards was right to say you should be paying a multiple of what you currently pay for licence fees?

Guy Laurence: I am very happy to have a discussion with Ed Richards on applying the formula that he found to be applicable in the past to the circumstances in 2011. If that results in a higher fee, then the answer is yes.

Q188 Mr Watson: Forgive me for responding, but I think I am probably going to take that as a "no", though.

Guy Laurence: No, it is a "yes".

Q189 Mr Watson: Yes? So he is right, you should be paying more?

Guy Laurence: No, Ed Richards had a formula that he used in 2005. If by applying that formula, which was deemed to be appropriate in 2005, to the circumstances in 2011 that results in a higher AIP I am very happy to pay it. What I don’t like in the way that the consultation is written at the moment is the arbitrary link to the auction.

Q190 Mr Watson: Mr Dunne, presumably you would agree with everything Mr Laurence has said?

Ronan Dunne: The Competition Commission itself says that auction pricing is probably an inappropriate benchmark measure for the value of spectrum, so we certainly think that the mechanism that is in place at the moment that Mr Laurence referred to is an appropriate mechanism for valuing AIP fees.

Q191 Mr Watson: I think when I read your submission, this is Vodafone, I think this is the argument you are trying to deploy here-and I understand it is very difficult in this Committee to make a very detailed regulatory argument-you are arguing that tying spectrum fees to auction price means that you are effectively paying twice, paying once for the new spectrum and again for the spectrum you already hold. Do I have that bit right? Yes, okay. You see, when I read that I was struggling to work out what the problem with that is. You are essentially wanting Ofcom to give you some kind of massive "buy one, get one free" offer, aren’t you?

Guy Laurence: I think what we are seeking to get from the auction is a fair and open auction process that allows as many bidders as want to bid or have the ability to bid to enter on a fair and equal basis. As I said, we don’t have an advantage from having the 900 spectrum, because if we did then I don’t understand how Hutchison can sell as many iPhones as I do. I don’t understand how Orange managed to have more customers in 2002 even before they merged with T-Mobile. They are clearly not disadvantaged now; therefore, I see no reason to distort the auction with a series of artificial rules. It is as simple as that.

Q192 Mr Watson: Do you not think your customers would think, "These guys are paying £16 million a year in AIP and yet they are giving Lewis Hamilton with McLaren $75 million a year in sponsorship"? I know you don’t want to be moral about this and, by the way, I understand that, but do you not think there is some kind of corporate responsibility for this spectrum, which is essentially a state asset, a public asset, that you share the benefits of that with your customers?

Guy Laurence: I think the key thing is, first of all, we are paying £346 million a year in spectrum fees, just to go back to that fact, because it is a fact. The second thing is that I do not pay Lewis Hamilton’s wages. I pay a contribution to McLaren’s running costs, a very great British company, probably one of the finest British engineering companies that we have, that go out on the track every two weeks and try and win races. They employ the best British drivers, two ex-world champions, to which they pay the market rate and is their business what they pay Lewis. I can assure you I don’t get involved in his wage negotiations.

Mr Watson: I would think he would be paid a little bit less if you were, Mr Laurence, but thank you anyway.

Chair: We want to stop at 11 am.

Q193 Louise Mensch: I think my colleague Tom Watson has asked most of my questions, but just for clarity could I ask you both to say precisely how you think licence fee levels ought to be determined going forwards, if I could start with Vodafone? How do you think licence fee levels ought to be determined in the future going forwards?

Guy Laurence: Are you talking about the AIP or are you talking about with respect to the auction?

Q194 Louise Mensch: No, I am talking about AIP. If you leave the auction out of it, we are talking about actual licence fees. How do you think those should be determined going forward?

Guy Laurence: I would probably repeat what I said earlier about the fact that the 2005 methodology, which was deemed to be appropriate, should be brought up to date with 2011 facts and figures.

Q195 Louise Mensch: Including the spectrum you already own or do you wish it to only include new spectrum? Should there be rates retrospectively added to the stuff that is already in your possession, extra fees?

Guy Laurence: I don’t think retrospective legislation is a fair demand to put on a business, to be fair.

Q196 Louise Mensch: Even if, as my colleague Mr Watson points out, there is a massive discrepancy between the valuation of British spectrum and German spectrum?

Guy Laurence: But there isn’t, as I said.

Q197 Louise Mensch: You dispute that?

Guy Laurence: Well, no, there isn’t. We pay £346 million in spectrum costs per year. You have chosen AIP, which is-

Q198 Louise Mensch: It does not equate to €1.6 billion, does it?

Guy Laurence: Sorry?

Q199 Louise Mensch: Did you not give me a figure of €1.6 billion for German spectrum?

Guy Laurence: No, I paid £5.9 billion for my 3G spectrum, which is considerably more than 1.4 billion that Germany paid. On top of that-

Q200 Louise Mensch: Is German undervalued?

