Joint Committee on The Draft Communications Bill Appendices to the Minutes of Evidence


Memorandum submitted by plc

   Freeserve were very pleased to have the opportunity to participate in the deliberations of the Joint Scrutiny Committee yesterday.

  As you will appreciate our primary concern is to ensure that OFCOM is in a position to regulate the dominant incumbent, in such a way as to achieve effective and sustainable competition, particularly in the emerging Broadband market.

  Commensurate with the Committee's request for specific proposals, we have prepared a supplementary submission which is attached, and which we trust you will place before the Committee for their further consideration.

  I am personally convinced from our experience dating back to December 2000, when ADSL was first launched to the consumer market, that an entirely new approach to regulation commensurate with the increasing emphasis on Competition principles rather than ex ante regulation is required if real competition is ever to be introduced. The UK has a unique opportunity to establish a truly world-class, competitive market for Broadband and therefore it is imperative in our view that a focal point is established within OFCOM if this is to be achieved—hence our suggestion for the establishment of a Competition Board, within the corporate framework being developed.

  We will of course be providing further, more detailed comments in response to the consultation process, but if the Committee seek further clarification on any of the issues raised in our supplementary submission I will be happy to provide that.


SUMMARY AND KEY CONCLUSIONS is the UK's largest internet service provider (ISP) with close to 2.5 million customers.

  We have been at the forefront of providing affordable internet access to consumers and are the only ISP to be selling broadband through high street shops rather than through web sites and call centres.


  It is crucial that the Parliamentary scrutiny of the Communications Bill in its draft and final versions pays adequate attention to issues covered by OFCOM, even when they are not explicitly mentioned in the draft Bill (ie internet access and the development of broadband).

  As well as a new regulator, the UK urgently requires a new approach to regulation based on tackling abuse of market power. This must be at the heart of OFCOM's work.

  BT's dominance in the residential voice telephony market has provided it with an unmatchable advantage in terms of selling broadband.

  Marginal short-term gains, aimed at stimulating demand, should not be allowed to obscure the long-term effects that anti-competitive behaviour will have on the broadband market.


  OFCOM should have a clear duty to act in the long-term interests of consumers.

  A Competition Board should be established within OFCOM to ensure that competition issues can be given the expert and detailed attention they require.

  The Communications Bill should be explicit in its support for the development of a competitive broadband market.

INTRODUCTION welcomes this chance to submit further comments following our oral evidence to the Joint Committee on 13 June. Freeserve is member of the Internet Service Providers' Association (ISPA) and in addition to this paper we support ISPA's submission to the Committee.

  Freeserve is the UK's largest internet service provider (ISP) with close to 2.5 million customers accessing the Internet through dial-up and unmetered narrowband as well as broadband services. (Dial-up internet access is where the consumer only pays for the price of the local call to connect to the internet. Unmetered access is where the consumer pays a fixed monthly rate for unlimited access to the internet with no call charges. Narrowband is a connection through a normal BT phone line. Our broadband service provides fast, always-on internet access through BT's phone network for a fixed monthly fee.) We have been at the forefront of providing affordable internet access to consumers and are the only ISP to be selling broadband through high street shops rather than through web sites and call centres.

  Unsurprisingly much of the attention towards the Communications White Paper and the draft Communications Bill has focused on the implications for broadcasting and in particular the regulation of content. This attention rightly reflects public concerns, however it is crucial that the Parliamentary scrutiny of the Bill in draft and final versions pays adequate attention to issues within OFCOM's remit, even when they are not explicitly mentioned in the draft Bill (ie internet access and the development of broadband). While these issues may not be matters of immediate public debate they are of substantial long-term consequence to consumers and to the UK economy.


  We welcome the establishment of OFCOM and the framework set out in the draft Communications Bill. We believe that the development of a converged regulator and converging regulatory regimes is ambitious and highly innovative and has the potential to make the UK's communications regulation amongst the strongest in Europe. However, as well as a new regulator the UK urgently requires a new and stronger approach to regulation. This is self evidently true for the simple reason that 18 years after the privatisation of BT and the creation of Oftel in order to develop competition in the telecoms market, there is still a dominant operator which controls access to over 80 per cent of homes.

  The absence of a competitive market in significant areas of the telecoms industry has been put down to a lack of regulatory will in Oftel by some commentators, others have argued that the regulatory will has been present but BT has been able to run rings around the regulator and frustrate competitors. The ongoing situation in telecoms regulation does not seem to reflect the pro-competition regime the Government and Oftel have indicated they wish to see. Increasingly commentators are now talking of "regulatory capture" to describe the relationship between Oftel and BT.

