125.At the start of its strategic review, Ofcom explained that increasing competition, reducing prices for consumers and encouraging investment in faster networks were its three main aims. There appears to be universal agreement that investment in high-speed connectivity is needed to support long-term economic growth, a cornerstone of the Government’s Productivity Plan in 2015. Moreover sub-optimal investment in the underlying telecoms infrastructure can have the effect of causing substantial disruption and inconvenience to people’s lives, and result in the provision of a poorer quality of service. Ofcom sees the next decade being all about a strategic shift to large-scale investment in more fibre to the premise networks as an alternative to BT’s development of its copper-based technologies.
126.There are polarised views on whether BT made the right choice in opting for the choice of “fibre to the cabinet” for its commercial rollout of superfast broadband. But in 2009, FTTP would have been momentously more expensive than the FTTC alternative and much slower to deploy. However, there is concern over BT’s persistence in clinging on to copper-based solutions. Several of BT’s competitors see this as BT eking out as much value as it can from its core copper access network. In doing so, they observe that BT, as a commercial company and owner of a substantial copper legacy, is acting entirely rationally but there is concern it is failing to future-proof the Openreach network or cater fully for the needs of those who rely on it. However, facilitating the ability of other infrastructure providers to invest in fibre is likely to stimulate BT to invest more in fibre.
127.While Sharon White recognised that there was a strong commercial interest for BT “to squeeze the juice” from assets and super charge copper speeds as consumer needs rise, BT recalled that when it launched its superfast programme in 2009 it was told by rivals that there was no demand for superfast speeds and that neither Sky nor TalkTalk chose to sell or market superfast product to their customers for some years after it became available. However, Sky explained that there was a significant cost in upgrading customers from copper-based services to fibre through Openreach. For BT Consumer, the money paid to Openreach for transferring its customers remained within the BT Group and so was less of a disincentive to moving customers to fibre.
128.Over the last 10 years BT has invested £10.5bn in its digital infrastructure, committing over £3bn in its superfast broadband network development. Its commercial fibre programme has extended “superfast” availability to over 21 million premises. At the same time, Virgin Media has been a strong competitor to BT in certain parts of the country, helping push the case for BT’s commercial broadband investment through the expansion and development of its own cable network. Virgin Media is investing £3bn itself in improving its fibre network, increasing the network’s reach from 13 million to 17 million homes. More recently, BT has announced that it plans to reach 12 million homes and businesses by 2020 with ultrafast broadband through a mixture of technologies including G.fast and fibre to the premise.
129.Ed Vaizey is now talking of a ‘Gigabit Britain’ for the next decade, although currently there remains some uncertainty over how many consumers want faster services and over people’s willingness to pay very much more in subscription fees to obtain higher speeds. Yet growth in trends in data consumption is conclusive in pointing to a need to future-proof networks as data-rich services become more routinely used. Cisco Systems forecasts that global-fixed broadband speeds will nearly double by 2020, reaching 47.7 Mbps, up from 24.7Mbps in 2015, and that global internet traffic will increase nearly three-fold in the same period.
130.The question now faced is whether the UK’s current market structure creates the right incentives for long-term investment and competition to deliver a fit for purpose digital infrastructure in the UK. If Ofcom’s objective is now to set the right conditions to create more choice for people and businesses, while reducing the country’s reliance on Openreach, this will involve encouraging the rollout of more FTTP networks as an alternative to BT’s planned investment in copper-based technologies such as G.fast and VDSL.
131.Through its regulation of BT, Ofcom told us that it does not start from what is the desirable level of investment but instead from a position that BT should not be making excess profits, which is why it sets Openreach’s prices based on its cost of capital and incentivises it to maximise efficiencies. In so doing, Openreach should then be in a position to invest in the network.
