Joint Committee on the Draft Communications Bill Minutes of Evidence

Examination of Witnesses (Questions 300-319)



  300. That would be very illuminating.
  (Mr Verwaayen) Get the reality on the table. It is a very important because it has cast a shadow over a lot of the discussions I have heard. First of all, I consider myself a little bit knowledgeable about the whole issue of broadband. I think I sold more broadband to companies around the world than many others in my previous life. On the whole idea about why the take up of broadband in the UK was so different to other European markets, you have to look at the full picture. First of all, there was an offer in the market called FRIACO which is the narrow band equivalent of a broadband high speed Internet access. Technology wise it was a little bit different but for a very attractive price you could have an always on Internet service—and, by the way, two million people here in Britain are using that service. So a substantial part of the market felt that they were well served. Second, the issue about pricing is a no-win situation for BT. You have heard people say it is so important that we have competition and you have to keep the prices high otherwise we cannot compete with them and the same people start to argue later if you lower the price they cannot compete. Other people say if you do not lower the price there is no pick up of the market. If somebody called BT on the day of my arrival and asked, "BT, do you have broadband?" our answer was "no", which was a flat out lie to our customers because in the regulatory environment they had to utter the words "BT Openworld" before they were allowed to say yes. So what I said to the regulator was, "I will never lie to my customers, never ever, so we will say yes and, second, we are going to look to the best possible price available on wholesale allowing everybody else to participate at a wholesale level, an open offer for everybody to get broadband organised." However, broadband is not a natural for consumers. You have to explain it. You have to put effort into that. You have to explain what the benefits are. It is not just knocking on doors and saying ADSL. Most people think it is a disease. It is not just price; it is price, it is services and it is marketing. What we have said is we are going to roll up our sleeves and we are going make sure that the bar is so high. BT is the only company in Europe that has set a four-year target that 25 per cent of all connections in this country will be broadband connections. Nobody else has done that. What you have to do for that is make sure you create the market by low prices, innovative solutions and you go and market the stuff. There is nothing magic about it. You have to do it. The critics, of course, say therefore you stifle the competition because you go with all your weight behind the broadband product. It is a wholesale offer and everybody else who wants to join can join. I can tell you a lot of companies are joining us. The issue here is that sometimes the fear of fear gets the overhead. This is a market that will be valid. I am absolutely convinced that BT will deliver on its promise of 25 per cent of connections being broadband connections.

  301. Perhaps the right question is why did BT not do it before you got there?
  (Mr Verwaayen) I think because you have to take a risk. You have to break the cycle of high prices means low volume/low volume means high prices. You have to go out and say is what I am going to do in the regulatory environment in which we live where we have to prove to the regulator that we can earn back that money in a reasonable amount of time (let's say two or three years) is what we are going to do. It is not only the regulator, it is also the investors. The financial institutions were not quite thrilled originally when they heard the concept of going massively for broadband. They understand it much better today and within the framework that we have given them and the total transparency of how we will operate they understand it. So you have to go through a certain set of assumptions and go and do it.

Mr Lansley

  302. Should we not conclude from the way you presented the argument that effectively as a new chief executive for BT you were able to make the decision independent of market pressures, you were able to make those judgments and those trade-offs between price and volume independent of market trade-offs, through a dominant position in the market-place. Is that not in itself a commentary on Oftel's performance over the preceding ten years?
  (Mr Verwaayen) I could not disagree more, with all due respect. Of course, as a company we have customers. We do not have subscribers any more; we have customers. Customers was a choice. I can make decisions until the cows come home but if our customers do not take it up and say this is exactly what we want you to do, this company will have no future. This is not an Oftel case at all. I do not think Oftel had anything to do with it. It is the company that has to look to the market and say is it economically justifiable, is it technically possible and do we understand what the market really tells us? You can have an old regulator on the chair of an entrepreneurial company. There is a different model if we go back 30 or 40 years, but I have not heard anyone pleading for that one.

  303. The point I am making is not that I want to make the regulator to make that decision for you but that the market did not force your predecessors to make that decision at an earlier point.
  (Mr Verwaayen) Why were there not 20 or 30 or 40 other companies jumping on the connection? There are other means to bring this service to the market. You have seen one of the major ISPs in this country signing up with a different way of delivering these services in an exclusive deal. There are all kinds of ways this sort of thing happens. There is a reasonable expectation in the market that you can take full advantage of a situation once the market is ready for it. Before that time you can jump high or low.