  The local loop unbundling episode clearly demonstrated how the absence of a clear regulatory purpose can allow anti-competitive behaviour to go unchallenged. The time taken for decisions to be made by the regulator allowed BT to gain a significant march on its competitors to the point that the majority pulled out of the process or suffered the affects of the downturn before they could put their business plans into action. Freeserve was not seeking to compete with BT at this level, but the lack of competition between operators means that we and other ISPs have no choice but to use BT to provide broadband to our customers. The parameters of the products we offer are dictated entirely by BT, limiting choice, innovation and service.

  We are concerned that the regulator seems unable to effectively prevent anti-competitive behaviour from the dominant incumbent which has retained its dominance since it was handed a state-funded monopoly in 1984. For further competition to develop in the network access sector a more rigorous approach based on tackling abuse of market power must be at the heart of OFCOM's work. This requires the Communications Bill to contain carefully crafted objectives along with balanced and appropriate powers. The risk of not adopting a new approach is that the lessons of unbundling the local loop will not be learnt in relation to other forms of broadband access.

  A specific example of where we see the wrong balance being applied may be seen at Section 69 (Conditions about network access pricing etc), where in our view there should be a positive obligation on OFCOM to impose conditions to prevent price distortions arising, not as presently drafted, an obligation not to impose conditions unless certain criteria are met. This lack of a positive duty to promote competition may even run contra to the duty to fulfil community obligations set out in section 4 of the Bill.


  The key reason why Oftel's approach to regulation has been unsuccessful is that it has prioritised short-term headline gains over longer-term sustainable measures that enable competition to develop. Although price cuts by a dominant player may in the short term please consumers, in the long term consumers are best served by a number of players competing on price and services. It is for this reason that we would like to see a clear duty for OFCOM, and a primary goal against which it can be evaluated, of acting in the long-term interests of consumers (Clause 3(1)(a) in the draft Bill). Such a duty would empower OFCOM to act with more clarity and more swiftly to prevent abuse of market power by dominant players.

  Another area in which the new regulator needs to be strengthened is in the knowledge and expertise of its staff. When dealing with an entrenched dominant player, a regulator needs to have a great deal of in-depth knowledge which can only be gained from experience in the regulated industry. OFCOM must equip itself with industry and competition law experts rather than simply expecting professional civil servants and economists to match the knowledge of those with years of expertise. This will require OFCOM to be able to be flexible in terms of the pay scales it can offer to prevent its best staff being poached by those it regulates.

  To harness this level of expertise to proper effect we recommend that a Competition Board be established within OFCOM to ensure that competition issues can be given the full and detailed attention they require. This Board could follow the model of the Content Board with a panel of experts being chaired by a non-executive member of the OFCOM Board. This level of expertise and ability to focus would also ensure that OFCOM's decisions are made faster and are more robust. Robust decisions are important to ensure that decisions are less open to appeals and legal challenges which further slow down the process of effective regulation. The Board would in effect ensure that there is a constant process of evaluating the level of competition in the market rather than needing to wait for drawn out investigation and referral processes. That having been said, we believe the Appeal process should take no longer than 90 days.

  A Competition Board would also be able to address and manage, the issues of concurrent powers between OFCOM and the Office of Fair Trading. At present concurrency does not act as any sort of check on the competition decisions of Oftel, in spite of the fact that Oftel has not used its considerable powers under the 1998 Competition Act once. We would hope that the OFT continue to act as a check on OFCOM, but a Competition Board would make this role less crucial and less onerous.

  It is to be hoped that the strengthening of the regulators duties and the establishment of an expert board to examine and take action on competition, will rectify what we increasingly perceive as Oftel's laissez-faire attitude to the application of competition law.


  The development of broadband is the crucial factor for convergence. Without mass, affordable high-bandwidth internet access content cannot be viewed and customers and citizens cannot interact with innovative private and public services. This market must not be allowed to be dominated by a single network operator.


  BT's dominance in the domestic voice telephony market provides it with a huge advantage in terms of broadband. This is not simply because it is able to leverage the familiar BT brand from voice services to its own ISP, BT Openworld, but because it already controls the customer relationship to an extent that competing ISPs and voice telecoms services cannot hope to match. BT asserts that its wholesale, retail and ISP businesses are separate and relate to each other on an equal basis to competing companies. However, despite rules aimed at preventing cross-marketing BT continues to collect information through its retail business which can be used to leverage its own ISP service on its existing customer base. An example of this is BT's "Census" circulated to the majority of its residential customers which collected market data about customers' use of internet services, satisfaction levels with their ISP and interest in broadband. This clearly sought to gather information from BT's residential customers in circumstances which cannot be matched by BT's competitors. [110]

  BT's latest announcement in relation to broadband is that it will begin offering a "no frills" service directly through its retail arm (as opposed to through BT Openworld) and billed on the normal domestic telephone "blue bill".[111] BT's dominance in the domestic telephone market makes this package unmatchable by any other player in the ISP market. The statements to the Committee by the BT CEO clearly demonstrate an intention to manage BT as a single, integrated company.