132.There is a risk that BT could just rest on its laurels, believing its incremental programme of VDSL, fibre to the cabinet, G.fast and a bit of fibre to the premises will keep it in the right place for some years to come and not increase its investment overall. If other smaller providers are to invest, they will need certainty that embarking on competitive infrastructure provision is worthwhile and will need to hear the right regulatory noises to gain confidence regarding risk. As things stand, according to Independent Networks Co-operative Association (INCA), the right regulatory environment will encourage more investment. It noted that there was a growing appetite from private investors and communities to get involved, with significant funding going into CityFibre, Hyperoptic, Gigaclear and others. As of last autumn, Gigaclear’s funding alone had amounted to more than 10% of the total capital investment committed by BT to the rural broadband programme and Gigaclear told us it had secured more since. Some of the larger nationwide communication providers, including Sky, TalkTalk and Vodafone, are also willing to invest more if the conditions are right.
133.Smaller alternative providers want access to finance, and often would prefer loans rather than subsidies. INCA explained that loans and guarantees which acted to reduce the cost of capital offered a very different profile for a project than grant aid. In the UK at least one local authority, West Oxfordshire, has supported a local project—Cotswolds Broadband—with loan funding instead of a grant. On a larger scale, the Government also provided a loan guarantee scheme, for which Virgin Media had pre-qualified its Project Lightning’s network expansion project.
134.We were told that initially getting access to capital could be a real challenge for new infrastructure providers. The Wireless Infrastructure Group (WIG) explained that for new entrants sources of capital for building infrastructure were particularly expensive and it was only when a company reached a critical mass, that it then was able to tap into the huge pools of infrastructure capital that was looking to come into the sector. As scaling up is difficult to achieve, WIG recommended that any actions that could speed up lowering the cost of capital for the challengers would support infrastructure growth.
135.In the Spending Review 2015, the Government announced it was exploring setting up a new broadband investment fund, to support the growth of alternative network developers by providing greater access to finance. This fund is expected to be supported by both public and private investors, and managed by the private sector on a commercial basis. The Treasury is currently consulting on the design of the fund and plans to select a fund manager by the autumn and to be in a position to begin investing by the end of the 2015/16 fiscal year. Given the rise in alternative providers, we agree with Ofcom that the future must be about infrastructure competition as well as service competition. In line with this aim, the Treasury’s plan to set up an investment fund for alternative network developers should provide the financial support necessary for network building and enable challenger companies to achieve adequate size and scale to allow them access to low-cost debt which would help enormously to accelerate scaling up of alternative network infrastructure builders in the UK.
136.Ofcom regulates BT’s access infrastructure in a number of ways to allow third parties to use its assets to provide their own retail services, in competition with BT’s retail and wholesale businesses. Openreach supplies various wholesale broadband services to communication providers that supply broadband at the retail level, enabling rival providers to either to connect their core networks with their customers’ premises using BT’s local loops or to resell BT broadband services on to their own customers. Communications providers can do this by either unbundling BT’s local exchanges and using Openreach’s wholesale products, local loop unbundling (LLU) for standard broadband or virtual unbundled local access (VULA) for superfast broadband, or by using wholesale broadband access (WBA) products sold by BT Wholesale.
137.Ofcom regulates the terms on which LLU and VULA are supplied, and for wholesale broadband access products in selected areas where there is limited competition. Wholesale line rental (WLR) is a wholesale product taken by providers who want to offer fixed-phone-line rental to their customers. This is used extensively by the same operators who supply broadband over BT’s access network, as these firms want to take control of the customer relationship and many customers prefer to have a single bill. Wholesale line rental is subject to a cost-based charge control.
138.LLU is a good example of the impact of policy decisions on markets. In the period between 2006 and 2009, Ofcom set out to support the development of LLU-based competition. As part of this strategy, Ofcom reached agreement with BT on retail price floors with no price cap, while lowering the (cost-based) charge control for LLU, to allow room for the new entrants to become established. While this approach enabled BT to make relatively high returns in the WBA market, Ofcom believe it was a key reason behind the success of LLU and the consumer benefits that followed.
