Oral evidence

Taken before the Trade and Industry Committee on Tuesday 11 November 2003

Members present:

Mr Martin O'Neill, in the Chair

Mr Roger Berry

Richard Burden

Mr Jonathan Djanogly

Mr Lindsay Hoyle

Judy Mallaber

Linda Perham

Sir Robert Smith

 

__________

Memorandum submitted by the Department of Trade and Industry

Examination of Witnesses

Witnesses: DAVID HENDON, Head of Business Relations 2, and STEPHEN SPEED, Director, Broadband, Department of Trade and Industry, examined.

 

Q123  Chairman: Good afternoon, gentlemen. We are pleased to see you here. I thought we would start off with how you see the role of Government in relation to the responsibilities of the telephony firms and the ISPs in achieving the Government's targets. I think it is fair to say that in 1998-99, when the Government was setting out the milestones for the roll-out of IT in the UK, probably we did not appreciate everything that was going to happen. Is there any sense in which the DTI is the lead department in this area, has it seen any change in what it would regard as the responsibilities of Government against the telephony firms, or along with the ISPs? Maybe you could sketch out how you see the horizons three or four years on, since the White Paper?

Mr Hendon: When you say the ISPs, do you mean particularly the ISPs, or the ISPs and the operators?

 

Q124  Chairman: The ISPs and the operators?

Mr Hendon: Chairman, the way I look at this is that it is very much a partnership between Government and the industry. The industry, in this case, means both the industry of people who will provide infrastructure and also those that sell services to the public, to individual members of the public and to businesses. It becomes more clear to me that it is a partnership when one realises it is not really possible for us to do anything much on our own. From the Government side, we can provide some leadership, and this is what we try to do. We try to make things happen, we try to generate some feeling that this technology and the services it supports are important. We cannot ourselves make things happen because the investments that are required are so enormous that the operators have to put in those investments, and there has to be some means to repay the investments otherwise they will not continue to invest. I think things have changed quite a lot maybe in the last year or so, because what we have seen is significantly greater activity, let us say, by BT, which I think obviously has an enormous impact on the market because of the size of their network. Also I think quite a considerable increase in activity by the Regional Development Agencies, and although they are not part of the DTI they are very much part of how we deliver, these days. The RDAs and the network operators, and BT in particular, have been doing, as I am sure you know, a lot of joint work, trying to bring broadband into places where otherwise it would not have been. I think it is very much a partnership between the Department and the industry.

 

Q125  Chairman: One of the things that has come across this morning has been that there is a notional, round about 20 per cent that are going to have to wait some time. In part, this is due to remoteness, the size of exchanges, the roll-out ambitions of BT. Our understanding is that, in the case of BT, whom you have mentioned, they have been afforded a degree of freedom, in fact, you might say freedom to cross-subsidise, to bring into their range of activity those exchanges which are rural and smaller, but they do not seem to be doing that. Are you satisfied that the major player outside of the cable companies is doing as much as it can to take advantage of the cross-subsidising facility, as it were, that is there?

Mr Hendon: One can never know whether an organisation is doing as much as they can, and it may be that, later on, Oftel will be able to give you a view on that. What I can say is that I think BT is doing a very substantial job in enabling the exchanges it has enabled, a big investment since they started this whole programme. What I think is particularly important is the fact that, obviously for their own reasons but nevertheless very useful for our purposes, they have been pursuing not just roll-out but also take-up. It seems to me that it is quite wrong to think of broadband only in terms of roll-out of infrastructure, or even availability, you have to think about the take-up as well, because that is the only way that the benefit to the economy and to people's lives, and so on, comes through. The way that BT have chosen to prioritise their ADSL enablement with the trigger scheme I think has been an extraordinary success, because it has provided a means by which the local communities can galvanise around the challenge that they face, as it were. That generates a lot of demand for broadband, and of course BT then can enable an exchange and something can happen. Whether they are going as fast as they could, I do not know, probably you will have to ask them. I think they are doing very well and we are very pleased with the way broadband is going at the moment.

 

Q126  Chairman: Do you think they are going at a pace which suits their purposes rather than the purposes of their competitors who want to come in to the action; or do you think that is a question for the regulator?

Mr Hendon: I am sure you will ask the regulator all sorts of questions, but I think one has to recognise that they are operating in a competitive environment. Even though they are the incumbent operator and they have such a large role to play, nevertheless, it is a very competitive environment. The fact that we have got cable companies operating in some parts of the country and a very large number of ISPs who have found a business that they can make delivering BT's wholesale product, I think that shows that BT have not got it all their own way.

 

Q127  Chairman: You have made reference to the agencies of the DTI, the RDAs, and the work in which they are engaged, and obviously already this morning we have referred to what is happening in Northern Ireland and Wales, where it might be suggested that European money, as a consequence of their Regional Selective Assistance status, is available. One gets the impression that we have been somewhat niggardly, as a country, in our expenditures. My understanding is that in the UK we have spent somewhere of the order of five dollars per head on support for the roll-out of broadband, and that compares with $25 in France and $95 in Japan. Are these figures with which you would agree, are these ones with which you are familiar?

Mr Hendon: I could not say whether I agreed with the figures, I am not familiar with those figures. I realise that different countries have different ways of developing markets, and the way that we believe markets should develop, of course, is by competition in the market-place and by activity in the market, which encourages people to take up the service. Really this is the thing that concerns me, not the roll-out of the infrastructure, although perhaps I can come to that in a moment, but the take-up I think is a critical matter.

 

Q128  Chairman: The figures I have just quoted were figures that were given to Defra and quoted in the report of the Defra Select Committee on rural broadband. It does seem that the word 'niggardly' might even be generous to the UK by comparison with these other countries. Is this one of these cases where by denying people money you force them to be more inventive, whereas these soft foreigners require subsidies and cushioning? Can you give any reason why the disparities should be so great?

Mr Hendon: I think there is a philosophical difference of approach.

 

Q129  Chairman: We are philosophically mean and they are philosophically generous?

Mr Hendon: I would not put it quite like that, no. I think the approach is one that, simply to buy infrastructure at a point in time, which is really what those figures imply, in the case particularly of Japan, does not provide a long-lasting shift in the way people make use of the opportunity that broadband gives them. I think we will have a far better outcome if you are measuring simply extensiveness of cover, it may take us longer to get there, but we will have a lot of people, as we have now, thoroughly committed to using broadband and actually keen to have it. I think there are something like 800 community actions around the developing of demand to the point where the triggers can be met in different BT exchanges. Those are groups of people who have really taken broadband unto themselves, as it were, and who will have a good reason for going on using it. In Japan, as I understand it, the network operators find it difficult to make their businesses work, even though they have had this big up-front investment, and of course it is broadband at the time that the investment was made. No doubt we will talk later, if you want to, about what is broadband, and I think there is a great danger in making an investment at a point in time which could well turn out to be a complete waste of money later.

 

Q130  Chairman: On that basis, one would not invest in anything. This vision of this dedicated band of UK anoraks fighting to get their next-door neighbour to take it on board, I have had a wee bit of it in my own constituency. Frankly, I think people do that not because they want to but because they enjoy it, it is because they damn well have to, because it is the only way they will get it. Those who shout loudest need not be necessarily the people who deserve it most?

Mr Hendon: I do not think, Chairman, that we are talking about a bunch of anoraks here. I think they are a lot of people who see what a difference broadband can make to their businesses, or to the way that they interact with the internet, for all sorts of purposes, and they have been able to get the message across to people in their communities. I think that is a tremendous force for change, actually. I should just refer to the note that my colleague has passed to me. I always like to read notes before I read them out, just in case it is an inconvenient message I have been passed. In this case, I am glad to say, it is not inconvenient, because the note tells me that the English RDAs will spend £235 million alone over the years 2000-06, so that is I think a significant amount of money.

Chairman: It is about £5 a head, one and a half times what I quoted in the Defra report and it will take another three years to achieve it. I am not sure, maybe you should have read it a bit closer, but, never mind.

 

Q131  Sir Robert Smith: Just a quick question on this philosophy of letting the market provide, rather than any kind of strategic input. Does it not mean that, those of us who are struggling to get any kind of broadband in our constituencies, even before there is even a hint of it coming to many of our exchanges, there are people in the urban areas saying, "This product isn't good enough. We need Asymmetrical DSL. We need this, that and the other"? The reality is that what we are trying to do is cobble together a system onto a network of telephones that was designed for speech, with all sorts of different problems with connecting the exchanges, with no sort of strategic idea of how you get something for the whole country which actually has got some future in it?

Mr Hendon: I do not think that is right. The fact that the telephone network was designed for speech is irrelevant, really. The ADSL system that operates over it can operate at much higher speeds than BT is offering in the market-place right now. It is a matter of what they judge the market to be, and I think if the demand is there then we will find the service providers following it. I acknowledge that you will see speeds in the centre of urban areas of a much higher capability than we will see at the distant edges of the country for quite a long time. That is, I think, the nature of allowing the investors to make investments, which have to be repaid.

 

Q132  Judy Mallaber: We have been concerned about access and coverage this morning and you have raised the question of take-up and Robert has moved us on to quality, but can I take just a step back. Why is it so important that the UK's homes and businesses have access to broadband? Should I be worried that one of my villages does not have broadband, or that one of my businesses does not get themselves connected? Does it really matter, or is it more for anoraks?

Mr Hendon: I promised that I would let my colleague have a go at some time, so maybe he can answer that question, if that is okay, Mr Chairman.

Mr Speed: I think broadband does matter, but I think it is very important to have in mind that broadband is a means, it is not the end in itself. What the Government really is interested in is greater wealth, greater economic growth, and all those sorts of things. We believe firmly that the roll-out of broadband and all the capabilities which broadband brings with it to individuals and businesses and communities has an enormous amount to offer. Indeed, in a sense, one looks forward to the time in the future when the word 'broadband' itself no longer is the issue, in the sense that all the other utilities are something that you take for granted, as it were, and you add value by using them rather than worrying about whether they are there or not. In relation to the people in your constituency, I think the answer is, yes, they should be worried about it. For example, there was a survey published recently by the British Chambers of Commerce which was presented at the recent Broadband Stakeholder Group conference, which, for the first time, is starting to show some real evidence in the SME sector of the benefits that broadband can bring.

 

Q133  Judy Mallaber: Could you elaborate on that? What is a business going to see that is different when they have got it, in terms of their day-to-day operation, and what is one of my residents in their home going to see that is really different? What is the order of magnitude of the difference it is going to make to them?

Mr Speed: In the BCC survey, only about 16 per cent of the small firms who were surveyed, who had got broadband already, said they could not see any advantages in having it. Something like 46 per cent said that it improved their productivity and they had used it as a means of process innovation, both in terms of the services that they delivered and particularly in terms of things like procurement and managing the value chain. In terms of residential, another piece of work that was presented at the Broadband Stakeholder Group conference was looking at the stages that people go through with broadband. They characterise this as adoption, which is where you first decide to make the investment to buy, adaptation, which is where you start to use the internet in new ways, because broadband allows you to, for example, people looking at music and video content and things like that, which is not really possible on narrowband. Then moving later into what they call the absorption mode, which is where, in houses where broadband has started to make a difference, the broadband connection, the computer, actually is in the sitting-room, near the television, or whatever. It is not hidden away in a cupboard, and people are starting to use it as if it were a normal, mainstream part of domestic life, to do things which they might have done in other ways before, or indeed to do things they could not do before, particularly things like shopping, looking at video content, using Government services, and things like that.

 

Q134  Judy Mallaber: On SMEs, do we have any evidence on how knowledgeable SMEs are about the potential benefits? It was suggested to us that the biggest obstacle to them taking up broadband was that it was not available. Do you think that is the case, or is it that they do not know about it and do not understand the benefits? Have you got an educational job here, or is it a job of making sure that it is there?

Mr Speed: I think there is an educational job to be done right across the piece. Certainly it is true at the moment, I think, that the take-up rate in businesses is slightly slower than it is in residential. We work through UK Online for Business, which is a partnership with industry to make a contribution to that, and I do think there is work to be done. Again, the British Chambers of Commerce study, which I have to say is one of the first pieces of evidence that we have seen, and broadband is sufficiently new that there is not a huge body of evidence out there yet, showed a rather interesting point. This was that many SMEs felt that increasingly they were coming under pressure from their customers and suppliers to become broadband-enabled, if they were going to stay effective in their market-places.

 

Q135  Judy Mallaber: So that is a question of availability?

Mr Speed: It is a question of availability. Of course, for SMEs availability is the same problem essentially as it is for people in residential areas. If it is available through an exchange then it is available for anybody, and there are different types. For example, BT in particular has different types of products with different contention ratios for businesses and domestic users.