Guy Laurence: No, because they also paid for 3G as well. The thing is in our P&L you have to take all of the spectrum costs together. You can’t take one line. The cost to the business is the cost to the business. We have to take all of our spectrum costs because that is the true cost to the business.

Q201 Louise Mensch: You are basically content to revise the 2005 mechanism to bring it into line with the 2011 market and that is the way you would like to see rates set?

Guy Laurence: Why not, yes.

Q202 Louise Mensch: You agree with that?

Ronan Dunne: Yes, entirely comfortable with that. There is an established mechanism there. Just for clarity, there are two pieces here. There is some spectrum that is bought upfront and there is some spectrum through which fees are paid. History records that the UK generated £22.5 billion, a significant proportion of which then operators wrote off because essentially they paid more for it than the value of it. Actually, since then, every operator in the UK has made a major write-down of the value of the spectrum. It is a transfer of economic risk from the state on to the operator. In the current auction we will have the same equation again where the operators will be asked to take the economic risk and I expect that we will see, similar to the auction in Germany, there will be demand for the spectrum because everyone is excited about new digital services. I wouldn’t expect that the fees generated will be similar to those that were generated for 3G.

Louise Mensch: I am certainly keen to see O2 acquire some new spectrum since, having been an early adopter of the iPhone, of late I find I am getting coverage blackouts all over the place. There must be serious congestion. Thank you for those answers.

Chair: I am conscious that you need to go so we will draw a line there. Thank you very much.

The Committee is now going to have a short private session before we move to the next set of witnesses, so if the public wouldn’t mind waiting outside while we do that.

Examination of Witnesses

Witnesses: Rupert Pearce, Group General Counsel, Inmarsat, Chris McLaughlin, Vice President of External Affairs, Inmarsat, Stephen Hearnden, Director of Telecommunications and Technology, Intellect UK, and Raj Sivalingam, Associate Director of Telecommunications and Spectrum, Intellect UK, gave evidence.

Q203 Chair: Thank you for your patience. We now come to the second part of this morning’s session and I would like to welcome Rupert Pearce, the General Counsel of Inmarsat, and Chris McLaughlin, the Vice President for External Affairs; and also from Intellect UK, Stephen Hearnden, the Director of Telecommunications and Technology, and Raj Sivalingam, the Associate Director of Telecommunications. Adrian Sanders is going to start.

Q204 Mr Sanders: What is the most realistic way for universal broadband coverage to be achieved in the UK?

Stephen Hearnden: I think it is a mixture of delivery mechanisms, obviously copper with fibre, wireless broadband, mobile broadband, and also for the very hard to reach areas, satellite broadband. It is a mix of different technologies depending on the most costeffective method of delivery.

Rupert Pearce: Yes, I would agree with that as well. Obviously, we feel that satellite has a part to play in the overall policy of deploying next generation services as far as possible within the UK, but it is at the fringes. My own business, Inmarsat, is all about mobile satellite communications and our markets are global. Although we would immediately deliver truly ubiquitous coverage in the UK merely by having a satellite over the UK, which we do, we have several, there are small issues like being able to serve only a few hundred customers at a time in a beam with a mobile satellite network and the fact that we don’t work in building. You actually have to have line of sight to a satellite to be able to have a service.

There is a next generation of satellite services coming along in Ka band, which are very high throughput, high capacity satellites, which essentially take the power that we spread over the globe and focus all of that power in on a single country. Probably the best example today of that is in the United States where Hughes Network Services and ViaSat both have consumer broadband by satellite offerings to now more than a million consumers in the United States. That is potentially something that we can take into truly rural, remote areas where a 60 centimetre dish can act as an adjunct to terrestrial systems to provide broadband into the remotest regions. Again, so long as the satellite can be seen and a dish can be set up, then Hughes and ViaSat are selling that service at $50 a month, which I think is a pretty good value proposition to people who would otherwise be in the notspots.

Q205 Mr Sanders: What sort of proportion of the country do you think would access services via satellite if that were available in the UK?

Rupert Pearce: One of the most interesting things that we have seen about the deployment of consumer broadband by satellite in the United States, which I think is a good proxy for the UK-they are slightly ahead of us in terms of the deployment of these services-is that the take-up has been much more profound and widespread than people had thought. I think because satellite is able to produce a 1 Mbps service for $50 a month it has proven to be very successful in suburban regions. As we have seen, and as you heard in Committee over the last week, as new technology comes along it tends to come with reductions in coverage rather than extensions of coverage. What we are seeing in the United States is that fibre and cable deployment is restricted predominantly urban regions and begins to bleed a little bit into suburban regions but the costbenefit analysis starts to run out as you get into semirural, semisuburban areas. There are still a lot of people in those areas that want access to broadband, and that has proven to be the sweet spot for satellite, which today can compete very satisfactorily against technologies like DSL. If you look at the business plans of Hughes and ViaSat in North America, they have ambitions to serve several million customers each in North America. It is more than just a rural, remote service.

Q206 Mr Sanders: Would you agree with what Arqiva told us, which is that satellite is only going to be useful for users beyond the reach of the other types of broadband?