  As well as allowing the company to side-step provisions on discriminating in favour of its own ISP business, this package illustrates how questionable the assumptions around BT Openworld's business plans are. This "no frills" service which would offer broadband connectivity without an ISP will be sold at only £1.99 per month cheaper than the BT Openworld service "with frills". Given that BT will be able to use its existing customer care, technical support and billing systems to support this service, it is clear that either this price is uncompetitive and should be much lower or—more realistically—that BT Openworld must be losing millions of pounds in its broadband offering. Given BT Openworld's £102 million loss (EBITDA) it appears to us that the BT Group is following a loss making strategy in order to squeeze competition out of the market. BT is of course the only company who can follow this strategy as it makes money from the wholesale fees that BT Openworld pay BT Wholesale regardless of the price the consumer pays.

  These developments have been welcomed by some as BT playing its part in developing the broadband market. However, the short-term gain of marginally lower prices should not be allowed to obscure the long-term effects that this behaviour will have on the industry and the broadband market. OFCOM must be equipped to prevent this sort of cross-subsidy.

  When examining these issues Oftel has stated that BT should be able to exploit the economies of scale it has, however it must not be forgotten that BT's scale is due only to the fact that BT was once a state funded monopoly rather than being the result of competitive commercial risk taking venture.


  The latest figures on broadband connections released by Oftel on 12 June would seem to justify our concerns. The figures indicate that since the reduction in wholesale rates BT's share of the broadband market has rapidly increased although a lack of transparency means it is difficult to be precise about the rate of growth in market share they are currently achieving. The biggest risk to not changing the UK's regulatory approach is that broadband will develop with a dominant monopoly supplier and thus a private company will become the single gatekeeper for all domestic users of broadband and consumers and public services will become beholden to that company. Furthermore, dominance in a market inevitably stifles innovation, but it is innovation of services and pricing that is vital for a new market to take root and grow. Consequently, not tackling BT's ability to dominate the market will set the UK broadband market back years in relation to our competitor countries, and as we currently rank 22 out of 30 in the OECD broadband ratings[112] we do not have that far to fall.

  Clearly the biggest loser in a non-competitive market is the consumer who will be forced to pay higher prices and put up with a single, lower level of customer service. There are also important economic and social consequences. The damage to UK competitiveness of failing to develop a modern communications infrastructure for businesses cannot be quantified at this stage, but common sense dictates that availability of broadband services, which are in the first instance demanded by businesses, will begin to affect inward investment decisions. Furthermore the "broadband economy" (ie the development and demand for broadband services) will be stuck in a catch 22 where neither demand nor supply will be able to develop. For those companies or organisations which are looking to develop broadband services, there will be no choice but to use BT, their lack of choice in price and service will ultimately be detrimental to the consumers of their services. The supply/demand catch 22 will be particularly harmful in rural and less-prosperous areas, as a lack of competition for customers will mean that there will be no commercial incentive for a dominant operator to invest in providing services in these areas. Freeserve was in active discussions with a number of companies interested in providing broadband in rural areas through local loop unbundling. However, due to the continuous regulatory and commercial delays from Oftel and BT these companies disappeared before LLU ever got off the ground.

  The cost of failing to foster competition in the broadband market is clear. This is why the Communications Bill must be explicit about enhancing competition and encouraging innovation.


  We believe that a change in regulatory approach and regulator is necessary, but is only part of the solution. If the communications industry in this country is to flourish it requires a long term solution rather than the long list of quick-fixes we have endured. The inescapable fact is that no matter how expert and strong a regulator is, competition flourishes through deregulation rather than regulation. The use of ex ante regulatory powers to try and enforce competition on an incumbent which is so large as to be unmatchable by any competitor merely prolongs the agony of market failure and regulation aimed at encouraging competition simply begets more regulation. In its current form BT can never stop being a monopoly as there is never going to be a competitor with a national network able to provide a universal service. A key task for OFCOM will be to examine the structure of the market to ensure that competition is being maximised. In the meantime for competition in the broadband market to develop, strong, expert and speedy regulation is required.


  The Communications Bill is an ambitious and groundbreaking piece of legislation, however the opportunities afforded by a wholesale revision of regulation in the communications sector must not be missed, nor should important sections of the industry be overlooked. OFCOM must have the strength and expertise to tackle the problems created by having such an unmatchable and dominant company within an industry. We do not want to see the situation where the UK requires intervention from the European Commission in order to make our domestic markets work. Finally, it cannot be emphasised enough, that the future of broadband in the UK depends on the Communications Bill creating a strong, expert and speedy competition regulator.

June 2002

110   Distributed by BT Consumer Division in Spring 2002, sections C and F. Back

111   Although BT has offered a packaged billing system to its competitor where they can charge for their services through the blue bill, this is obviously highly problematic for companies who are understandably reluctant to give up their direct relationship with their customers. Back

112   The Development of Broadband Access in OECD Countries, Organisation of Economic co-operation and Development, 20 October 2001, Back

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