139.Ofcom now faces a dilemma over whether and when to introduce a price control for fibre access products. In order to make investment decisions, communications providers require visibility and a degree of certainty of future revenue streams before they are willing to lay fibre into the ground. Ofcom has adopted a period of pricing freedom for VULA in recognition of the risks that BT took on when it decided to invest in 2008. This approach recognised that a firm needs to benefit from sufficient upside potential to offset the downside risk of failure. However, Ofcom has indicated that BT has now enjoyed a significant period of pricing freedom on VULA and said there would be a variety of arguments, some in favour of reduced pricing flexibility and others of maintaining some flexibility to leave room for further competitive entry and expansion.
140.The position of VULA is therefore not straightforward. Setting the wholesale price too low discourages alternative fibre providers from building, as there needs to be margin for new entrants if they are to compete with BT. Leaving the price where it is will discourage those downstream competitors who currently offer LLU based services from actively promoting VULA-based services. Looking ahead, the options appear to be to continue with the current position of no cost-based control and just a ‘margin-squeeze test’ or regulate the price of VULA product at cost which could bring the price down and remove some of the margin for others to build fibre infrastructure.
141.In terms of the original design of VULA, Sky complained that it did not enable other providers to offer differentiated products to the extent they could through local loop unbundling. At present it is not technically possible for providers to unbundle the fibre product at the exchange, as they can with the copper equivalent. Therefore Sky see the development of VULA (and also G.fast) as technologies created by BT to allow it to cement its advantage in fibre and to continue stretching out the life of its copper assets.
142.In the context of driving further fibre deployment, we see the choice facing Ofcom as between satisfying the needs of consumers now, i.e. by maintaining lower prices; or the needs of consumers of the future, by encouraging investment in fibre networks and allowing a pricing freedom to incentivise alternative providers to invest. The price of copper broadband product LLU will no doubt keep a check on the fibre price. Not introducing a wholesale price cap on Openreach’s fibre broadband for a while more would allow other providers to continue to make a sufficient return on their investments for further network deployment.
143.A significant piece of Ofcom’s strategy to facilitate network building is to open up access to BT’s ducts and poles. This will allow other providers to deploy their own fibre and equipment to deliver services at a lower cost, as well as enabling mobile network operators to connect to their masts and base stations from their own networks. Passive Infrastructure Access (PIA) was offered by Openreach to allow BT’s competitors to lay an alternative fibre product of their own, rather than take BT’s superfast option which cannot be “unbundled”. The situation in other countries, for instance in Spain and Portugal, has demonstrated that the ability to use existing passive infrastructure can dramatically decrease costs associated with fibre deployments and allows operators to direct savings into further expansions. However, it is not entirely clear how far the experience of other countries in this respect extends to the UK—for instance, whether their ducts were in a better condition and offered more capacity and space.
144.We heard that use of existing Openreach’s ducts and poles by competitors had so far been minimal. Several witnesses complained that BT’s accreditation process to allow personnel access was very restrictive and that the current charges, access and mapping of Openreach’s passive infrastructure were not fit for purpose. For instance, we were told that the processes and costs around surveys required to allow other network operators access to Openreach’s ducts and poles were prohibitive. Vodafone explained that in Portugal eight years ago there had been no auditable records of its passive infrastructure. However, after the incumbent was incentivised to open up access, it was now possible to order access via an online portal and have fibre pulled though ducts days later.
145.According to Vodafone, there was no reason why that physical infrastructure which was “effectively gifted” to BT should not be used by all competitors in the market. In Portugal, Vodafone had now passed over 2 million premises and connected over 300,000 homes with fibre connections. In its estimation, the deployment had been 25% cheaper in Portugal than in the UK. This had been purely on the basis of using the ducts and the poles that Portugal Telecom had opened up.
146.BT told us that since its passive infrastructure had been available there had been only 17 requests that had led to communications providers pulling their own cables through its ducts. If demand changed, BT said it would investigate what changes could be made if there were shown to be any genuine obstacles for competitors that were in its control to remedy. Nevertheless, BT noted that fibre investment involved long-term paybacks and improved access to its ducts and poles would not change this materially.