Rupert Pearce: Certainly, I respect that view. But it is not what has been seen to happen in the United States. Now, we have to decide whether the United States is a good analogy or not for the UK, but the first generation satellite capacity built for the United States did assume that it would be predominantly rural coverage and both suppliers were surprised when it turned out to be much more suburban, even to the extent that the next generation satellite capacity being brought into the United States won’t even be ubiquitous coverage. Both of the satellite operators there are going to offer only west coast and east coast coverage because they are essentially competing head to head, in their views, with cable, fibre, DSL, and the more rural, remote areas of the United States up the middle of the continent are being left to a prior generation of satellite technology, which I think is very, very interesting.

We have new technology coming along in this field as well, not Inmarsat because we are about mobility, but Avanti in the UK has a Ka band service available today and Eutelsat, a European operator, is bringing next generation Ka band offerings, which will offer 10-15 Mbps, 20 Mbps offerings to rural remote areas. I think they should definitely have a part to play in an overall strategy to push technology out as far as possible.

Q207 Mr Sanders: Can I ask both of you if you think imposing coverage obligations on the next spectrum auction will actually benefit customers?

Stephen Hearnden: Certainly, getting a coverage obligation will, in fact, get us to a higher level of coverage. Whether or not doing it via the auction is the best methodology, we have BDUK at the moment who are working towards the delivery of the final third and that will include areas that are very hard to cover. There is one school of thought that says impose a coverage obligation on the operators, but the cost for the operators goes up very, very steeply when you get beyond the 96% to 97%. There may be other better ways of delivering it. With the mobile broadband, as we heard earlier, the costs become high when you have to get backhaul into the remote areas, either by fibre or by microwave, and microwave is very expensive, especially if you need several hops to get in, you can’t have a line of sight from-if I call it-civilisation into the remote area. As a result of that the costs go up very highly. I know that BDUK are exploring a variety of different ways of delivering the service in the most costeffective manner through the county councils and local authority procurement processes.

Raj Sivalingam: I would also add that I think there is an issue that we need to explore a bit further about the idea of putting the coverage obligation on a single 2x5 MHz channel, which is that there will be issues, challenges, when more than one or a number of users are present in a cell. We can tackle it to some extent by, as was discussed in the previous session, adding more and more cells, but that is an issue that I think needs to be explored further. As my colleague said, we need to look at the coverage obligations in the round through the BDUK programme as well.

Rupert Pearce: I guess it is easy for us to comment because we are not directly affected by it, but I would have no issue with the concept of coverage being a requirement for someone bidding. I think that is just an example of joinedup policymaking. It will be reflected in the value that people bid. In theory, they should bid less because it is going to cost them more to deploy, but you are accomplishing your policy objectives through the auction. If they bid less, well, you expect them to bid less but then you expect them to deliver more. What you get, though, is the tension of competition. Someone will take a different view on how much it will cost to extend coverage to that extra 2% to 3% of the UK population and it is in that competition you get the combination of public policy objectives and value. Of course, the people deploying have the opportunity to invest in technology solutions to deliver lower cost options for that extra 1% to 2%. It is very hard for you to drive that except by direct investment in technology as a Government. Therefore, you are using the coverage requirement in the auction to create competition, foster different views around how to get there, and encourage innovation to find the lowest cost solution that makes everybody happy. I think it is a winning strategy.

Q208 Chair: The suggestion has been made that your technology, satellite broadband, is not only more expensive but actually if more than a relatively small number of people want to use it simultaneously the speeds drop substantially. Is that true?

Rupert Pearce: It is absolutely true in the main. Our business is a niche business. Our revenue base last year, for what is by far and away the leading mobile satellite services operation in the world, was $1.2 billion. We get that operating in more than 200 countries. We are a niche part of the telecommunications world, but we serve very, very important public policy objectives and we serve very important communities. We are the provider of the only global maritime safety system, for example. We are the only supporter of global air traffic safety systems on aircraft, and we are the only available communications solution in many far-flung regions of the world. We are a mix of serving niche communities and serving very important policy objectives.

If you step back, though, and look at satellite as a medium for distribution and communications, satellite is extremely effective and extremely efficient at deploying broadcast services, one-to-many services, because of its coverage. But when it comes to twoway communications it is fundamentally constrained by the power of a satellite and the bandwidth that can be put through that satellite. The largest communications satellites that can be lifted by rockets today-and these are rockets that can take a man to the moon so they are very large, powerful rockets, costing about $120 million a pop just to launch a satellite-they are six-tonne satellites about the size of a double-decker bus and with a solar array wingspan of about 30 metres, so about the width of a football pitch. They are very, very large, complex, sophisticated beasts. But the communications capacity they carry will only support tens of thousands of users if you deploy that power across a third of the globe, which is what we do. We basically have a global network with three satellites.