Mr Hendon: I think another reason your constituents might want to have it is because it can change the quality of their lives in a particular way. One thing which has been brought home to me is that, at the moment, one of my children is in Thailand and another one is at the University of Nottingham, and on Sunday mornings we have a four-way conversation, between my wife and I and the two children, using MSN Messenger. It is an extraordinary experience and my daughter says it is like sitting round the lunch table. Really it is only possible because we are all able to access broadband in different places, and therefore you are not bothered about the cost of the connection or the time of the connection. Even though the bit rate that is involved is not very high, the fact it is always on and there is no marginal cost to using it I think is quite important. These are the sorts of benefits it is quite difficult to explain to people. If you start putting the numbers on then it does not sound as if broadband is very important, but actually it does change the way you use it. I think it will make a big difference to everyone, eventually.

 

Q136  Sir Robert Smith: You said 'always on' was the important thing. There were hints this morning that the market is going to start to change and they are going to start charging for the amount of data, so, whilst there will be a flat rate for being connected and always on, for quite a lot of products, people are going to be charged for their use of it. A bit like the 'always on' narrowband tending always to be on, as long as you do not use it too much?

Mr Hendon: There is a difference between always on and a flat rate, of course. What I mean really by 'always on' is that it is there. If I am watching the television I can put a website in that takes my interest and I have got the page up more or less immediately. That means that I do look at websites while I am watching the television, and actually sometimes they are more interesting than the television. I think the idea of charging for content arises because, of course, quite a lot of the traffic on the internet now is from, let us say, young people sharing files, I think is the euphemism they use to describe it. Some of this, a DVD, for example, as you know, I am sure, is a very large amount of data, and if network operators and ISPs are having to size their networks to cope with this very significant amount of traffic then I think it is only reasonable that they should make those users pay for it.

 

Q137  Mr Berry: The enormous benefit of broadband for me is I can delete spams more quickly. I suppose, if we could sort out the spams in the first place that would be the first best solution; but I digress. You say in your memorandum that, as we all know, about 80 per cent of the population has access, and you anticipate that going up to 90 per cent or more during next year. That leaves ten per cent, or less. Do you anticipate commercial pressures ensuring that everyone else gets access to broadband, or does it require further intervention from Government?

Mr Speed: I think we are at a very interesting time, where it is not yet apparent how far the commercial model can be made to stretch, how far up that percentage scale it will go. It seems to me though that it is very likely to go considerably higher than where it is at the moment, and 90 per cent seems to me a reasonable estimate of where it will end up. Beyond that we move into a slightly different scenario, in which, if commercial operators are to be enticed to make the necessary investments, which become increasingly expensive as you get out closer towards the edge, there will need to be more imaginative ways of partnering between the communities, the regions, the devolved administrations and the companies themselves. Of course, we have seen already some quite nice examples of partnering going on, we have seen them in Cornwall, and at a much smaller level in other parts of the country as well.

 

Q138  Mr Berry: By 'partnering' do you mean subsidies?

Mr Speed: I mean public sector bodies bringing something to the table, yes.

Mr Hendon: The other thing you might add to that is what we are doing with broadband aggregation, and I will not say too much about it because if you want to know about it you will ask me. That is a way the Government is using its own buying power to change the risk/reward balance of the business plans out beyond 90 per cent, obviously within the 90 per cent as well but beyond 90 per cent. We are not at all satisfied that 90 per cent is enough actually and we are thinking currently about what sorts of things we can do, particularly pursuing this partnership idea, trying to make it slightly less confrontational, or trying to work together more to get out beyond 90 per cent.

 

Q139  Mr Berry: Thinking beyond 90 per cent, what would be an acceptable proportion of the population who would not be able to access broadband if they wanted to? Clearly, you think that ten per cent would be too high. Would five per cent be acceptable?

Mr Hendon: I think you have to put a time line on that, because today five per cent is acceptable but in 25 years' time five per cent will not be acceptable, and I am not quite sure where between today and 25 years' time it becomes unacceptable for anyone not to have it. I am sure there will be a time when we will expect everyone to have broadband, yes. Whether it will be while I am doing this job I have no idea.

 

Q140  Mr Berry: What targets do you have on this? Is 90 per cent during next year a target?

Mr Hendon: The target is for us to have the most extensive network in the G7 by 2005, which means probably by the end of 2005, to be frank, but it gives us that amount of time. It depends a little bit upon what other people have achieved, and that is not me trying to dodge the question. It is a fact that it is a bit unclear, when you accept these targets, quite how the market is going to run. Equipment prices changes all the time, we have seen all the disruption in the telecoms industry over the last couple of years, with the dot-com bubble, and so on. All we are saying is that we will do our best to do better than other countries in the G7. Personally I do not think, and I know my Minister does not, that 90 per cent is enough, but quite exactly what is the right number would be very hard to know.

 

Q141  Mr Berry: Just to be clear. One of the objectives is to have the most extensive broadband market in the G7 by 2005. Can you remind me, exactly what does 'the most extensive broadband market' mean?

Mr Hendon: I am sure there is a definition in our memorandum.

 

Q142  Mr Berry: I have looked for it but I could not find it before lunchtime?

Mr Speed: There is some material on that in Appendix 3, on pages 25 to 28. Essentially, it is a metric which we have adopted, which combines what we call market context and availability. Availability is the sorts of numbers we have been talking about already, in other words, what percentage of the population has access to broadband. Market context is a slightly more difficult one to explain. It is a slightly subjective measure of the extent to which a country is in readiness to take up broadband should broadband become available. A particular issue in this country, for example, is that we have a large number of people already using flat-rate, narrowband internet access and so that gives us a reasonably good base for people to migrate into broadband, and we have a better position on that than some other countries. You combine those two metrics and you get the extensiveness metric that we are using.

Mr Hendon: It is on pages 27 and 28 of the memorandum. The reason why this is rather complicated is because we do not feel that simply measuring percentage of population covered, or something like that, is clever enough, you need to have something which is a bit more indicative of the state of the achievement, so to speak.

 

Q143  Mr Berry: This index is the same index used by other members of the G7, obviously?

Mr Speed: No. This is an index that we have developed with a company called Analysys, a quite well-known consultancy company in this field. It uses data coming out of people like the OECD and the G7 and it makes sure that when comparisons are made between countries they are made on a like-for-like basis. For example, when we are looking at a retail product, it would make sure that it was looking at a retail product which had the same band width, that sort of thing.

 

Q144  Mr Berry: That I appreciate, but, if each country is developing its own index, presumably, logically, it will be possible for each of the G7 countries, in two years' time, to say "We have the most extensive network," and that could be correct, could it not?

Mr Speed: It could be correct for some of them, probably not for all of them.

Mr Hendon: I think the point is, Analysys is trying to arrive at common data, so it is trying to arrive at a common comparison, a common benchmark, between the countries. They are not choosing figures just at random to compare us with, they are trying to arrive at data which is meaningful.

 

Q145  Mr Berry: The Government having defined its objective in terms of the most extensive, it was subsequent, was it, to that statement of a policy objective that then you got round to saying, "Let's define what 'extensive' means"?

Mr Hendon: No. I think it was the other way round.

 

Q146  Mr Berry: It was there already? I am checking that the goal-posts are not being moved. I am sure they cannot be, but I am just asking, to be sure?

Mr Speed: The targets and the metrics were developed at the same time, in 2001. I think the point to stress is that they use information that is in the public domain. We are not using information which we derive from sources which other people cannot get at.

Mr Hendon: The target is changing because as other countries get better we get a tougher job to do.

Mr Berry: That is very helpful. Thank you.

 

Q147  Chairman: We are a wee bit concerned, because it has happened in the past that colleagues of yours in the DTI have moved the goal-posts and have shifted things round and what were original figures turned out to be interim figures and final figures were different. We will be crawling over these, just on the basis of past experience.

Mr Hendon: I am confident that you will find them to be fully to your liking, Chairman.

Chairman: Whether I like them or not is of no consequence. It is whether or not they are true, which is a different issue.

 

Q148  Richard Burden: This follows a similar line, but I am not going to ask about extensiveness, I am going to ask about competitiveness, where you say that you think the UK is only in third place on competitiveness in the G7, behind Japan and Canada. You define that as a composite measure of the market regulation index, market choice and price, weighted: regulation (1), choice (3) and price (3). I read the words there, I still do not understand it, I have to say, and, given the fact that the first thing you say about your market indices is that "simplicity - the index must be transparent and easy to explain and understand;" will you explain it to me so that I understand it?

Mr Speed: I think the answer is that competitiveness is not a one-dimensional concept, it has to cover issues like consumer choice. If you are going to have a competitive market, you need to have a healthy degree of choice and competition among players in that market. Also, you have to have regard to price, to the way in which the companies who are offering the services are setting their price, how they are covering their own costs and their investments, and all that sort of thing. That covers the first of the two. The third one, which is about regulation, is really a measure of the extent to which a market is being measured, first of all, and secondly has to be regulated. Essentially, in a completely competitive market you would not need regulation, but most people recognise that the markets we are talking about are unlikely ever to be perfectly competitive so a degree of regulation is needed. What the regulation index says is, does the country concerned have a clear and transparent method of regulating the things which are listed here in our report? Then, in order to get a view about the state of competitiveness in a market, and it is only a view, it is not necessarily the only view, we use a bit of arithmetic to combine these indices and use that as a way of comparing the countries. It is not particularly an unusual way of using metrics to measure this sort of thing.

 

Q149  Richard Burden: We heard this morning from some of the ISPs, but not just ISPs, others would say, "Well that's all well and good, but the fact is, particularly on wholesale, we've got one really dominant player, who shows no signs of being anything other than the dominant player and uses their market position to ensure they stay there and actually inhibit competition between Government and others." How does fit with your index? How can you have a really competitive position when you have got one player which dominates, particularly on wholesale?

Mr Hendon: I do not think really you can look at the role of BT in that way. BT are having to make a return on their investment, like anyone else, like any other investment owned by shareholders, who are people like you and I, sort of thing, except I am not allowed to own shares in telecoms companies, so actually it is not you and I.

Q150  Richard Burden: I have not got any either.

Mr Hendon: It has been a source of great relief to me over the last few years, of course. What the regulator is having to do is find that path which allows competition to develop, on the one hand, and allows BT to make enough money to coax it into continuing to invest, on the other hand, and I think it is a very tricky point to get right. In a way, the fact that no-one thinks it is right - BT complain that they are overregulated, and the people who are trying to come into the market and make use of BT's wholesale product complain that the price is too high - just shows that it is a good compromise because no-one particularly is benefited by it.

Mr Speed: You are looking at the wholesale end. At the retail end, we have an extremely competitive market, in which BT is able to win only about 50 per cent of its own wholesale business, if you like. On top of what David has said, neither is it correct to say that we do not have a competitive market. When you go to BT's website, if you tell them where you live, they will list for you all the operators from which you can get broadband through your exchange, if it has been enabled.

 

Q151  Richard Burden: The question was about wholesale, but presumably there is a link, and whether it is available, at the end of the day, retail, depends partly on what is happening at the wholesale end of things. One of the witnesses this morning said, I thought probably quite perceptively, "Just go and look at what happens in other countries, just look at the results, and you'll find that they appear to be doing something in other countries that we're not doing here." What would you say to that? On Local Loop Unbundling, for instance, it is pedestrian there, is it not: why?

Mr Hendon: I think you will have to ask the regulator about Local Loop Unbundling.

 

Q152  Richard Burden: I am sure we will, but, from a public policy point of view, given the fact that you are interested in a competitive market, ensuring competitiveness according to your index, ensuring that the roll-out is as extensive as possible, if we appear to be going so slowly on, say, Local Loop Unbundling, what do you think are the causes of that?

Mr Hendon: Probably you should ask the companies that are not using Local Loop Unbundling why they are not taking it up. No doubt some of them have told you already.

 

Q153  Richard Burden: They all say it is too expensive?

Mr Hendon: The price is set by the regulator, I believe. I think you will have to ask the regulator about pricing. I am pleased that the possibility for Local Loop Unbundling is there and the technology is there, but if the industry does not see there is a market to make, in using that infrastructure, and they prefer to use BT's wholesale product, or put in their own infrastructure, radio infrastructure, or whatever, that is their decision.

Mr Speed: I do not know, but I hope that perhaps Easynet have made a submission to the Committee. They have a business model which seems to be going quite nicely, which is based quite fundamentally on Local Loop Unbundling, and now they have their own registration scheme, which is slightly different from the concept that BT is using and appears to be working well.

 

Q154  Linda Perham: The speeds required to constitute broadband in the UK are considerably slower than the ones available in other countries, in the leading broadband markets. I am thinking of, I think it is, 768 Kbps in Germany and Holland, 960 in Canada, one to two megabits in the US. Is this disadvantaging UK households and businesses in the future, or the ability to keep up with developments?