  304. But to take Lord Crickhowell's point and bring it back to the Bill, leaving aside the question of whether there should be vertical integration because that is not really a question for the Bill as such, the question for the Bill is do you talk about the presumption in favour of the use of competition powers and the primacy of competition as promoting competition as a duty for the regulator. The implication of your decision is that you do. That is responding to the market and that is the way you want to be; you want to be a mature market governed by competition powers and not governed by sector specific regulation.
  (Mr Verwaayen) What you want is a market that recognises there are situations where we are already mature. You already have some situations where we are truly on our way to maturity.

  The Committee suspended from 21.49 to 21.56 for a division in the House.


  305. We are quorate I am happy to say. Are you comfortable with the Bill's provisions regarding appeals against OFCOM's decisions? To give that a context, one of the recurring themes this evening has been the fact that the old appeals procedure was languid, to put it politely, and that the market did not benefit from the extraordinary amount of time it took to get the results of those appeals.
  (Ms Fletcher) We are content with the appeals process in the Bill. The appeal is required by the framework Directive. It has been implemented and I do not think I have anything more to add on that point.

  306. Some of your competitors suggested that a 90-day limit on appeals could be helpful. Do you think that is practical or desirable?
  (Ms Fletcher) This is not something we particularly lobbied for. I can see in some circumstances it might prove helpful.

Mr Lansley

  307. We had an exchange with Derek Morris from the Competition Commission on the question of appeals under the Enterprise Bill (which is currently going through Parliament) which are currently the basis of judicial review appeal only, and effectively he said there is a two-stage process, firstly that OFT or OFCOM would make the reference and then the Competition Commission would examine it. Are you content that that kind of appeal under the Enterprise Bill would be in that form rather than a full appeal on its merits?
  (Ms Fletcher) Where you have got a reference to the Competition Commission, it is a competent body.

  308. You are content with that?
  (Ms Fletcher) Yes.

  309. While I am with Derek Morris' views, can I refer to one other thing he said to us. He said that as things stand appeals against SMP conditions would be to the Competition Appeals Tribunal. He thought that this would be very unwise and he uses some very strong language in suggesting that it ought not be the Competition Appeals Tribunal specifically in relation to price control conditions and that it should be appealable to the Competition Commission. If anybody should have a view about this I guess it should be BT.
  (Ms Heal) I think we were content with the proposals as they currently stand. I do not think we had a particular view that that form of appeal process was a problem for us.
  (Mr Verwaayen) Are we missing something here? I am very curious as to why you bring it up.
  (Ms Heal) He feels so strongly about it.

  310. He suggested it would be along the lines of taking a rivet out a ship, as it were, to have the reference to the Competition Appeals Tribunal. I think it is principally because of the lack of expertise as compared to that which the Competition Commission has acquired over the years it has done price control references. Perhaps if you would like to send a note to us.
  (Ms Heal) We are happy to.

  311. He said of the Competition Commission that they had developed the expertise and resources and they had had 17 cases. "To place it with the Competition Appeals Tribunal, which I think is an extremely competent and able body, would be particularly disastrous because, firstly, it is not designed to deal with such cases, it has no economists or accountants or business people on its staff . . ." He clearly does not think it would be the right way to go.
  (Mr Verwaayen) May we take you up on your offer. If it is disastrous, that is a strong word I believe.

Baroness Cohen of Pimlico

  312. Another thing I would like to play back to you is a comment by one of the earlier witnesses from the cable companies that what they would like to see in the Bill was an economic board, just as there is a Content Board and a Consumer Panel, which would be charged particularly with considering the economics of the industry rather than the broadcasting type issues or what was coming down the pipes. Really they wanted somebody to consider the pipework of the industry. Do you have a view on this?
  (Mr Verwaayen) First of all, there is expertise around economic regulation that is truly important. Whether you need a separate board for that or not I am not sure because if you look to convergance in the industry, as this is, you will see that a lot of issues have a broader context than just one context, so if you are going to make for each and everybody a separate board it can become rather complex.
  (Ms Heal) I would agree entirely with that. The expertise of economic regulation and indeed knowledge of the telecoms industry ought to be firmly embedded within the workings of OFCOM. One of the challenges for the new chair of OFCOM and indeed the chief executive and the board is to ensure that when they create the workings and bring the bodies together they are able to preserve that expertise and not lose it and let it escape because it is critical for the industry.


  313. There is a dichotomy that has emerged for the very first time certainly for us and that is a sense among telecoms that there is a danger that OFCOM might become overwhelmed with content issues to the detriment of economic or other considerations. Previously we have had heard the exact opposite from content providers, that it will be essentially an economic regulator with no more than a nod towards cultural considerations. Do you have a view?
  (Mr Verwaayen) What we have seen here is quite a good balance, to be honest, so it is a matter of execution. It is a merger of five so you get a lot of expertise within the merger. It is a way to handle it and to manage it and it would be presumptious for us up front to say we will get too little or too much. It is a matter of balance and it is not an easy task to bring a convergence industry together. Certainly it is not an easy task for a regulator. Having said that, it is the right thing to do.