When we are looking at consumer broadband by satellite, we are looking now exclusively, I think, at very large satellites that harness that power to a very small area of the globe, for example, the UK or the United States of America. Even then, if you look at the total communications capacity of a next generation Hughes satellite or a next generation ViaSat satellite, they can probably cover a couple of million subscribers each in totality across the whole of the United States. That is at a 1Mbps data speed. If we scroll forward another decade and people laugh at the idea of a 1Mbps speed and they say, "Sorry, basic human rights says it has to be 10, 20, 30Mbps", the capacity of those satellites can’t be changed and so they won’t be able to provide that new level of service to large numbers of customers. You can’t send a man up with a screwdriver; you can’t send up a man with a new rack of line cards to plug in. You have got what you have got; it is locked and loaded.

To that extent, satellite is always going to be pushed to the margins. It is always going to go somewhere where you have a special community that can’t get that level of service anywhere else. Equally, because a satellite takes five years to build and repays its capital investment over the next 15 years, you are looking at something that could be up to 15 to 20yearold technology. Again, that only gets used by people who probably have no choice to use anything else.

Chris McLaughlin: I think we are very enthusiastic, and you must forgive us because as satellite people we don’t get to talk to you very often, so bear with us. Essentially, a satellite is built for a purpose, whether it is obviously earth observation, or it is broadband as in Avanti’s case, or it is mobile communications for Inmarsat, everything from Haiti and Louisiana flood recovery to things needed by the Herefordshire Regiment. So, lots of things to be done; lots of different purposes. Where satellite will help with your specific task is as part of the bridging, to Mr Sheridan’s point earlier: how do you touch areas that are never going to be connected up with fibre? Maybe satellite of a community can help you.

Q209 Chair: Essentially, the limitations you are describing mean that satellite is not really going to be able to compete with other means of broadband delivery if they are available, but if you are in the Outer Hebrides and it is 1Mb off a satellite or nothing, then you are going to be happy with 1Mb from a satellite?

Rupert Pearce: I 100% absolutely agree with you, and that is true whether you are talking about mobile services or whether you are talking about fixed services, this being pushed towards-

Chris McLaughlin: The sales pitch.

Rupert Pearce: This is our poster child.1 This is a half a megabit per second data and simultaneous voice terminal. The BBC use this a lot, for example; plonk it out there in North Africa, point it at the sky and you are away. I use it in my home, which has no terrestrial mobile coverage, and it works very nicely.

I think satellite works in combination with other technologies at the fringe. It works to backhaul remote base stations. If you plonk a base station down in a village, satellite is a very good medium for backhauling that back into the network, into the terrestrial network. Satellite operates beyond that where someone won’t build a base station because logically you have very few people, because the economics don’t work for the person thinking about putting in a terrestrial network.

The differences between satellite and terrestrial are getting smaller. The next generation of satellite technology is faster. It can serve more people with more power being harnessed. Our technology, with the same amount of spectrum that we have always had over 30 years, each generation of our satellites has carried significantly more than the capacity of the previous generation. That has been a huge investment in technology. We have gone from one global beam covering a third of the globe to each satellite now having 250 spot beams. As these satellites get more powerful-they are pretty much as large as they can be now because we can’t find a rocket to push up bigger ones-we are innovating all the time in terms of what you put on the payload, but we are always one step behind terrestrial technology somewhat by definition.

One area that is particularly exciting is Europe. Europe has imported from the United States, the concept of a hybrid network. The European Commission has engaged in a panEuropeanwide policy here. They have handed out two licences, one to Inmarsat and one to a company called Solaris Mobile, which is a joint venture between SES and Eutelsat. This is a licence in the S band to deploy a hybrid satellite and terrestrial network, complementing each other and fully integrated with each other. The idea is that you can deploy a satellite network with a complementary terrestrial network wrapped around it. When the terrestrial network goes down you have satellite ubiquity, but when you get to the edge of coverage of a terrestrial network you then have a fully integrated satellite capability. That is quite an interesting concept because the idea is that each network plays to its strengths, but most of all that the mass market economics of terrestrial can be shared with satellite so that the satellite users can get a better service, access to better technology, and a smaller, cheaper handset or device for broadband. That is something that is going to be deployed across the European Community over the next decade.

Chris McLaughlin: The handset we have just passed around is a joint little illustration. It is a BlackBerry-sized normal phone, which may have multiple band capability, and then the shoe around the outside of it is to make it Inmarsat or ATC or CGC compatible.

Rupert Pearce: That in the context of this network that the European Commission has licensed us to deliver in terrestrial mode would be exactly like a BlackBerry or an iPhone, in satellite mode would deliver about half a megabit per second, so not true broadband but not too shabby either.

Q210 Jim Sheridan: That is not a new iPhone 5, is it? No.

Rupert Pearce: Some will speculate that these devices are going to get bigger, not smaller.

Q211 Louise Mensch: That feels like 20 years old.

Rupert Pearce: I know. It is retro chic, as you say.