Mr Hendon: I do not believe so. You get into this fundamental question of what is broadband, and I think you start off with, broadband is always on and faster than dial-up, even 128 kilobits probably is three times faster than what most people will get with dial-up, because probably a V90 modem will give you about 35 kilobits on a typical line. I start with the idea that is what you are offering people when they go into broadband. For some applications, that is nothing like fast enough, and if you want to transfer very large computer-aided design files, or if someone is doing pre-production processing or post-production processing on a video, on a film, or something like that, then they need much faster broadband, and no doubt they will be willing to pay for it. The idea that we should push broadband of a particular speed onto people who maybe have not got any idea what they want to do with it yet, just because it fits somebody's idea of what broadband is, I do not think that is right. As the demand for higher-speed broadband develops in the market then I think we will see those products being offered, in places where they can be offered. In fact, at the moment, those higher-speed products are not being offered except in the large business context.

 

Q155  Chairman: Why should not people get the best technology that is available? They are paying enough for it. The Government is contributing precious little. Other countries are getting it, why should not British citizens? You have just been telling us that there are all these energised, you would not call them anoraks, groups of community-minded citizens who are moving towards triggers. If they are going through all these hoops and hurdles to get the damn thing, surely they are entitled to get as good as is available, not second-best, or some mini-multiple of what they are getting already on dial-up?

Mr Hendon: I think, if it were simply a question of giving people what they asked for, I am sure the network operators would be offering enormous speeds. I am sure BT will be able to explain better than I can, because I know you are seeing them later on today, that the cost of offering a broadband connection of a certain speed is not just the speed of the connection itself but also the capacity of all the network behind it. There are a lot of costs associated with general higher-speed broadband connections, and if people are willing to pay those then I am sure their network operators will be wanting to supply them. I think, for us in the Government to take the decision that broadband is, by definition, at least a megabit, or something like that, will have cost and accessibility and business plan consequences that really would be damaging to the whole thing.

Q156  Mr Berry: I take your point that there is a range of possible speeds, but, just so I am clear, when you say one in ten households have a broadband connection and statistics relate to the broadband connections, obviously to be consistent here, are you referring to 128 and above?

Mr Hendon: I believe that is what Oftel have used as the definition, yes.

 

Q157  Mr Berry: What about DTI?

Mr Hendon: We use the same definition, because we are part of the same Government

Mr Speed: We use Oftel data.

 

Q158  Mr Berry: Does Oftel always use the same definition?

Mr Hendon: I believe so. I am not sure, you will have to ask them. I think they have clarified recently what the definition is. We all use the word 'broadband' rather loosely, to begin with. You need to know quite a lot about it before you can discover what is your measure of that term.

 

Q159  Mr Berry: In terms of the statistics, actually this definition is quite important, it is a separate issue from should we be aiming for a certain speed. It is just that, if we have statistics on broadband connections for the UK, and we talked about how they change over time, or we were comparing them with another country, we need to know if we are comparing apples with apples or apples with pears. It is 128 and above?

Mr Hendon: Yes. I believe that is the same rate that is used by other countries as well, so that the measurements are comparable.

Mr Speed: The point I made earlier. In relation to the metrics which we use, the team who put them together take great care to make sure that it is apples and apples.

Mr Berry: I am delighted to hear that. Thank you very much.

 

Q160  Mr Djanogly: We have had a fair old discussion about apples and apples and the meaning of the words 'extensive' and 'competitive', in relation to the Government's target, but after all of that are you confident that we are going to meet the target?

Mr Hendon: No. I cannot be confident because it is a comparative target with what other countries achieve, and so for me to be confident I would have to know precisely the way that the populations were going to behave and the companies behave in all of those other countries. I believe that we will be near the target, if not at the target. I hope we are at the target.

 

Q161  Mr Djanogly: You must have some idea. You can see how quickly France is expanding, with its Local Loop Unbundling, and so forth?

Mr Hendon: Probably you have noticed that in the UK things have changed very fast in the last year, and it is quite difficult to predict what will happen in the next year. I know things are still moving very quickly, and at the moment we think we have got something like 2.7 million connections, or so. I hope we will meet the target. I cannot say that we will.

 

Q162  Mr Djanogly: Do you feel that the regulatory regime in the UK is generally helping or hindering our ability to meet the target?

Mr Hendon: I think it is helping, because, as I said just now, you need a regulatory regime which allows all the players in the market to make some money out of their investments. It is very easy and rather fashionable to knock companies like BT, but they have the same problems convincing their shareholders that it is a safe investment that all the other companies have. I think, what BT have done since Ben Verwaayen arrived there, he has taken a tremendously brave leap into the unknown really, in putting BT's shareholders' money behind an investment which was not at all secure for them, and we can see the benefit in the figures of take-up of ADSL. The very fact they have done that has inspired all sorts of activity all round the country, and people are talking about broadband in a way they simply would not have been if BT had not taken that action.

Q163  Chairman: Do you think it is desirable to have the same ownership of the infrastructure as well as retailing?

Mr Hendon: I am familiar with the issue, and of course there are always pros and cons in these arguments. I think that, because what we are talking about here is not simply a question of putting in infrastructure but also it is about delivering services and making people feel they want them so they will buy those services, there are advantages to having the retail operation and the wholesale operation in the same company. I have confidence in Oftel's regulation of BT to ensure that there is proper separation between the functions, so that there are no disadvantages of having them in the same company.

 

Q164  Chairman: In other utilities, where there is a competitive element and a monopoly element, over time you tend to get a separation of the two. Given that both the areas require investment, is it not asking rather a lot to be taking two pitchers to the same well and might it be better if they were in two different wells?

Mr Hendon: Why I think it is a different matter with telecoms from the other utilities is that the provision of new services depends in a very complex way on what infrastructure is installed and the way the infrastructure operates and the delivery of services over that infrastructure. If we simply separate out infrastructure provision from service provision, I think it will be quite difficult for us to have offered to our businesses and citizens the very best technology. I think having a company who have got a lot of clout in the market, who are able to do those things, actually provides a good environment for others to compete as well.

 

Q165  Chairman: What sort of competition is there in infrastructure at the moment then?

Mr Hendon: There is some infrastructure competition, in the cable companies, for example.

 

Q166  Chairman: You have got three monopolies?

Mr Hendon: I do not think there are three monopolies.

 

Q167  Chairman: Let us face it, NTL is working in one part of the country, Telewest is working in another, and then you have a totally different technology which is operated by a third party, so, by definition, all of them are monopolies?

Mr Hendon: I do not agree. I have an NTL 'phone and a BT 'phone in my house and I can decide which one I pick up. Perhaps I am lucky because I have got two providers where I live.

 

Q168  Chairman: You will be helped to pay, if the Government is paying for it.

Mr Hendon: No, the Government is not paying for it. I am paying for it.

 

Q169  Chairman: That is your priority. Most people, if they have more than one 'phone, still have one 'phone bill?

Mr Hendon: Chairman, I could choose to put my business with either of those two operators. In fact, I choose to have both.

 

Q170  Chairman: Unfortunately, my constituents cannot do that, because they cannot have NTL and they cannot have Telewest, and a lot of the non-urban users, and you do not have to be rural, it is really just outside of cities?

Mr Hendon: Obviously, you will have seen the advertising the same as I have. A lot of people are offering services now over BT's infrastructure which compete with BT's (select me ?) provision.

 

Q171  Chairman: Yes, but BT still holds the whip hand. Why are you so frightened of BT? You are working in its shadow. It is like pulling nails out of hands trying to get regulators and Government in this country to stand up to BT.

Mr Hendon: I am not in the least bit frightened of BT, I assure you. I stick with my point, that I think the delivery of modern services on the telecoms network involves an interaction between the network and the service delivery which is entirely different from the other utilities. I think actually it is very difficult to see how that would be done well if you had the entire separation of BT's retail and wholesale businesses.

Chairman: I think we might have to disagree on that point.

 

Q172  Sir Robert Smith: Just on the point you were making about your NTL 'phone and your BT 'phone in your house, but if you want to go to an ISP, apart from AOL who have got a deal with NTL, you can go only through the BT line to get the choice of ISPs and you could not through the cable line. Do you think that is right?

Mr Hendon: I use a cable modem, yes.

 

Q173  Sir Robert Smith: What I am saying is that BT's network is available to all the ISPs to use, but the cable network is not?

Mr Hendon: It depends what you mean by an ISP. Although it is true that NTL provide my connection to the internet, I do not have to use their mail services, or anything.

 

Q174  Sir Robert Smith: They are the people you pay. With the new legislation, and we are seeing Oftel in a minute, but we will be seeing them probably for the last time and then, next time we do this, it will be Ofcom, how does the Department see the remit differing in relation to broadband as a result of this change in the legislation?

Mr Hendon: First of all, the fact that we have a converged regulator now for the whole telecoms, broadcasting space, we think is really important. Prior to 25 July, and I suppose even now actually, prior to the vesting of Ofcom, if someone has got some ideas about a service or content that they want to put out there, they have got to go and talk to the television regulator about broadcasting, and maybe someone else, the radio regulator, about radio broadcasting. They have got to try to work out who might be wanting to regulate their internet content, and if it is a mobile 'phone they have got to talk to yet another one. Really it is very difficult. It has been very difficult for companies to know quite how to move forward in that space and I think Ofcom will make a big difference in that respect. We should see it being very much easier for people to understand how their business is going to be regulated, and indeed for Ofcom to be able to take consistent and sensible decisions quickly about how to change the approach they take as technology and services change. That is one thing. Also there is the new duty that Ofcom has to take due account of the desirability of encouraging the availability of high-speed data transfer services throughout the UK. I think that will give them a new reason to think about what is happening, that Oftel perhaps would not have been able to do, because, of course, with regulators, as everybody realises, they do what they are told to do by statute, so even if they want to do something they cannot if they have not been told to do it. With Ofcom, this change, which came through an amendment, of course, eventually, a Government amendment, ultimately, I think that is a good development actually.

 

Q175  Sir Robert Smith: Do you think also it will improve the chances for the alternative technologies for the last ten per cent, in terms of access to spectrum?

Mr Hendon: Yes. I think it will be alternative technologies. It will not be ADSL running on telephone lines, in that last ten per cent generally.

 

Q176  Sir Robert Smith: Does it free up or improve the playing-field, in terms of trying to get the spectrum that might be required for that technology?

Mr Hendon: I think the change to Ofcom in itself does not, but one of the things that the Board of Ofcom have said already is that they are going to press forward with the recommendations that Professor Martin Cave made, in his report on Spectrum Management. I am sure you are familiar that he reported about 18 months maybe two years ago, and the Government accepted the recommendations. Ofcom I know is wanting to take forward in particular spectrum trading, and I think spectrum trading holds a real prospect of faster decisions about the use of spectrum for new technologies. Basically, people who want spectrum will be able to go and buy it in the market, rather than having to wait for the case to become sufficiently strong that some sort of administrative action is taken from the Radio Agency. So I think Ofcom will be better in that respect too, but, in fact, the Radio Agency probably would have done it as well.

 

Q177  Mr Hoyle: I wonder what consideration has been given to the introduction of a universal service obligation in the case of broadband, and through not doing that do you not think we have failed people in the United Kingdom?

Mr Hendon: It is easy to talk about universal service obligations, if you know what it is that universally you are going to require to be available.

 

Q178  Mr Hoyle: Shall we give you a little help. If your coverage is 80 per cent and your target is 100 per cent, in fact, I think you would agree, if everybody can expect their mail to be delivered through the letterbox, that is what we are trying to say by universal obligation, that every household will be connected, every business will be connected, and I think there is enough evidence to say we have failed people by not doing so?

Mr Hendon: I understand that is what you mean, but what I am saying is that, with broadband, in order to have an obligation we have to have an agreement on what broadband is, and that has to be realistic, in terms of what it would cost to provide it. At the moment, if we were to try to impose some universal service obligation on the operators, I think it would have the effect of stifling some of the innovation that we are seeing, and which I believe is around the corner, in some of the wireless providers, and so on, actually it would have the effect of slowing things down. At the moment anyway the services that we are able to have as universal services are defined at the EU level and we cannot set that aside easily. The EU is intending to do a review in 2006, I understand, and I know that my Minister would like to consider the matter in the context of that review, so that we will have our own position which we can take into the EU machinery when it is negotiated. The overriding thing for me is that, if we are contemplating a universal service obligation, we have to be clear about what exactly it is we are going to require universally to be available. We have got to be absolutely certain that, doing that, it is not simply going to dump a lot of cost on those that already have it, and that it is the right time to make that service available. The other thing is, all that helps with is access, it does not help with take-up, and I think take-up is at least as big a problem as access.