Paul Farrelly

  314. On the point of the content, the Government has said clearly it does not intend (like most, if not all, governments) to try and regulate the Internet, yet in your submission you have raised a concern that OFCOM may be drawn into this area. Can you explain what your concerns are?
  (Ms Fletcher) If you refer to the paper our concern is to do with the way the various definitions fit together. It is quite a technical concern that hinges round sections 154 and 155 of the Bill and the way in which those definitions work. In fact, we are already in dialogue with relevant members of the Bill team to try and identify how the current definitions might apply to various Internet activities and to look at how the drafting may be improved, so what we do not want to see is language bringing activities within the scope of definitions where that is not intended. We are in active dialogue on that issue already.
  (Ms Heal) We do very much welcome the view that comes out of the government guidance that they do not intend to include it for various reasons that have already been expressed by various groups this evening.


  315. Would the Bill team like to comment on anything you have heard, particularly that last point?
  (Mr Arnott) No.
  (Mr De Val) This is exactly the kind of comment we welcome. We know this is a very difficult area and we have worked hard on these difficult issues.
  (Ms Fletcher) It is a very tricky area. We would be happy to give any support we can.

Paul Farrelly

  316. Just returning to future-proofing, clearly you are very hot on the case of future-proofing with the discussions you are having on definitions, can I return to broadband. You raised a very spirited defence of BT and some of the concerns about the slowness of the roll-out across the UK and I am sure I would hear exactly the opposite that BT has been cast as the villain and has impeded the roll-out of broadband in this country. If we were to return to the Bill itself, is there anything that you feel should be in this Bill that would very definitely encourage better roll-out of broadband in this country or should it simply be left to the market?
  (Mr Verwaayen) First of all, I think a Bill like this should be technology neutral. It is very important that regulatory certainty is built in a new situation so that people know what to expect. People invest for the long term and therefore they need to know that there is a consistency and transparency in regulation. You do not want to go into regulating technology as such. That is one point. Secondly, the biggest stimulant is to make sure that the market gets a loud voice. I can tell you that our customers do have a very large voice. If you have heard what we have said in our strategy, customer satisfaction is number one not because it is based on them not being vocal; it is based on them being very, very vocal. Having said that, I do not think that a regulatory Bill is a place where you should have a specific technology stimulated.
  (Ms Heal) I guess we would say that apart from the point of technology neutrality that perhaps more detail on the deregulatory intentions of OFCOM and more duties around OFCOM's role of deregulation would help in the future-roofing because that would encourage a regular review every year or every couple of years in looking at and removing regulation and I think that in itself would have a future-proofing role. I think the other thing to put future-proofing into context is of course underpinning all of this we are going to be seeing the EU market reviews. Those will be going on and will be repeated in the future. Having that rolling programme of market reviews underpinning this will in fact help to future-proof the Bill without having to put too much actual detail into it.

Lord McNally

  317. Whether you like it or not, you are one of Britain's flagship companies.
  (Mr Verwaayen) We are very proud of that.

  318. You have almost answered my question then. Is it a role or a burden that you welcome? Within the context of this Bill is it one that you can carry forward?
  (Mr Verwaayen) We have 22 million customers, the majority being United Kingdom citizens. We have 2 million shareholders in this country. We have more than 100,000 employees in this country. We have 35,000 directly working for us but not employed by us. We are very proud of that. We do recognise—and maybe that is the biggest difference—for a long time to come this will be a regulated market so we do not fight the principle of a regulated market, but what we do want is a recognition of the maturity of the market allowing us to be a player in the field, to make sure that we have the ability to serve all our stakeholders to the best of our ability. One of the stakeholders is the community at large and that is where you get a Bill like this. We are absolutely proud and it is part of not only our inheritance but of our future.

Anne Picking

  319. I see that you want the Consumer Panel to be appointed by the Secretary of State rather than an independent, separate from OFCOM panel. Why would that be and how powerful and effective do you think the Consumer Panel will be?
  (Ms Heal) We think there is a very real and useful role for the Consumer Panel. OFCOM is going to be a very significant body with very wide-ranging powers and it will have a great deal of influence in the UK. We think it would be very helpful to have a body that acted as the focal point of consumer opinion and consumer dialogue and could give a balance to some of the economic regulatory arguments that OFCOM will be skilled in. In order to make it work as effectively as possible we would feel that it ought to have just that arm's length ability with the members appointed directly by the Secretary of State with separate funding. We feel that all of those things would help give a certain robustness so that, yes, they could be the voice of the consumer and but also feel confident to speak back and give Oftel their real genuine opinion.

  Chairman: Thank you very much indeed.

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