Q212 Louise Mensch: You are not selling satellite to me hugely much, if I may say so, by your very honest-Sir Humphrey Appleby might even have called it courageous-description of satellite’s limitations in your last answers, because you basically appear to say that satellite is a very weak provider. It takes five years to build a satellite; it cannot then be changed or altered at all, so you have got what you have got, that is it. Presumably there is also limited real estate up in space in terms of the orbit of the earth and how many satellites we eventually stick up there. Once you have new generations they have to compete with, as you say, these massive monoliths the size of a bus that you are sticking up now, which will be obsolete in a few years. Yet the benefit of satellite is that it refreshes the parts that other networks cannot reach and that we need it, therefore, to run on maritime operations and airlines.

It does strike me that you are in a world of pain if the terrestrial networks develop technologies such that it would make it more cost effective, which is now not cost effective, for them to reach the last 2% of coverage that they cannot reach, where at the moment satellite is the reasoned alternative. What happens to the satellite business if these technologies expand and the terrestrial operators find ways to reach the Outer Hebrides that are somewhat cost effective or at least they are willing to absorb as part of the price of doing business? We heard from Vodafone an innovative technology that they are coming up with, which only works if you have broadband, where you plug a little cell into your broadband thing and it will deliver you 5bar coverage in your house, which would be very useful in my house with its ancient thick walls in rural Northamptonshire that does have broadband but doesn’t have any phone coverage. What happens to satellite provision and, as a corollary, the harmonised spectrum that you reserve to yourselves if the terrestrial guys can come to us and say, "Okay, it is three years down the line, we are now capable of giving the Shetland Islands coverage. You don’t need satellite any more. Can we have our harmonised spectrum back?"

Rupert Pearce: Well, you are talking about a part of the industry that is not where Inmarsat is present. If you look at our business, I agree with your assessment and I think consumer broadband by satellite propositions are at grave risk of technological innovation on the ground and terrestrial networks expanding their coverage to compete more effectively, more efficiently for the particular customer. That is undoubtedly the case. What we do is we serve mobile customers and our business, a very large part of our business, is not affected by terrestrial deployments for the simple fact that something like 50% of our business is maritime. We serve people at sea; we serve the aeronautical industry. The next innovation that we are bringing to a seatback near you is aero-passenger connectivity to the back of an aircraft so that you will be able to get voice and data services in your seat to your own device. You won’t have to use the in-flight entertainment any more. Where we are on land, we are serving distinct communities like Government, military, aid agencies, media, first responders, people who are dealing with the world where there are no networks or the networks are down because there has been an emergency event or some kind of terrorist outrage or something like that. By definition, we are providing them with something that is completely novel and innovative that they can’t get anywhere else.

Chris McLaughlin: You are actually spot on in your question, as Rupert says. There are two sorts of things to think about in your Committee here. The first is can satellite bridge the broadband gap to remote communities? The answer is at the moment through Avanti and through other solutions, Eutelsat, yes. Inmarsat has never been in that business because we are just in a particular area of global service with global requirements. We are disaster recovery. Where we would ask you to consider is that we have seen a lot of mobile networks around Europe especially in the last few years pushing to try to cut into satellite allocated spectrum for the benefit of the European consumer. For example, WiMAX, we had a problem with C band, which is used to control our satellites and which it seemed perfectly reasonable to the EU that C band spectrum should be redesignated for WiMAX without a thought for interference with the control of our satellites, which were put up there many years ago.

Separately, we see a logical evolution at Inmarsat. We see ourselves moving towards Ka band with the $1.2 billion investment we have done for Global Xpress taking us from half a megabit to 50 megabits. Equally, we see that the Vodafones and the others need spectrum, I think it was fairly clear this morning, although perhaps a little bit unfair to Mr Watson, the $346 million debate that went on, but the question really is what did your spectrum cost for the original 2G stuff and when are you going to get off the original 2G stuff? In Inmarsat’s case, we have never had more spectrum than we have in the L band, approximately 33 MHz or less.

Rupert Pearce: The whole band is 33 MHz and we have about 20%2 of that, because we share it with all the other MSS operators around the world.

Chris McLaughlin: The emphasis on our entire business has been on getting ever better performance out of our equipment. This is an aside but I heard this morning that so many people are on 2G that they are never likely to want to be moved. I think the answer is the other way round. If the 3G network was there, they would get a 3G phone, and so there is a chicken and egg element to it. In our case, we have had to learn to move within our small spectrum constraints and get better services each time.

Q213 Louise Mensch: This comes back to my questions here. You are worried as a satellite network that mobile operators are asking for your Ka frequency to provide backhaul services. You are worried that the harmonised spectrum that you need, because you provide a global service and it has to be harmonised spectrum, is going to be cannibalised by the overweening necessity to have mobile coverage. Are you worried-and this will go to both sets of witnesses-that the demand that is growing all the time for mobile services is going to increase other spectrum users? Is it going to shove you out of the picture? Is that a general concern?