 

Q179  Mr Hoyle: I would have thought that the people really who would take it up are the 20 per cent who cannot get it, because they have been the poor relation all the way through. I think that is where the DTI has failed, and I think that is where everybody else is failing. If you take cable, most of my constituents have not got cable, that has not come round those in rural areas, we did not get cable. We have never had the alternatives, and once again we are the poor relation. These are the people that would really benefit by having that link-up, but unfortunately everybody is saying, "Well, look what a good job we've done; the people in the cities, the people in the towns, they're all connected. We've two choices. Isn't that marvellous?" People out there, that 20 per cent, would love just one choice, and it is the fact that we are failing them, unless we put something in there to force people. I think the only way to force them is actually to put in that universal obligation, and that way I think people would feel that you are serious about reaching those parts which have never been reached before?

Mr Hendon: If I were seeing no further investment in the market then I might feel more sympathetic to that concept, but I see a lot of things going on in the market and I think it is just too soon to think about a universal service obligation. Let me assure you that we are absolutely not satisfied with that 80 per cent coverage, or even 90 per cent coverage. We are certainly not satisfied with that, and we are thinking now about what we can do to push beyond 90 per cent, partly so that we do not get beaten by other countries in the G7 who manage to do that, and partly because actually I think that we should be trying to get towards 100 per cent coverage, but it has got to be done in a way that is realistic in the market, I think.

Mr Hoyle: I think that is the danger, is it not, everybody's judgment of 'realistic' is different. All I would say is that the poor relations are the people who live in rural areas.

 

Q180  Chairman: Do you think you can send a note on where Government thinking is at the moment on universal service obligations? You have given us quite fulsome replies, but it might be that when you pause and reflect there are other things you would want to add. It is something which has appeared just on the edge of the radar screen, as it were, and it would be useful for us to accommodate the note within the evidence that we have got. It would be helpful if you could do that?

Mr Hendon: Of course, we will set that down.

 

Q181  Chairman: Thank you. If there is any Euro-thinking, for them as thinks Eurowise on these matters, then it would be useful. One last point. There is the Government's own, as it were, generated bit of the action, the Broadband Aggregation Project. What is the state of play on bringing others into the loop, as it were, which departments are in, which departments are out, and, the ones which are not in, why are they not?

Mr Hendon: We have canvassed around all the major departments that have responsibility for significant chunks of public sector activity. I think it is true to say that all the ones that you would expect to know about the project do know about it, and have a seat, if they care to take it, on both the Steering Board for the project, which I chair, and the Ministerial Steering Board, which Stephen Timms chairs. The two particular customers that we have signed up right now, which were the ones that we needed in order to make the project viable, are the NHS and DfES. Both the NHS, for the new N3 network, and DfES, for their broadband requirements for schools and education officers, have said that they will use the Broadband Aggregation Project to deliver their broadband connectivity. Our calculations show that we can get significant savings on the cost by using just these two customers, and, at the same time, because the network operators, who will be meeting the requirement for connectivity, have a sort of gilt-edged contract, the risk/reward for them in their business cases for making investments would be a lot better. I am very alive to all the other potential customers, for example, the Criminal Justice System undoubtedly will need a lot of broadband, the local authorities, and so on, and we have had preliminary talks with them, but they are not ready yet to set out their requirements in a way that we can do anything useful with. Let me assure you that just as soon as I see them picking up their broadband catalogue I will be banging on their doors and getting them to have a look at our Project.

 

Q182  Chairman: If you have got Health, why do you not have Work and Pensions? If you have within your sights, shall we say, the Criminal Justice, why do you not have the Home Office? I have been in this job long enough to know that there is a degree of bloody-mindedness and silo thinking between government departments of an order that means that most of them will not sign up and they will find every excuse. The MoD, as I recall, when I used to shadow its activities, was one of these departments. For reasons of national security, the fact that on occasions it looked like a service of no consequence, they would not play ball with anybody. The Foreign and Commonwealth Office is not much better. Yet you have these massive departments obviously using broadband an awful lot, and you have got a fag end of the Government machine?

Mr Hendon: I said, Chairman, that all the departments that I thought you would expect to be there are represented and on the Board. I must admit that the Ministry of Defence is not one that I have had the ambition yet to try to get. At the moment, we have DfES, the Department of Health, the ODPM (Office of the Deputy Prime Minister), the Home Office and the Police Information Technology Organisation and the Criminal Justice System, the Department for Work and Pensions and the Benefits Agency, all represented on that Board. All of them know about it, they are all the recipients of sales talks by me and my staff, and when we looked at the potential broadband requirements that they had in the immediate future, in the next year or so, then only DfES and DoH were significant. Together, they were perhaps 20 or 30 times as much as all the rest put together. Just as soon as one of those others shows signs of having sorted out what its broadband requirement is then, yes, we will be talking to them about using the Broadband Aggregation Project, partly because it gives them better value for money and partly because we want to get the benefits in terms of roll-out of infrastructure.

 

Q183  Chairman: There is one dog that is not barking in the night, if I can put it like that, it is the eEnvoy. I thought his job was to boldly go and bring everybody on both sides of Whitehall into this kind of activity. (A), his name has never been mentioned, either in terms of his personal name or the office, and, (b), there does not seem to be any role for him in this activity?

Mr Hendon: I think, Chairman, about 18 months ago, the responsibility for broadband was moved from the eEnvoy's office to the DTI, so that is why you are talking to me rather than him, I suppose. Let me assure you that he does a lot of barking, at least in my part of the wood, and he has been extremely helpful to us in engaging these other government departments and helping us to allow them to see the value of working with us, let me put it like that. I have no complaints in that direction.

 

Q184  Chairman: The idea of wired-up Britain seems to stop at Westminster tube station, just about, would that be right, and starts again at Charing Cross?

Mr Hendon: No, I do not think so. I think this Project is a very significant move, in terms of a unified approach to providing these services for the public sector, but we need to be careful that we do not push departments into signing up for capacity that they cannot use. What I want to do at the moment is take real capacity, which is going to be used to produce real services that people want, and deliver it in a cheaper and better way, and that is what the Broadband Aggregation Project is about.

 

Q185  Chairman: I am right in thinking that the leviathan which is the MoD, which I imagine uses a wee bit of broadband now and again, was never within your sights?

Mr Hendon: It has not been a priority, but I have the idea now.

 

Q186  Chairman: Because they would not play ball, I mean. I am not trying to put words into your mouth but I am just trying to get the basic facts. It would be unrealistic to assume that the MoD would be the natural partner of anybody, in any collaborative venture of this kind, in Whitehall. Would that be a reasonable summation?

Mr Hendon: I think the MoD have requirements for survivability and availability of circuits, and suchlike, which perhaps are different from other departments. We might find, if we try to provide capacity for the MoD, that actually it would raise the cost for everyone else, so it is not automatically a no-brainer, that it is the right thing to do. Undoubtedly, there are lots of things the MoD does where the broadband capacity could be provided equally well by this Project as by anyone else, and it is an interesting thought, which I admit I had not really thought about before.

 

Q187  Chairman: Can I say that we are going to be returning to this issue after Christmas, so I hope we do not spoil your Christmas, but we will be looking at, in the broader picture than broadband, the range of activities and the milestones, targets, that the Right Honourable Member for Hartlepool, when he was in Victoria Street briefly, set out in his White Paper, so we will be coming back to this. Maybe by that time we will be talking about it again and we will be able to hear even better news than we have heard today. I think we have covered all the areas that we wanted to.

Mr Hendon: Can I make one point, Chairman, and I hesitate slightly to make this. I said before that we developed the metrics before we announced the target, and, unfortunately, I have to say, I am told that we announced the target in February 2001 and developed the metrics the following month, although actually they were not reported until October 2001. I hold up my hand to having got that wrong.

 

Q188  Chairman: Maybe it could have been an aspiration before it was a target?

Mr Hendon: I hope you will feel the proximity between announcing the target and developing the metrics does not constitute the fiddling that you were hinting at earlier.

 

Q189  Chairman: Maybe not, in this instance, but anyway thank you very much. As I say, if there is any additional stuff, we will get back to you. If you could give us a note on universal service obligations we would be grateful?

Mr Hendon: We will do that, and I look forward to your further discussions after Christmas.

Chairman: Thank you very much.

 

Memorandum submitted by the Director General of Telecommunications

Examination of Witnesses

Witnesses: DAVID EDMONDS, Director General, CHRIS KENNY, Director of Compliance, CAROLINE WALLACE, Chief Engineering Adviser, and JIM NIBLETT, Director, Broadband, Oftel, examined.

 

Q190  Chairman: Good afternoon, Mr Edmonds. The end of a long sang, as they say. This is, I think, probably your last appearance before us in your capacity as Oftel? I am not sure of that.

Mr Edmonds: My staff move from Oftel to Ofcom in six days' time, and my duties are stripped, by the Act of Parliament that you and your colleagues passed, on 29 December, and move into Ofcom, so unless something fairly extraordinary happens I fear this is the last opportunity of coming before you, yes.

 

Q191  Chairman: I think we have met some of your colleagues, but perhaps you could introduce them to us again and then we will begin?

Mr Edmonds: Caroline Wallace, my Chief Engineer. On my immediate right is Chris Kenny, who is Director of Compliance. On his right is Jim Niblett, who is Director of Broadband.

 

Q192  Chairman: Thank you. Can I start with a very simple question to a regulator. Are price reductions always in the consumers' interests?

Mr Edmonds: I think that price reductions in the area of broadband in the UK have always been, so far, in the interests of the consumer, because at the wholesale level it has ensured that there has been a product in the market-place that service providers are able to use and sell on and still make a decent profit. At the retail level, price reductions have now got a broadband basic product down to about £16, so I think in the UK the availability of very cheap broadband, at a whole range of speeds, has been to the advantage of the consumer, yes.

Q193  Linda Perham: There has been some discussion about what the definition of broadband is, but if it could be defined as a speed of 500 Kbps, even that is considerably slower than some other countries are providing, and it seems that you consider 128 Kbps as adequate. Does not that mean consumers and businesses in the UK are getting a sub-standard product, and does not that give us a disadvantage?

Mr Edmonds: I listened carefully to the answers of David Hendon and I think the Chairman's question on that. Let me confirm what he said, that, since 2000, Oftel has used exactly the same definition, our figures are there in an absolutely consequential flow. When first I appeared before you, Chairman, there were 35,000 broadband connections; as of this morning, by my own calculation, there are 2.92 million broadband connections, and we always use the same database. The fundamental answer to your question is that I believe the putting out into the market-place by companies of services, a range of product, is to the benefit of the UK consumer. It so happens that in France, I think you heard evidence this morning about what was happening in France, or reference to France, the basic definition there is the same, and much of the French progress currently is being made with a product very similar to the basic products being put online in the UK. My hope is that companies will tailor their products to the demand. For example, if you get onto the BT website, or to the NTL website, you will see a range of products at different speeds that you can buy, from the basic, very fast internet, through to two megabits, if you are a small business. I genuinely do not believe that the definition is to the detriment of the UK consumer. What matters is that across the range of cable and BT services there are different product sets directed at different price points for different parts of the market-place. I do believe genuinely that is what we have got in the United Kingdom.

 

Q194  Linda Perham: Do you think that the British customer, whether business or ordinary household, is aware of the differences when they are buying broadband, the range of services and the speeds available? Do you think that is getting through to people?

Mr Edmonds: Again, as you know, one of the pressures on my organisation from this Committee in the past has been consumer information and the availability of consumer information. I think there is a great deal of consumer information in the market-place. I think actually consumers are very sophisticated in what they buy and they understand what they are buying. For many people, the cheap, £16, £20, product is more than enough. Again, I can only go back to the numbers; 49,000 consumers a week in October bought a broadband service for the first time, it is an astonishing number of consumers. I suspect that most of them knew precisely what they were buying. A final point I would make, if I may, is that we do research consumer attitude and approach, and our research, the questions that we ask, indicates a high degree of knowledge and indeed satisfaction on the part of consumers about the services they are getting currently.

 

Q195  Mr Djanogly: Local Loop Unbundling seems to be going apace in France now, with the fall in prices, and yet in this country we have the problem still of it proceeding very slowly and with high prices. Why is that?

Mr Edmonds: Can I ask the Director of Broadband to give the first answer to that and I will supplement it, if I may.

Mr Niblett: I think Local Loop Unbundling has not been a raging success anywhere in Europe, arguably except Germany, where it is used not for broadband but primarily for telephony. It may be taking off a bit in one or two countries, but still not many are a long way ahead of us. Prices are high, yes. UK prices perhaps are a little higher than the European norms, but they are not wildly out of line. The obligation under European law is that prices must reflect costs. We have carried out rigorous analyses into BT's costs and set prices on that basis. I think the fundamental reason why Local Loop Unbundling has not taken off to any great extent is that it is hugely capital-intensive, and over the last few years anyway there has been very little capital around, very little appetite around to provide capital for such investments.