147.Ofcom are concerned by the low level of take up of the PIA product and is making proposals in its Digital Communications Review to facilitate access further. Sharon White admitted that Ofcom had not given this issue adequate attention in the past but would now require Openreach to provide a new database showing the physical location and characteristics of its ducts and poles and would, if necessary, enforce these changes through its competition powers. This will undoubtedly involve a huge amount of work. However, Ofcom said it was committed to having the detailed guidance on access and dispute resolution ready by the summer. It seems likely that Openreach’s own records of the availability of duct and pole space may be deficient and require significant remedial work. There will also need to be a protocol in place to decide who covers the cost of repair to Openreach’s passive infrastructure when it is found to be defective but a communication provider wishes to use it for a deployment of fibre.
148.The requirement of easy access to BT’s passive infrastructure on reasonable terms is vital, as it will allow network builders to come to better investment decisions. This issue should have been given a higher priority by Ofcom much earlier. Key to its success will be Openreach providing online access infrastructure maps so that providers can plan their deployments. Pricing will also need to be regulated in a way to encourage investment. Openreach’s processes must be realistic and flexible to meet alternative network builders’ needs and not just those of BT, and Openreach must demonstrate a willingness to deliver access arrangements that are flexible and encourage take up.
149.Given the lack of progress since 2009 in increasing third parties’ access to BT’s infrastructure, Ofcom must treat this issue with much more urgency. It should set out a programme of work to facilitate take-up of access to Openreach’s ducts and poles facilities by non-BT providers. Access arrangements will need to be supported by an Alternative Dispute Resolution process to resolve any problems, perhaps in line with the mechanisms used to support effective functioning of the Electronic Communications Code.
153 Government launches plan to fix the foundations of the British economy, BIS, 10 July 2015.
154 Strategic Review of Digital Communications, Ofcom, Executive Summary.
155 Australia’s plans for a full FTTP rollout had to be abandoned in favour of an approach using a mix of technologies including FTTC and wireless solutions, owing to cost and the scale of the challenge in delivering such a deployment. A report for the Broadband Stakeholder Group in 2008 estimated that FTTP solution in the UK would have cost five times more than a FTTC deployment.
156 BT has announced that it is planning to offer ultrafast speeds to 10 million premises through G.fast, a copper based technology.
157 Q150 [Sky]
159 BT ()
160 Q119 [Sky]
161 Our Charter, Building Britain’s Connected Future, Openreach, September 2015, page 10.
162 Together BT’s commercial programme and the BDUK’s subsidised programme have passed about 25m premises.
163 Defined as speeds of 100Mbps or above.
164 ‘BT to invest billions more of fibre, 4G and customer service’, BT Press Release, 5 May 2015.
166 Average speeds in towns and cities can appear to be low not because of lack of availability but because people have chosen not to take up faster services.
167 Cisco Visual Networking Index: Forecast and Methodology, 2015–2020.
169 Independent Networks Co-operative Association ()
170 Q445 [Gigaclear]
171 Q142 [Sky & Vodafone]; Q363 [TalkTalk]
172 See: Department for Culture, Media and Sport ()
173 Q432 [Wireless Infrastructure Group]
174 It will complement the UK Loan Guarantee Scheme for larger infrastructure projects.
175 Openreach’s charges for LLU are now subject to a cost-based charge control.
176 Ofcom ()
177 Ofcom ()
178 “There is regulation of VULA to prevent BT discriminating in favour of its own retail businesses: this takes the form of a margin test comparing the margin between BT’s SFBB retail price and VULA price with its retailing costs.
179 VULA is currently being reviewed by Ofcom in its wholesale local access market review, with a final decision expected to be made by April 2017.
181 Q364 [Dido Harding]
183 Q133 [Vodafone]
184 In Portugal, the regulator has compelled the incumbent to grant access to poles and ducts since 2006.
185 Q100 [Vodafone]
186 BT ()
187 BT ()
18 July 2016