Rupert Pearce: Mobile satellite services I think will always be different because we are by definition global and ubiquitous and we serve communities that have particular communication needs. If you look at the consumer broadband by satellite offerings, I think all I would say there is they are always going to be a few years behind terrestrial technology evolution simply because of the cycle of building satellites. Whatever is new and shiny in the terrestrial world is always going to be restricted in coverage. The proliferation of that technology deeper to the edge of networks, to the edge of a country and to rural, remote or even suburban areas, frankly, is going to take many years. Satellite will always have a role filling in those notspots. There will be a constant evolution of technology. Satellite technology does not stand still. Next generation satellites are 100 times more capable than the ones that came only six or seven years ago. I think from a public policy perspective satellite will have a continual relevance to play at suburban and edge of coverage areas.

Q214 Louise Mensch: You might describe what you do as a safety net, in terms of phone coverage around the world with your funky little phone there, and presumably I would use that if I was stuck in rural Jordan and I needed to make a phone call. I could use your satellite technology to make that phone call in a place that nowhere else could I receive coverage.

Rupert Pearce: Correct.

Q215 Louise Mensch: But also because you provide services on which the public relies, like maritime, air traffic control and so forth, those services, your argument would be, must be protected and because you need harmonised spectrum frequency they must be protected by European regulators. I know that I have used broadband on American airlines when flying in the States, for example. I am assuming you provide that broadband or a satellite company provides that broadband.

Rupert Pearce: Yes, that is us.

Q216 Louise Mensch: Are you, therefore, satisfied that the European regulators who regulate spectrum are taking into account the needs of the niche safety players like yourselves who provide other mobile-

Rupert Pearce: No, they are not.

Q217 Louise Mensch: What about you, Mr Hearnden?

Stephen Hearnden: No, I don’t think they are and I think also, if there is a criticism of Ofcom, they seem to be reducing their commitment to the European programmes. We don’t see as much activity now with Ofcom, who represent the UK in the discussions within Europe on these and other matters. It is a source of concern that certain bands seem to be ceded to the broadband community and there are activities like, for example, the services that Mr Pearce mentioned that could suffer as a result of some of the changes in legislation that come out of the EU.

Q218 Louise Mensch: You would urge Ofcom to be more proactive in reserving a little space for non-mobile operators to use that harmonised spectrum on which your business is run?

Stephen Hearnden: Yes.

Rupert Pearce: You have a conflict between the ITU, the International Telecommunications Union, which sets overarching spectrum policy. They allocate bands to different types of services, which is an international global approach to managing spectrum. The conflict is between that and regional or even national regulators’ desires to farm spectrum as efficiently as possible. When it comes to mobile satellite spectrum or satellite spectrum generally, there are clearly bands allocated primarily to satellite. The L band is a good example of that, Ku band, Ka band and C band. But there is a fistfight that goes on at the level of the local regulator when whatever the ITU says, whatever happens at World Radio Conferences in terms of spectrum allocation, individual regulators are pulling against this and looking to-

Q219 Louise Mensch: You recognise it would be more profitable to use that for broadband-

Rupert Pearce: Much more profitable.

Q220 Louise Mensch: -but your argument is that the public policy issue, the need for us to have this global safety net, requires that regulators set profit aside and carve out a little niche for you guys?

Rupert Pearce: This is at the heart of the duality in our relationship with Ofcom because Ofcom is one of the world’s leading regulators in terms of their free market, economistdriven orthodoxy, which would say just give all spectrum to the highest bidder. We obviously would say that is great nine times out of 10, but one time out of 10 recognise that there are companies like Inmarsat and others that are providing important services to vital communities on a global basis and that if you turn around and salami slice Inmarsat 200 times in 200 different countries, the whole business model ceases to make sense.

Q221 Jim Sheridan: I feel like an extra in Star Trek here. With the technological advances with these satellites that are up there just now, will these become obsolete and, if so, what happens to them then?

Rupert Pearce: We currently have three generations of satellites flying and in a sense they represent 2G, 3G and 4G in terms of their technological evolution. Our oldest satellites provide just voice services and low speed data. Our most recent satellites do half a megabit per second to a laptopsized terminal that we just showed you and deliver 60 times the communications capacity of our prior generation. That is since 1990 all the way to today, so it is not a very long period of time to see that kind of technological evolution. The older satellites support legacy services, just like 2G does not just switch to 3G overnight, but over time a satellite lasts about 15 to 20 years. The thing that kills them is not the fact that they have a redundant technology-you can usually find someone to sell this old technology to-they just run out of fuel.

Q222 Jim Sheridan: Do they sort of disappear to be satellites in the sky or-

Rupert Pearce: You deorbit them, which means you turn them to face deep space and say, "Goodbye". You have to leave enough fuel to deorbit them so you can do a controlled deorbit. They don’t fall back to earth. They are sent to a satellite graveyard, which is outside the orbital arc where satellites are sent to die.

Q223 Chair: As the mobile operators come to use the 800 MHz spectrum, how great a risk do you think there is that their activities are going to interfere with other users?