 

Q196  Mr Djanogly: Thank you, but you seem to imply that the pace of unbundling in France is not that more dramatic than here. My understanding is that 5,000 lines are being unbundled now every month, whilst in the UK a total of only 7,100 were unbundled to the end of August 2003. I think that was borne out by some previous evidence we heard this afternoon, which I think had some even more up-to-date information on France, saying that really it is now soaring ahead. I still do not understand, from what you said, why there is this big difference. Why cannot we get to grips with this problem?

Mr Niblett: You are slightly ahead of me on French statistics, I must say, and I must catch up with that. Happily, we have a meeting arranged with the French regulator very shortly, in which we will be able to find out exactly why it is roaring ahead. If it is happening in France, good for them, but I do not think it is happening generally across Europe, so maybe we have something to learn from France in this area.

Mr Edmonds: To supplement that, I think we do need to look at this issue. To be absolutely honest, my focus, and my team's focus, has been on broadband delivery in the UK and the series of interventions we have made. The Chairman, earlier, suggested that regulators are frightened of being tough with BT. I suggest humbly that some of my interventions, in terms of broadband, with BT have been more dramatic than any taken by my European colleagues, so we have focused very hard on those interventions in the BT network to get that wholesale distribution out there. I think now it is time to turn to Local Loop Unbundling again. I am delighted that somebody can turn to it in January, after I no longer have anything to do with the subject, for reasons that the Chairman, at least, is very well aware of. More seriously, there is a market review that Oftel will pass on into Ofcom, and in the first six months of next year my hope is that there will be a fundamental analysis of some of these cost issues, we will look again at the prices. The main price is the price of a line. Jim is quite correct in talking about co-location prices, interconnection prices, being roughly similar. What is different in France is that they seem to be able to get a line rental, and in other countries, that is significantly cheaper than ours. We need to look at that part of the equation, and we will do. Ofcom will do that analysis as part of this market review, and it is the next market review on the agenda to be started.

 

Q197  Mr Djanogly: Is it not true that BT refuse to talk about the costs of their local loops?

Mr Edmonds: No. BT are under a statutory obligation to provide the regulator with information that we request. In the case of local loops and the costs of local loops, we have asked for information, we have got information and we can ask for any information we need in the course of that review to reach a conclusion about their costs and the prices that follow.

 

Q198  Mr Djanogly: I think it is an important point, because we have had a number of companies come here today, and all of them have come back to Local Loop Unbundling, in terms of future pricing and taking up the service further?

Mr Edmonds: I think that is absolutely correct. It is a jigsaw. I would say it is the next piece in the jigsaw. It is a jigsaw that is started. We never got that piece firmly founded when we got into the process, so we have found another way of completing most of the puzzle and now we are back to that first piece. I accept totally the assertion that you put on the table there, and, again, my commitment is, as we move into Ofcom, that now this is going to be a high priority. It has to be.

 

Q199  Sir Robert Smith: Following on from that to the other part of the market, because the concerns we had brought to us this morning, in many ways, were to do with the wholesale part between the IPStream and the DataStream and the ability of people to switch and the costs being charged. I think some suggestions have been made that you have priced things as an operation cost minus, as a return minus type charging regime, whereas they would suggest you should be looking at building it up from the costs plus?

Mr Edmonds: When we are being asked to intervene in a pricing dispute, we have always got to find a mechanism that enables the provider of the infrastructure, obviously, in this case BT, to make a fair return on the investment it is making, in an environment which, as David Hendon said, was not totally without risk. The investment decisions taken by the BT Board did entail a degree of risk. Therefore we took a view that actually screwing them down to a very, very tight level of cost, and therefore a very, very low price, would not be an inducement to that investment. However, what I have determined also, and this is the key fact in the recent decision that we took, is that there must be a fair margin for service providers coming into the market-place, so that they are not squeezed by the BT retail arm, and at the moment that does appear to be working. I can only go back to 49,000 sales a week, and the fact that the gap between the BT wholesale price and the price at which other retailers can market that to all the rest of us clearly is sufficient for them not just to market but to sell and to sell in big numbers. Again, it is something that we have to keep under continual and continuous review, and we will. I think where we have struck a pretty fair balance at the moment, and I think the way that the market is operating shows a fair balance, because BT retail has got only about 25 per cent of those connections into the home, the rest of the market-place, compared with anywhere in Europe, is very, very buoyant indeed.

 

Q200  Sir Robert Smith: Yes, but those other 75 per cent, a lot of them are arguing, they are then all going back through the one wholesale provider, in effect?

Mr Edmonds: Sure. Local loops have not been unbundled on the scale that we had hoped for, therefore they have always got to go back to the same provider.

 

Q201  Sir Robert Smith: Even from there going back, if they go down the DataStream they are carrying on with BT. At the moment, there is a lot of fear of innovation, because of the costs of switching?

Mr Edmonds: There are costs in switching, and costs in switching are an issue that we are looking at, at the moment, because we have had formal complaints about the costs of switching. We are looking at that and we will reach a decision on that in the next three months, less maybe.

Mr Kenny: Probably it will be caught up in the full look we are doing at the broadband market as a whole.

 

Q202  Sir Robert Smith: The market review is going to cover all these other concerns, as well as the Local Loop Unbundling; so the whole thing is in the melting-pot?

Mr Kenny: If I may supplement briefly the Director General's answer. We are very keen to stop BT margin-squeezing between its retail and wholesale product, but also we want to make sure that ISPs have got a good choice of operators, so they need not use BT's network for the full traffic. We have made that crystal-clear to BT, and that underpins the determination we made about interconnection with BT's ATM network. The precise pricing basis for that is a very difficult issue to determine, because we do need to preserve BT's incentives to invest and innovate. When BT has brought down its end-to-end wholesale prices we have made sure that there has been a pricing mechanism in place which has led to the interconnection price also coming down. BT have not liked that, but it has been essential to ensure that ISPs can have greater choice, and that has allowed them to innovate for end users, on the basis of both quality and price, in a way that would not happen if they were dependent totally upon BT end to end.

 

Q203  Richard Burden: If I can move ahead to regulatory regimes abroad. You said you are going to be looking at what the impact is on Local Loop Unbundling and what has been going on elsewhere. Are there any other aspects, are there any lessons you think can be learned from experience abroad on regulatory regimes?

Mr Edmonds: I think again partly under pressure from this Committee six years ago, five and a half years ago, we started a massive benchmarking exercise. We learned a lot from that because we learned where we were in relation to everywhere else in Europe. We have moved through the last period of years in building up relationships with other European regulators through the Independent Regulators Group. There is now a European group called the European Regulators Group. That is producing now best practice documents on areas of regulation. So, yes, I think there are things that we can learn. Every year the EC comes and looks at regulators and performance, and the last EC Implementation Report talked about the UK in the following terms, "The appropriate regulatory environment for broadband is in place," and for almost the first time in their lives they gave us a very good, clean bill of health. There are always things to learn, but I am confident that we have added to the regulatory regime and we are using the regulatory regime now in a way that is as flexible as most places in Europe.

 

Q204  Richard Burden: What do you think we could learn then?

Mr Edmonds: What I want to learn is, going back to the very first question about Local Loop Unbundling, I still do not fully understand, notwithstanding all the research we have done, if it is the case, why the French Local Loop Unbundling market has opened up again. Is that due to regulation, or is that due to commercial pressures and a different cost structure within the French industry, and, to be honest, I do not know the answer to that. What we need to do is learn from where people are doing things well and bring back those ideas very quickly.

 

Q205  Richard Burden: On a slightly different situation, there has been a lot of discussion today generally about BT and how it may or may not have used its market position, on wholesale particularly but also its dominance generally, to benefit itself, even if that is perhaps to the disadvantage of customers. From Oftel's point of view, can I ask how you feel about certain other practices, particularly the Consumers' Association have brought to our attention the problem of other providers', ISPs, overuse, as they saw it, of minimum one-year contracts? Does Oftel have any views on that?

Mr Edmonds: We do have views, and if complaints are made to us of behaviour that is anti-competitive, i.e. a contract that simply is not long enough for the company to make a business, we are perfectly prepared to intervene, and intervene hard, in the terms of trade. I can go back to Local Loop Unbundling as an example. I think there are now 26 separate directions and orders that we have made in Oftel, many of them going into the detail of BT's own contract practices. We did the same on leased lines. We got stuck right into the contract on leased lines, when again we made a massive intervention into the market-place. If there is evidence that an ISP has, that terms of trade, or the conditions that are being imposed upon it, are anti-competitive, we will investigate and investigate quickly.

 

Q206  Richard Burden: I meant the other way round actually. I meant ISPs using their position vis-€-vis the customer to impose on the customer - I am talking retail now - minimum one-year contracts, and, therefore, in practice, getting in the way of customers switching, even if that was what they wanted to do?

Mr Kenny: We do have the power to investigate those kinds of contracts because we have jurisdiction under the Unfair Contract Terms regulations. To the best of my knowledge, we have not even been asked to investigate 12-month contract terms. We would need to look at that case by case. The thing that I would say, and I am sure an ISP would say, is that, in many cases, if they are making quite a big up-front investment, they are either subsidising the broadband modem or, in some cases, they are giving the modem away, and they need to be able to recover that cost of customer acquisition over a reasonable period. I am not prejudging the issue, but there is some argument on the ISP side which we would need to weigh up carefully if ever we had that kind of case.

 

Q207  Richard Burden: That is precisely what they did say. It is just that the Consumers' Association seemed to indicate to us that nevertheless it was an area that perhaps could be looked into a little closer?

Mr Kenny: Certainly I think this highlights the need for consumer awareness, and, as the Director General said, consumers are becoming significantly more canny about precisely what they are buying. I think the fact that a number of ISPs are advertising now precisely on the basis that they do not have 12-month lock-ins will begin to shift the normal contractual approaches in the industry.

 

Q208  Richard Burden: Have you had any problems with ISPs, again, since their relationship with the retail end, with the customer, apparently making it difficult for customers to switch from one company to another by leaving things on their computers, so that when actually it comes to try to switch from one provider to another you find the new provider does not work?

Mr Edmonds: Personally, I have not had any reports of that. I am not aware that it has been a general issue that has come in via our contact centre.

 

Q209  Judy Mallaber: What do you think is likely to be the impact on the UK of the increasing liberalisation of broadband markets across the EU? Are we likely to see big, wealthy companies coming in and challenging BT's monopoly of the infrastructure?

Mr Edmonds: A slightly positive answer to your question, because all the evidence at the moment suggests that capital is coming back into this market-place. One of the things I do is talk quite a lot to analysts and others in the City, over a sandwich lunch and a glass of water, which is all they offer you now, and they are seeing, and people have come along to me saying, "We are seeing investment that is ready to flow." People connected with Local Loop Unbundling also are telling me that, providing we can get the conditions right, capital is ready to come back into the market-place. Whether that extends to France Telecom, or Deutsche Telekom coming into the UK and investing in infrastructure networks in competition with BT I have some doubts. I have some doubts because I think, again, picking up the Chairman's point about monopolies, there is no monopoly in the big ticket stuff, you have got people like COLT and GUS and Cable and Wireless and Energis, all of whom have national networks. The big buyer already has immense choice at his, or her, disposal, and I guess it would be, for the big European countries, that is the market in the past they would have wanted to get into first, and indeed some of them did come in, AT&T came in from the States, and went back again. It is a cautious answer to your question. I do not see European liberalisation bringing that about necessarily. It would come about if they saw investment opportunities, and I think the fact that investment opportunities are appearing now does give me a degree of hope.

 

Q210  Judy Mallaber: When you say you see them appearing and if the conditions are right, can you expand on that, in terms of, what conditions would there need to be, what would make it attractive to another company to come in and challenge BT here?

Mr Edmonds: What would make it attractive, indeed what happens at the moment, what makes it attractive in another country, is the lowering of any possible barrier to entry, and, of course, as regulator, we do work very hard on barriers to entry. I am sorry if I am sounding a bit historic this afternoon, but again the Chairman, in my first meeting, asked me about carrier pre-selection. Carrier pre-selection now has come to the UK, there are two and a quarter million customers who have now got carrier pre-select. A new product called wholesale line rental, where you get single billing, instead of the two bills that you were talking about in the earlier session, will be available to the customer. My hope is that kind of product, which lowers the barrier to entry, will attract investment, not necessarily from abroad, but is attracting investment from other big brands, people like British Gas, Tesco, now are brand names, coming into the telecommunications market-place. There is no reason, of course, why France Telecom or Deutsche Telekom, using some kit of their own, but then using bits of the BT network, could not start to put together an offer for the UK consumer. Those are the conditions, I think, that will lead to more investment.

 

Q211  Judy Mallaber: Is there any further role for Oftel in this process, or are you sitting and watching?

