Examination of Witnesses (Questions 300-319)|
MONDAY 10 JUNE 2002
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 serviceand, 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
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.
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
(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.
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.
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.
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 recogniseand maybe that
is the biggest differencefor 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.
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.