Stephen Hearnden: If you look at the 800 MHz band being given over to, say, LTE or 4G, which is the technology that seems to be the technology that will be chosen by the mobile operators should they be successful in the auction, there is a case where potentially a mobile base station operating at 800 MHz could interfere with terrestrial DTT receivers, in other words, a broadcast receiver, a TV that somebody has in their living room. There are a number of mitigation techniques that can be used and Ofcom have recently announced a consultation on this matter. They have identified a number of different interference mechanisms that can be resolved by filtering techniques and repositioning antennas and so on. They also are proposing to set up an organisation that will deal with any potential interference cases that occur. These cases could be at one level just a sporadic, very occasional problem, very much like the problem that you see today when if you are in a public place with a system like we have here and somebody has a GSM handset that registers, you get the "ditditdit" noise that I think we are all probably familiar with. That is at one level of interference.

At another level of interference it is so great that it effectively prevents you from receiving that TV broadcast. They are the ones that concern the mobile industry and the proposals are that the mobile industry would assist in the payment of alternative methodologies or mitigation techniques to resolve the problem. At the moment, Ofcom are out on consultation to that. The consultation is scheduled to close by some time in early August. They have already done some technical studies, which have also been published, and currently the industry is looking at these studies to see whether this is a reasonable attempt at trying to measure the amount of interference that will be caused. It is likely to be a few percent and probably there will be one or two people who will be permanently affected and the mitigation techniques are not sufficient, but it will be very, very small. In those cases, possibly the viewer would be encouraged to move to perhaps Freesat as an alternative delivery or cable TV as a delivery technology, as an alternative to Freeview. But it is very small and the industry does recognise it and the industry is working with the regulator to try and resolve it.

Q224 Chair: You think Ofcom are on top of this?

Stephen Hearnden: I think Ofcom are on top of that, yes.

Q225 Chair: Intellect represent a number of members from the PMSE sector who have been vocal, I think it is fair to say.

Stephen Hearnden: They certainly have, yes.

Q226 Chair: Do you think they have a serious case?

Stephen Hearnden: I think Ofcom have done a good job, on balance, of recognising that PMSE pervades an awful lot of our lives in terms of entertainment, outside broadcasts, and the industry is vital if we are to get effective communications. Without PMSE there would be no Olympics, effectively, so it is a very important sector of the community. We don’t represent them, but we do recognise that they are an important group of people. The methods that have been suggested and adopted by Ofcom for moving them from channel 69, as we call it, down to channel 38 I think has been a fair and reasonable compromise. With the part funding of the new equipment where that equipment can’t tune down to the new frequency, I think that has been a fair and equitable solution for the greater good of delivering mobile broadband as a public policy objective.

Q227 Chair: Turning to Inmarsat, are you confident that Ofcom are fully taking your interests into account in what they are proposing?

Chris McLaughlin: We have had some fun and games, to put it mildly. Ofcom seems to be suffering from a need to change. It is not too much of a secret to say that they have always seen themselves as the guardians of the consumer in the UK and nowhere else. They have struggled, shall we say, to think about how they could also be the guardians of leading British industry that operates with spectrum. Now, there is hope because they have expressed to us privately the view that they would love Government to change their remit to enable them to also give support to business. Clearly, that is not for us to beg for here, but I just mention it.

I think that one of the challenges we have is that Ofcom in the past has seen itself as a facilitator within, if you like, the European tent, the European camp. Spectrum has become an issue within Europe over the last Hungarian Presidency and it is going to be a key output, as it was described to me, of the Polish Presidency. Their intention is to make a Europewide spectrum policy to be in place before the World Radio Conference in 2012 so that there will be a European alignment. From our perspective, the last WRC was spent defending the C band links. My colleague has reminded me I misspoke. I said WiFi; I of course meant WiMAX. I am also feeling like an extra as well. I am sure you picked it up, Mr Sheridan. We would like to feel that in these negotiations Ofcom is tasked with thinking about the business end of UK and the growth prospects that have been identified both by this Government and the previous Government with regard to space.

Rupert Pearce: I think, just to add a little bit on that, two things. First of all, I have to personally pay tribute to Ofcom’s great support to Inmarsat internationally, so it is not black and white. We have seen them mobilise teams tremendously powerfully to support us overseas, most notably in the United States where our L band spectrum was under attack from the FCC through their support of hybrid networks in North America. It was through the support of Ofcom that we came out with a very strong position there and sustained our business and, in fact, were able to enter into a joint venture to provide ATC services in North America. We had a lot of support from Ofcom there.

Ofcom are also in the vanguard of supporting us in the S band for next generation networks as well and have developed a very solid, balanced regime for the deployment of terrestrial services in the S band complementing a satellite service. They have an AIP approach for us there that for us is innovative and works and actually can build with our business, so I pay tribute to that.