Mr Edmonds: No. I think there is always a role. There is always a role when somebody comes along and says, "Look, there is a barrier to entry here. We would like to offer this product. We would like to offer flat-rate access to the internet," and a year later we have provided it. "We would like interconnection at the asynchronous transfer point in the BT network," and we gave it to them. "We would like wholesale line rental," and we have given it to them. I think, for the regulator, for Ofcom, there will always be a consciousness that there are new services which competitors might want to develop, there are new points into the network at which interconnection may be possible. I suspect much of the future of telecommunications regulation will follow the pattern that we have established over the last five or six years, where you are talking about different ways of taking out from the BT network the functionality that you want, adding your own bits to it, sometimes kit, sometimes servers and sometimes billing, and creating a different market-place. I do think there is a role for regulation on that side. I think also there is a fundamental role for regulation which is ensuring that anti-competitive behaviour does not happen. I think Ofcom will have a massive role in telecommunications regulation over the years ahead, yes.

 

Q212  Judy Mallaber: You have been slightly cautious. If you were going to predict, in five years' time, would you expect BT still to have the monopoly on the infrastructure they have got at the moment? If you were gazing in your crystal-ball, would you see a greater number of suppliers?

Mr Edmonds: I have to be very careful, because anything I say about BT's market share could be perceived as being market-sensitive, and, as I would be guessing, anything I say now, if any journalist is here, it is not at all market-sensitive, it is a pure guess. If you look at what BT has now, in terms of infrastructure, it has a very big, strong core network, but I expect to see the competitors to that core network continue to develop. People like Telewest and NTL, Cable and Wireless, have restructured their own finances, they should be able to compete better in that core network. So I see continuing pressure there on BT. I see a lot of pressure on BT from these market entrants I have just described, using carrier pre-selection, using wholesale line rental. To lose two and a quarter retail customers, in, what, two years, is a lot of retail custom to go out. I see BT's share steadily coming down, but over a five-year period I think I would confidently predict that my successors in Ofcom will still be doing their market reviews and finding that BT are dominant in the provision of the basic telecommunications service, and probably are going to be dominant still in the provision of broadband. Therefore that regulation is an evil that will always be with us.

 

Q213  Sir Robert Smith: Are you convinced that there is sufficient separation between BT's broadband retail and wholesale arms?

Mr Edmonds: I think that BT needs to do more to convince not just me but the community at large that there is sufficient separation. We work very hard with them, and Chris Kenny in particular, to create a much better, a genuinely better, understanding of BT accounting. I think that there has been major activity within the company. I was invited by Sir Christopher Bland to address the whole Board. The regulator has never done that. Again I gave the message that I gave in my last answer, that, however good they are, however well they behave, however they try to help the Government with its targets, if they are dominant in the market-place they are going to be regulated, and they have got to understand that. That regulation means that the wholesale and retail split must be clear, must be precise, people buying from wholesale must believe that they are being treated in the same way as people buying from the retail arm.

 

Q214  Sir Robert Smith: What still do they have to do?

Mr Edmonds: I think they have got to be much clearer in terms of the corporate structures inside the company. I think they have got to be clearer in terms of the imposition of what are known traditionally as Chinese walls and make sure that people outside believe there are Chinese walls and understand that they actually operate. I think they have got to avoid getting into the kinds of rows they did with me and my team in the last couple of months, when, prima facie, they did at least come close to being guilty of a margin squeeze, and the result of course was that they reduced their price and the margin squeeze disappeared. I think it is for them to work through what the consequences will be of their actions before they launch a new product. If they do that and if they are absolutely transparent, I think that does give the general public and competitors confidence that what they say happens does happen.

 

Q215  Mr Berry: Would it not be just more straightforward to split completely the retail activities from the wholesale activities, like the gas market and others?

Mr Edmonds: I think the considerable difference between the gas market and the electricity market is the deeply integrated nature of the BT network. Actually, I think it is a fairly simple equation, at the end of the day. Let me start that answer again. From the perspective of the BT Board, is value to be gained from splitting up in the way that you suggest, because, of course, in both of the other markets, although regulators push, the final decision will be taken by the companies, is there value to be gained? The value to be gained is the transparency, the clarity and a possible rationalisation. The disbenefit, the disvalue, the damaging from value, comes from an incredibly disruptive process, in the first place, to disentangle it all, because BT went to an awful lot of trouble in 1984 to ram everything together so that it could not be the start point for denationalisation. Is the disruption, at all parts of the process, worth it, and what impact does that have, does it damage BT's ability in the short and medium run to provide the level of services that, in the economy and society, we want? Then there is that whole range of disruptive answers that you would need to give. I think then you need to look at, in the longer run, the impact on innovation, the impact on customers, of not having the integration. I think it is a very important question. So far, as a regulator, had I wanted to intervene in the past I would have had to advise the Secretary of State that there was a serious problem that I had perceived coming from integration and would have asked her to take action under the Enterprise Act. Under the new regime for Ofcom, the same characteristics would apply but Ofcom does have those Enterprise Act powers, but before even contemplating using them it has to be very sure that there is a problem and issue that can be addressed only by going down that route. Quite clearly, we have talked about what is going to happen in the next year, in Local Loop Unbundling. Stephen Carter, the new Chief Executive of Ofcom, in the first speech he made a few weeks ago, announced that Ofcom would be looking at the whole telecommunications market-place during its first year, and I suspect he will be saying more about that in the not too distant future.

 

Q216  Mr Berry: Given the dominance of BT over ADSL, and given the deep integration that you have referred to, does not that suggest a priori this problem, by the very nature of it?

Mr Edmonds: By the very nature of dominance in a market-place there is a problem. That is the whole underpinning of both the Competition Act approach to companies and the European Directives. Whether there is a problem on the ground I think depends on what happens on the ground. Where there have been problems on the ground, until now, I would argue that the regulator response in the United Kingdom has been effective. On occasion it has been bloody but it has been effective in ensuring that the fairness that we want to see delivered from the wholesale arm actually is delivered on the ground.

 

Q217  Mr Berry: Would it not be less bloody if there were a clear division?

Mr Edmonds: If there were a clear division then you would be creating a permanently regulated wholesale business, and that is a potential solution, but that is what you would get. I have to say, at a personal level, and it is not a matter, for one moment, of being frightened of BT, having observed this scene over the last six years, I am far from convinced that is the right answer at this point in time for the United Kingdom. I would much prefer to see any solution emerge, that might emerge, through the natural forces operating inside the company.

 

Q218  Mr Berry: Natural forces operating inside a company can operate against the public interest, of course. It seems to me that you are saying it is the disruption of change which is the fear. Would the disruption be that great? Would it not give power to this straightforward exercise?

Mr Edmonds: I do not think it would. Again, Mr Verwaayen is here later on. I think genuinely, and it is a personal view, and quite clearly others can take a different view, that by no means has the case been made that the benefits will outweigh the disbenefits. Before any regulator could go down that path, he, she, it, Ofcom, would have to do a very substantive cost/benefit analysis to justify that the potential benefits outweighed the costs.

 

Q219  Chairman: Is it not the case in the UK, where there has been a programme of improvement, of the Chinese walls, that, in fact, the bits have split apart? Perhaps simply the establishment of Chinese walls of a sufficiently vigorous kind would result in there being circumstances where BT might say "It's not worth the candle, sustaining the retail and wholesale business"? You have hinted that the Chinese walls are not yet where you would like them to be, or as high, or whatever it is, thick, transparent, whatever, that there would be disruptive consequences. It would be inconvenient for BT but it would not be inconvenient necessarily for people who wished to sell in different types of bundles from what they are doing at the moment, or for us, as consumers, who might want other packages. It comes down to the fact that you seem to be more concerned about how inconvenient it is for BT rather than how beneficial it may be for other players and their eventual customers?

Mr Edmonds: I am concerned about inconvenience for BT. I cause them quite a lot. What I am concerned about is that, I suppose, at a very simplistic level, a forced demerger of the company, in response to a regulatory initiative provoked by competitors, it seems to me, has the scope to create a period of two, three years of confusion, diversion of focus within the company, resistance, and all of that. The balance that, in my own mind, I have sought to create weighs very heavily, and I do not see that the advantages coming, in terms of the bundle that you have just proposed, outweigh necessarily those disadvantages.

 

Q220  Chairman: It could be argued that BT is digging itself out of a hole and is doing it with some success. They have begun to get their finances in order, there is a better focus in the business, management is running things in a way that looks as if it is going to work. With the value of hindsight, in a state of being demob-happy, six days to go, probably the wages are in the bank, they cannot get at you - - -

Mr Edmonds: They have not paid them yet. We are still arguing.

 

Q221  Chairman: Of course, I forgot, you were a banker at one time. The point I was getting at really was, you have been in the job for six years, do you think that perhaps, six years ago, when I think the state of BT's finances was somewhat less parlous than it is now, there might have been a case then? I would be quite happy to see the Gordian knot sliced, but I would be worried if it caused undue financial pain to the shareholders of BT and the pension funds which depend upon it in the immediate short term. Do you think, in retrospect, that perhaps you could have taken this on, or do you think that the awareness of it in those days was not as heightened as an option as it is now?

Mr Edmonds: No. I will give you an absolutely honest answer. I think, six years ago, with all the benefits of hindsight, had we taken on an Enterprise Act style investigation into BT, with a view to forced demerger, it would have been catastrophic, because it would have arrived during the downturn, it would have been catastrophic because the then management certainly would have resisted it with everything at their disposal. I think six years ago would have been absolutely the wrong time. What do I think now? Catastrophic is not a word I would use now. I would say simply what I have just said, that my own balance still remains firmly that the case is not proven, by no means proven.

Chairman: In Scotland, when you talk about a case not being proven, it means that probably they are not guilty but certainly they are not innocent. We will leave that one there.

 

Q222  Linda Perham: Currently the only significant alternative to BT as a provider of infrastructure is cable. Why are not the cable companies subject to the same wholesale regulation as BT?

Mr Edmonds: It is a fairly straightforward legal issue, stemming from the European Directive and indeed British competition law definition of dominance. We identify a national market and we say, "In a national market is this company dominant?" Clearly BT is dominant, because of its market share, because of its ability to act in a way that makes it independent of the rest of the market-place. Telewest and NTL do not have dominance in the national market-place, they are quite small players, they cannot put up their prices independently, if they did they would lose all their business to BT. The market reviews we have done have not defined them as dominant, if they are not defined as dominant we cannot mandate access into their networks, and it is a simple, consequential flow through.

 

Q223  Chairman: If they were to merge, would that change the circumstance at all?

Mr Edmonds: If they were to merge, we would do another market review and see whether or not the merged company tipped them over into a dominant situation, and I do not know what the answer is to that.

 

Q224  Sir Robert Smith: Earlier, you said you addressed the Board of BT. One of things that is happening, obviously, with all these local trigger levels, the argument has been put, "We have looked at the economics of your exchange, if you can get us this number of customers that exchange will make us money and you can have it." According to what the DTI says, you have argued that broadband is a national product and therefore you would accept a model where costs of roll-out just moved across exchanges. How have BT responded to that message from you?

Mr Edmonds: I think BT have responded constructively to that message. I am much more optimistic than David Hendon, in terms of where we will get to in DSL roll-out and where we will get to in terms of national roll-out. Again, doubtless you will ask Mr Verwaayen. The pace at which they are selling the service now indicates, I would hope, that they are making decent returns from it. The ability to sell at a uniform price across the UK, which I think is fundamental to all of this, and therefore, to use a phrase which was used before, to cross-subsidise, I hope will encourage them to even further efforts in rolling it out. I think that the arrival in the UK market-place of PCCW and its gaining 13 licences for 3.4 GHz radio fixed access is very, very hopeful too. I think you asked earlier "Will Ofcom make a difference?" I think Ofcom will make a difference because I think the ability to get spectrum out in a much more intelligent way, the ability to trade spectrum, the ability for spectrum to be sold on to somebody else, that somebody does not want, is going to invigorate that part of the market-place. I would hazard a better guess than I would before about BT's share of the market, in terms of broadband. I would be very surprised if within the next two years we were not well into the nineties, and I think our aspiration should be the 97, 98 per cent that we got originally with fixed telephony. I believe genuinely that is a feasible target. Whether you need to put a slug of Government cash into the last three or four per cent to secure that I am not sure. I think so far the market has done pretty well, and that could be the case. If so, so be it, we should do it.

 

Q225  Chairman: You have made provision already, have you not, in the sense that you have said to BT that if they wish to cross-subsidise to get some of their more remote services, and therefore perhaps more expensive, and probably smaller, into activity, you would be quite happy that the cross-subsidy could be justified in widening access?

Mr Edmonds: We are happy, indeed, to encourage a uniform price for DSL across the UK, yes.

 

Q226  Chairman: We have heard all kinds of remarks and statements about nascent technologies just over the horizon. From a technical point of view, as distinct from a market-driven one, which you have identified already, how long do your advisers think it would be before we could expect to get the technology which would mean that the footprint would be right over the whole of the UK?

Mr Edmonds: I think, no more than three years, two to three years. I am very confident within two to three years. The changes in DSL in the last three years have been absolutely dramatic, the mini DSLAM stuff, the much greater reliability, the radio fixed access stuff coming out and showing remarkable connectivity. Caroline, you are my Chief Engineer. Do you want to add a word about that?

Ms Wallace: Geographic availability. I think the one thing I would say is that, in theory, broadband is 100 per cent available by satellite across the whole of the country. The problem is the price. People who want it can have it but often the price is very unpalatable for certain people. I think the innovations that David has been talking about are the kinds of innovations that will make realistically and affordably priced broadband much more widely available. You have got to be realistic about these things as well. I think it was mentioned earlier, the technology involved, in terms of DSL, it is broadband technology running on a network that was designed initially with that in mind, and that is one of the issues. Great strides are being made and I think they will continue to be made.

 

Q227  Sir Robert Smith: Looking at Northern Ireland, where they have gone down the road already of saying, "Let's not faff about, let's get the public sector, put it out to tender and have 100 per cent broadband here in Northern Ireland," do you have any concerns as a regulator if that is premature before the market is fully there?

Mr Edmonds: The personal answer is, providing that it is done in a way that is competitive in the local market-place and providing it is done in a way that does not stop competitors to BT or the cable network, whichever radio fixed access operators might be involved, I am totally relaxed about it.

 

Q228  Chairman: Of course, it does enjoy a privileged status, in terms of Regional Selective Assistance, and there are euro slush funds there of a kind that are not available to most parts of the UK?

Mr Edmonds: Indeed, and far be it for me to comment on the whole question of industrial assistance and that kind of stuff. Providing it is decent, legal, honest and truthful and that people have done their risk analysis before they get into it. I started off working for Mr Wilson's Government in 1966, and in those days we had Regional Development Boards and Regional Development Agencies and we were happy and proud to invest in the regions. I finish my career, some 38-odd years later, still happy to endorse selective regional investment for the sake of the community in which that investment is made.

 

Q229  Chairman: Thank you very much, Mr Edmonds. One last point, you did mention that you were engaged in discussions with the French market. Perhaps you could send us a note on that afterwards as well? Could I say, Mr Edmonds, to you and your colleagues, thank you very much, and to you in particular. I think we have been crossing swords, exchanging words, for some years now, with varying degrees of intensity, I think perhaps is the mildest way of putting it. Can I say thank you very much for all your efforts, and I think it is safe to say that the British Telecom consumer would be rather worse off had it not been for your efforts. Thank you very much for the manner in which you have given your evidence.

Mr Edmonds: That is kind of you. Can I thank you for your courtesy over those years to me and my whole team.

Chairman: It may not be extended to your successor. Thank you very much.

 

Memorandum submitted by NTL Group Ltd

Examination of Witnesses

Witnesses: ALEX BLOWERS, Director of Regulatory Affairs, STEVE UPTON, Managing Director of Networks, and BILL GOODLAND, Director of Internet Products, NTL, examined.

 

Q230  Chairman: Good afternoon, gentlemen. We are very pleased to see you. Some of you have had quite a long wait, but you have been sitting in. Mr Blowers, perhaps you could introduce yourself and your colleagues?

Mr Blowers: Thank you very much, Mr Chairman. My name is Alex Blowers. I am Director of Regulatory Affairs for NTL. To my left is Steve Upton, who is our Managing Director of Networks, and who will be able to help you in particular with any difficult technical questions or issues about the practicalities of broadband technologies. To my right is Bill Goodland, who is our Director of Internet Products, and he is our expert on issues around market development, the kinds of products that are out there in the market. I will try to deal with anything else.

 

Q231  Chairman: Thank you. I think probably, at the end of our questions, you got the issue that we raised, that, in some respects at least, you present the only infrastructural competition to the telephony broadband. We realise that your sector has gone through some difficulties of late. What prospects are there for increasing cable roll-out, particularly in those areas without ADSL coverage where they are doubly disadvantaged? How do you see the prospects for that?

Mr Blowers: I think we have to be very honest and as open as we can be with you today. I think it would be wrong and a mistake for us to imply that there is likely to be widespread cable network roll-out in the foreseeable future. Really there are two reasons for that. The first is that, although clearly we have been extremely successful in rolling out broadband services and we have set out the numbers for you in our submission, the truth is that we are running still at something like 13 per cent penetration. In other words, customers who have access to our existing network, 13 per cent of those customers are taking broadband currently. That leaves a very, very significant potential market share for us to reach simply by continuing to market services aggressively to the people who have already spent the capital to connect to the network. The second point is that also we have some areas within our network which are not currently broadband-enabled, and we do get a lot of criticism and comment on the fact that, in some cases, the historical legacy networks that we have inherited are not capable of supporting broadband. If we were going to spend capital in the near future I think the public would expect that the first thing we would do is build out to those parts of the network that are not broadband-enabled. Having said all of that, a very important message that we want to leave you with today is that NTL is extremely interested nonetheless in being a national provider of broadband services and not simply a provider of broadband services in the enclaves which currently we occupy with our own network. I think you will have heard a great deal today about the need for internet access products that use the BT network, in one form or another, and I think we would highlight that is indeed essential. Whilst infrastructure competition is very important, and indeed is delivering massive benefits, in terms of pushing innovation both in terms of the products that we have been able to bring to market and the response that we see then from BT, ultimately we do need products which allow people to compete on a national basis. As the broadband market starts to evolve, it will be driven very much by the kind of national characteristics. For instance, contact providers will be able to partner with broadband service providers, they will be looking to do so on a national basis. If you have a national footprint you can do national advertising and get the full benefit from that. There are all sorts of reasons why, even for a company in our position, some of the issues that you have been hearing about around the need for viability, regulated access products are very important. That is our aspiration, to be a national player and to be able to compete on all fours with BT.

 

Q232  Chairman: You mentioned BT's role. Also in your evidence to us you made reference to the way in which BT seems to be acting, in what could be construed as an almost anti-competitive way. I wonder if you could be more specific about this and tell us where they are behaving anti-competitively, or could be construed as such, and would you like to see regulatory changes to cope with that? We are talking about a transitional period, going from Oftel to Ofcom. It may be that the new broom can sweep cleaner than its predecessor because it has got new powers, or the like. Perhaps you could be a wee bit more specific than you have been in your written evidence in this area?

Mr Blowers: I hope we can be. One of the dangers of this kind of session is that it ends up being an extended whinge-fest, where everybody criticises everybody else. I think one of the important points to make is that everybody will always criticise BT for behaving anti-competitively, if there is not a product in the BT portfolio of advice that meets their particular needs. You have to be very careful to distinguish the normal cut and thrust of the relationships between people in the industry from a genuine kind of pattern of behaviour. One of the points that we make in our paper is that, I think the phrase that has been used is, BT, in the face of competition, walks backwards slowly, and clearly that is a very sensible strategy for BT. I interpret that as meaning that BT does whatever it can to delay the rate of competitor entry into the market, falling short of behaving in a way which would breach competition law. The point that we would make is, if we look, for instance, at the way the Local Loop Unbundling process works, undoubtedly it was the case that there was a certain amount of tactical delay built into the way that happened. However, the problem is that, if you try to demonstrate that is a breach of competition law, it is a Competition Act case, that these guys have committed some kind of offence, I believe it is almost impossible to show that is the case. There is a distinction that we would draw between using the advantages that delay and tactical procrastination provide from behaving in a way which means you can go straight down to court and get an injunction. That has been one of the problems we have had, that increasingly we have relied on a kind of competition law mentality. In fact, the key issue is taking a strategic view of what you want to see achieved in the market and then driving hell for leather to deliver that. I think that would be our criticism. It is not that we would allege widespread malfeasance by BT, because if that were the case there would be a string of cases against them already, through the courts, where they had lost. I think it is much more that the framework has failed to extract from BT the key strategic concessions that would make competition work.

 

Q233  Chairman: Let me put it another way, very briefly. If you had been in their position, would you have behaved any differently?

Mr Blowers: I am not sure that I would.

Chairman: I take the point you are making, and certainly we have always felt that the elbow of the regulator needs to be jogged at times, and we see that as one of our functions, to try to ratchet the process along a wee bit.

 

Q234  Sir Robert Smith: Earlier this morning we discussed, and it was touched on throughout, the definitions of broadband. You have a product at 150 kilobits. Do you think really that is what people perceive by broadband, when they see the marketing of what can be done with broadband, or do you think it is more of a midbrand product?

Mr Goodland: This is a suggestion with which we are quite familiar. It has been made primarily by our competitors in the past. When this first came up I commissioned research amongst our 150k customers and also amongst the public at large, internet subscribers and non. The feedback that we had was, first of all, among the public at large, there were no particular expectations of a specific speed associated with the term 'broadband', so that was the first point which I think came through. I should say, this is research we would be happy to share with you. The second point was, when then we consulted with our 150k customers the vast majority were (a) satisfied with the product they had got, (b) quite aware that effectively they had paid less for a product with a lower band width, and, interestingly, I think, and importantly, (c)) a significant proportion told us that they would not have taken a 150k product if it had been priced at the price of 512k or 600k products. In other words, I think the contribution the 150k product makes actually is to grow the market and take people into broadband who would not have gone there otherwise, or would not have gone yet. Certainly I can tell you that it is an awful lot easier to up-sell, or to sell a 150k customer, sorry to use the jargon, a higher-speed broadband product than it is to sell a broadband product at 600k to a completely new subscriber.

 

Q235  Sir Robert Smith: In terms of the consumer, they cross the threshold and maybe you can transfer them. On the technical side, you have mentioned already that parts of your network are not even able to do any kind of broadband. What is the consequence, once a lot of people have bought into the 150k, is your network robust enough, if they all decided to upgrade, would you be able to cope?

Mr Upton: The areas of the network which currently offer broadband services would be able to offer a range of higher speeds, if that was what the customer base wanted. Clearly, investment would be required to provide additional capacity in those areas, but that is quite different from those areas of the network which currently are not capable of carrying broadband at all. The principal reason for that is that those networks were built really to carry analogue television, which is one-way traffic, and therefore currently do not have a way of carrying the return path which is necessary to support broadband.

Mr Blowers: Can I make one additional point in connection with the 150k product. At an earlier stage, indeed, I think probably the last time the Committee met and looked at broadband issues, there was a lot of discussion about the extent to which an unmetered internet product militated against the early adoption of broadband. With comparisons, for instance, with Germany, which did not have any metered internet product but therefore moved more rapidly into the broadband environment. The price point that we have adopted for the 150 kilobit product is designed to be a step function, if you will, from the unmetered environment into the broadband environment, so it creates a critical price point between our metered offerings and higher-speed broadband offerings. That is really important, because without that kind of intermediate step there are a lot of people for whom the price differential will be too great. Because they do not quite perceive what the benefits are, the price differential is too great to justify the leap.

 

Q236  Chairman: What percentage of your cable customers are only on analogue TV, have cabling which is capable only of receiving analogue?

Mr Upton: The current roll-out, we have in excess of 90 per cent of the network is capable of carrying broadband.

 

Q237  Chairman: It is ten per cent. Would it be a disproportionate cost for you? This ten per cent, before very long, are going to have to have their television problems addressed anyway, are they not, so would you anticipate anyone going in for broadband as a consequence of digitalising them, and when do you think that will be?

Mr Blowers: That is exactly right. The analysis is absolutely correct. Now that we are out of the restructuring process, the painful restructuring process, I cannot give a commitment today about the time line but what I can say is it is definitely and firmly on the road-map.

 

Q238  Linda Perham: Will technological developments reduce dependence on the companies that own the copperwire and cable infrastructures competition in the near future?

Mr Blowers: I would like to ask Steve to deal perhaps with some specifics, but what we would say is that it is absolutely right that the policy framework should encourage other forms of technology and facilitate those wherever possible. Particularly we are very keen to explore the possibilities around broadband wireless and to make sure that suitable spectrum allocations are available for that. Having said that, all of these things at the moment are falling in the box marked 'unproven', at least as far as providing a product that competes on price with existing wire technologies. Absolutely these things should be investigated but they should be facilitated and the Government should remove any roadblocks, but I think it will be important not to send the message that, frankly, it is just there, waiting to be productised and it is all going to be rolled out next week.

Mr Upton: Yes, I think that is right. There are a number of technologies, which are in trial in various different places, which have got the potential to provide a non-DSL solution to broadband coverage. We are keeping a close eye on a number of those, and, as Alex said, fixed wireless access particularly is something that we are actively investigating ourselves. I think, if you look at all of those technologies, there is a reason why none of those has been rolled out yet on a mass scale, either they have performance limitations, which means that the product experience is unacceptable, or they have got some sort of economic limitation. For example, the costs of satellite equipment for satellite-delivered broadband means that, although that works reasonably well technically, from an economic point of view it is not at the right price point. I think a number of those technologies have got the potential but none of them is commercially deployable today.