Nonetheless, the two areas we do worry about is we do feel that Ofcom is split between wanting to be the regulators’ regulator, proselytising new ways of regulating outside the UK to its comrades there, as against wrapping itself in the Union Jack and supporting British business out there in the rest of the world. Domestically, we feel uncomfortable with the economicsdriven approach to spectrum policy, which I think if that is the only approach and it is not leavened by public policy objectives as well and recognising there are other businesses that can’t compete for spectrum on the same basis as, say, a Vodafone or an O2, then over time businesses like ours will struggle to compete in the UK.

Stephen Hearnden: Perhaps I could just add to that, and I agree entirely. I think Ofcom do a great job in terms of delivering their requirements under the Communications Act inasmuch as they are judged on their efficiency in terms of delivering what they call economic value. Economic value has served us very well. However, there are some concerns that they are very much geared towards the citizen consumer, which is nothing wrong in that, but the difficulty we have as an industry is that we are striving to deliver innovation and new services to the citizen consumer. The industry would like some sort of help and it is not a pleading but what we are looking to do is to try and encourage Ofcom to strike a balance between economic value to the exclusion of everything else versus the idea of recognising that some things don’t fall into that.

A good example, which we made in our submission, is that the emergency services are in need of additional spectrum for the future growth of the emergency services, the blue light network. They are not in an easy position to bid for spectrum on a pure auction basis. Similarly, other public sector needs are not adequately covered because under economic value they have to pay the full market rate and there needs, I think, to be a recognition. If the Communications Act is revisited by Government, by Parliament, over the coming two years, as Jeremy Hunt has indicated may be possible, then I think it gives Parliament the opportunity to look at that to see whether or not Government can assist these sorts of players in the market and ensure that they are protected for their legitimate needs, which they would find difficult to deliver.

Chair: That, I think, brings us quite neatly to Damian Collins.

Q228 Damian Collins: We have not discussed so much in our public sessions so far but we are debating the use of public spectrum and the amount of spectrum that is reserved for public use, particularly for the military, which does seem to be a great deal of the spectrum available. You said that we would not have the Olympics but for white space, but we are seeing some of this military space as well that has suddenly become available. How much spectrum should the Government be releasing in order to maintain a balance between the public need and also the public demand for increased commercial services?

Stephen Hearnden: I think there is a good case for releasing some of the underutilised spectrum that is held by MoD, CAA and other parts of the public sector. However, the release of it, as we found in our discussions with MoD, is not easy. We have been working with them. We provided a demand forecast last year for them, which was an industry-collated input of where we saw the value of which pieces of spectrum should be released first. The biggest benefit in releasing that spectrum is the spectrum that can be harmonised within Europe. Harmonised spectrum, spectrum that is available not just in the UK but is available in Europe as well, and ideally globally, is worth a considerable amount more money because harmonised spectrum commands a bigger premium in terms of the volume of equipment that can be developed and the cost of that equipment comes down and the innovation goes up. We have identified several bands that we would like MoD to see about releasing, but we do recognise that in times of war and terrorist threats that spectrum may have to be clawed back for use in the event of a national emergency. Whether 500 MHz is the right number, which is the figure that has been quoted, that seems to be a number that probably came out of the US. It was part of President Obama’s statement.

Whether it is 500 MHz or 300 MHz, what we see is there are a number of bands and we have put an order down of those bands that we would be very happy as an industry to work with Government towards that release in a timely and efficient and costeffective manner. One of the things we are a little bit concerned about is that Ofcom are quite a long way divorced from that process, because in the release of spectrum, with respect to Government, they don’t have a lot of experience of releasing spectrum; Ofcom do. The pitfalls and minefields of developing auctions that don’t result in litigation and judicial reviews are quite important. We would encourage Government and Ofcom to work more closely together to the release of this spectrum.

Q229 Damian Collins: From what you said, it sounds like there is a good degree of untapped potential.

Stephen Hearnden: Yes.

Damian Collins: That is straight forward. Thank you very much.

Q230 Chair: Just before we finish, can I just put one question to Raj? Putting on your previous hat, I think you were at BIS before you went to Intellect?

Raj Sivalingam: BIS, yes.

Q231 Chair: You will be aware that the responsibility for spectrum policy has moved from BIS now to DCMS. As a now more detached observer, do you think that that has any implications? Are you confident that DCMS is going to be able to take on this role?

Raj Sivalingam: I think, to be fair, that caused quite a bit of concern within industry. I think that is quite well known. We are very keen. We had an established relationship with BIS and that is not the case with DCMS, certainly in the communications market environment. I think we are reaching out, shall we say, to build those relationships and certainly I think there is a willingness. In fact, the mobile broadband issue has helped heighten the importance within DCMS, but I think there is some way to go. Certainly, I think we are working very hard to build those relationships with DCMS to do that.

Q232 Chair: Does anybody have anything to add to that?

Chris McLaughlin: I think the only observation, if I may, is that in the move across I have noticed a number of civil servants from the BIS have moved across and so there must be some continuity between the parties there as well, so that is encouraging.

Chair: Good. I thank you very much.

[1] Note: Witness held up Inmarsat’s BGAN terminal to the Committee.

[2] Witness correction: 50 %.

Prepared 31st October 2011