 

Q239  Linda Perham: What sort of timescale might we be looking at then, is it in the next couple of years, or is it still too far ahead?

Mr Upton: Certainly I think it is not imminent. We have heard today people mention timescales of two years, three years, and so on, and I think that is the earliest at which any of those technologies would become commercially available.

 

Q240  Mr Berry: In your memorandum, you argue that the regulatory regime has failed in important ways, and in fact you have alluded to it already. Has regulation worked more effectively in other countries, in your view?

Mr Blowers: The difficulty that we have in answering that question is finding a country that is sufficiently close in terms of its other characteristics then to isolate the factors which have differed in terms of regulation. I think what we would say is, although Oftel comes in for a great deal of criticism, some of which is justified, it is noticeable that in Europe other national regulatory authorities still look to Oftel for a lead on many policy issues and still see Oftel as exerting considerable thought leadership, to use the horrible jargon, on a whole range of issues. I think it is important not to misstate the position. I do believe that overall the framework in the UK continues to be pro-competitive, pro-investment. I think really what we are talking about is, for instance, I heard David Edmonds explaining about the steps they are taking in voice telephony, and I think there are examples, both in relation to voice telephony and narrowband internet, of very successful regulatory interventions. The problem is that we are still not there as far as broadband is concerned. In our view, we wasted a lot of time on the hard yards of the Local Loop Unbundling process, only to arrive at a point, at the end, where the relative pricing of Local Loop Unbundling and BT's own on-net wholesale offerings meant simply that Local Loop Unbundling was not attractive as anything other than a niche application in the market. You will hear from some companies, who are using Local Loop Unbundling successfully, that it is not a mass market application, as things stand, because of the differential between LLU pricing and so-called Option Four pricing, or Option Three pricing. I am hoping that at this stage of the day everybody else has had the difficult task of explaining all these different products and I do not have to go into it, but I can if I need to. I think there is an issue there about finding a viable product that is based on the idea of competing infrastructure, not just services competition. The fallacy is that services competition is an end in itself. I think, if you get the right infrastructure solution, the services competition will flow without the need for any further regulatory intervention.

Chairman: Thank you very much, gentlemen. I think we have covered everything that we wanted to get through with you, and thank you for your very concise answers. Sometimes, at this time of the day, we start asking concise questions as well, but it would have been Hamlet without the prince, and we have got the prince now. Thank you very much for your time and trouble. Thank you.

 

Memorandum submitted by British Telecommunications plc

Examination of Witnesses

Witnesses: BEN VERWAAYEN, Chief Executive, ALISON RITCHIE, Chief Executive, BT Broadband, and ANNE HEAL, Director, Regulatory Affairs, BT, examined.

 

Q241  Chairman: Good afternoon, Mr Verwaayen. Could you introduce your colleagues and then we will get started?

Mr Verwaayen: Thank you very much. On my right-hand side, Anne Heal, Director of Regulatory Affairs, and on my left Alison Ritchie, who has the unique title, I do not think anyone else in the world has the title, of Chief Broadband Officer. I am the Chief Executive.

 

Q242  Chairman: Thank you very much. You have enabled a number of exchanges but you have still got some to do. Have you any estimate of what the cost would be of enabling your remaining exchanges to afford broadband to the rest of British potential customers?

Mr Verwaayen: Allow me to say, first, thank you for taking a whole day to talk about broadband. I think it is absolutely vital that we get that type of attention to a subject which, for the knowledge economy, is key, and it is very important. Secondly, just to give you a perspective of what is happening in the market, since you started this morning, and right at this moment, more than 10,000 people in Britain have got broadband, so there is something happening in this market. Yes, we talk about investments but it is not just enabling an exchange that is at stake. If you look to broadband, broadband is not just an access pipe, where you can say it is 512 or 128, or whatever, that is just the access part, it is the whole customer experience which allows people to get new stuff. So far, we have invested, I think, over £700 million and I think there is another 200, £250 million to go forward, at least, to make sure that you get that door-to-door carpet of availability you were referring to. The issue, of course, is how many customers are there to recover, because this is, as you know, not just a product, although it is treated from a regulatory point of view as a stand-alone, therefore stand-alone must be profitable within a certain time frame to have a proposition. So we have to look to the number of customers, not just to the exchanges.

 

Q243  Chairman: We know that you have introduced trigger mechanisms and these have been somewhat variable in some areas, and obviously the variability does lead us to believe that you think also in terms of exchanges as well as customers?

Mr Verwaayen: The two go together. What we need to do is say, "Okay, what's a formula that's fair and right?" What we have done is say we have the obligation, on a stand-alone basis, to make broadband a profitable business for BT, because we compete with others in the market, I am sure we are going to talk about that. In order to make that the profitable thing, we have to look to, in this particular case, cost per location where you have to go, look to the population, see what is forward-looking, as always, see what you can do in successful selling and then look to the individual cost of upgrading that particular exchange. We have set a trigger level of 50 per cent of the cost, so 50 per cent is taken by BT as a risk, as an entrepreneurial risk, and the other 50 per cent, if we get it to that level we enable the exchange, which I would argue is a very pro-broadband type of reasoning.

 

Q244  Chairman: Is there the possibility that as you move on so your cost diminishes therefore the trigger mechanisms are not as high, or when your costs are going down it means that your capacity for profit increases?

Mr Verwaayen: Let me try to put it slightly differently, if I may. We have now, today, one million, and I will give you the exact number, which was not published before, 1,533,858 customers, as of last Friday, on DSL. You will remember that 18 months ago we were in nowhere land, and we have been able to go from a coverage that was, like everybody else, metropolitan only to a coverage that now, today, we are covering 80 per cent of the population with a clear road-map to go to 90 per cent. We understand what it takes to go from where we are today to a footprint that is much bigger and much, much wider, and the answer to that is demand. It is not enabling and see, it is creating demand and answering the demand from our customers, that is the mechanism we are using. You are right, the more demand we have the better we are, the quicker we are, in making sure we go on as high a percentage as possible. We are working very hard to do it not only by ADSL, because there is a natural limit to ADSL, it is a technology limit and an economic limit, also we are using fixed wireless, we are using MASH technology, we are working together with MIT in the US to develop all kinds of new technologies, to expand footprints of existing and new technologies that we evolve. We are working day and night to make sure that we have a larger footprint.

 

Q245  Linda Perham: Can you tell me why Local Loop Unbundling is more expensive in the UK than elsewhere in Europe?

Mr Verwaayen: Sure. I apologise should I bore you. There are four different ways that people can go to market in the UK, not available in other countries. First of all, people can decide, and they do, massively, to go as a reseller to the market, those are called the ISPs, and we have 160-plus ISPs in the UK using BT services to go to market. Some of them are large, others are very focused, most of them have a very good business model because they know what they sell. Then we have people that use DataStream. DataStream is you buy everything from BT but, the IP layer, you either build the IP layer yourself or you buy it from somebody else and you have a business model based on DataStream. Then we have Local Loop Unbundling, which means that you go physically into the exchange and you have the ability to work from there. Then you have the last group that says "I'll build it myself." There is absolutely no barrier today to building broadband, broadband is something completely different from narrowband. Sometimes people think that BT have an advantage by being in the narrowband. We have a level playing-field. Everybody else can go and build a broadband network, and some do. Local Loop Unbundling, for regulatory reasons in the UK, has been what I would call focused on itself, so we have to recover the cost within the domain of Local Loop Unbundling, we cannot spread it around other products. If you spread it around all the products of BT then maybe the cost will be a tiny, tiny little bit more expensive because you spread it. Not here. We have chosen for a system in this country to recover totally within the domain of Local Loop Unbundling. The recovery of the product is based on a forward-looking formula. So what happens is, in 2000 people said, "Hmm, how many lines will there be in 2005?" and people said "A million," 1.1m I believe. "Hmm, what will the cost be? BT give me your cost. Hmm, I'll deduct this and this and this, that's what will go forward. I will make a projection forward and then bring it back to prices for today." Today's projection on Local Loop Unbundling is that it will not be 1.1 million lines but 135,000 lines, for a very good reason. DataStream was not available at the time of Local Loop Unbundling and there are much smarter business models than going with Local Loop Unbundling, because the cost of Local Loop Unbundling, even if it were to be for free, is only applicable if you go to a very targeted audience. You go with a proposition to SMEs and others that want high in the value chain so you can get the cost, because you have to do your own maintenance, you have to drive the trucks around to do the stuff, that is the nature of Local Loop Unbundling, so many people say, "Uh-uh, I don't want Local Loop Unbundling, I want DataStream products." Local Loop Unbundling in the UK is a reflection of a non-realistic assumption of volumes, and besides Local Loop Unbundling in the UK is based on flexibility to the maximum. In Europe, if you go to Local Loop Unbundling you sign a contract for a year. In the UK you sign a contract for a month. You know that if you rent an apartment for three weeks you pay a different price than if you have a ten-year lease, because you pay the cost of flexibility and the cost of risk. Not in Telecom.

 

Q246  Chairman: Mr Verwaayen, in the days before you arrived at BT, we conducted an inquiry into Local Loop Unbundling. What was perfectly clear was that BT then had to be dragged, screaming and kicking, into a position where it was affording comparatively easy access because the number of exchanges, the difficulties imposed, the charges before any business model of the kind you have been talking about was constructed, were such that, your predecessors, short of legal action by the regulator, were going to do as little for as long as possible. That was the first thing. The second thing was that when the British public woke up to the possibility and business woke up to the possibility, after eventually Oftel got you to open it up, it was at that point that other technologies were that much more attractive and were cheaper. I have to say, I do not think you are telling us the whole of the picture. You are giving what is happening as of late, but three years ago I think that BT was culpable of delaying access to that part of the market over which, at that time, they did not have the business sense to recognise that they could have made money out of the spare capacity that was available to them and which they did not require. I think it may well have been one of the factors in your appointment?

Mr Verwaayen: Mr Chairman, you have infinitely more knowledge about what happened three years in the UK than I have, so I am not at all a good partner for this debate. I have no first-hand knowledge about considerations, what happened. However, I think we would do you a favour if we were to submit to you an international comparison on Local Loop Unbundling, on prices and conditions, in which you will see that your observation may be 100 per cent or not, I have no idea. What I do know is that the reality of the market in Local Loop Unbundling in the UK is no different than in any other of the EU markets.

 

Q247  Chairman: It may be a question of timing, and certainly we would be very happy to swap reports. I will give you a copy of the report we wrote three years ago, which was accepted broadly by Government along the lines that perhaps I paraphrased, for the purposes of brevity, this evening. My colleagues here who were on the Committee at that time were signatories to that report, three of us were on it, and it may be that if you have a couple of moments of near insomnia it would be a reasonable cure.

Mr Verwaayen: I would be delighted to read it, but I hope also that you know the possibilities that companies change.

 

Q248  Chairman: I was saying merely that I realise you are operating on a kind of year zero approach, which may be two years ago.

Mr Verwaayen: I apologise for that.

Chairman: I was trying merely to redress the balance, as it were, because I think that your picture, although accurate, was not complete.

 

Q249  Sir Robert Smith: You have touched on this already, about trying to get into the rest of the country, it is 80 per cent so far and you see us getting to 90 per cent fairly straightforwardly.

Mr Verwaayen: Fairly straightforwardly. Let me pay tribute to hundreds and thousands, literally thousands of people, who in their free time campaign on a local basis. I think the UK has never seen anything like it and, to be honest, I think the western world has not seen anything like this. I think we show a tremendous amount of respect and gratitude to the people who go campaigning, day in, day out, for their trigger levels.

 

Q250  Sir Robert Smith: You have an interest. In my constituency there have been people campaigning in Kemnay and they have got the numbers way up and finally now the internet sites out there say they are non-viable. What is your next step for the ones that have been termed non-viable under the current trigger levels?

Mr Verwaayen: First of all, we have no such thing as non-viable. I refuse to accept the thing is non-viable, because maybe it is non-viable today in the economics that we have, but we are working day and night to get better business models, with partnerships, and I would like to underline that. This is not something that you can say is BT, it is BT and partners, because this is the market, it is market demand, it is the economy. It is important as much for business as for consumers. We have great partnerships with some of the regions, we have great partnerships locally, that will bring demand, and demand will bring competition to BT, because where BT comes 160 ISPs come with us. It is very important, extremely important, that we develop further plans in technology and in the business model to go as far and as deep as possible, and you can count on us as a company and on me as a person that we are passionate about making that happen.

 

Q251  Sir Robert Smith: How much have you taken comfort from Oftel's information that they see broadband as a national product and therefore they are quite happy to see you take the profits from the easy exchange to help smooth out the process?

Mr Verwaayen: What profit? There is no profit yet.

 

Q252  Sir Robert Smith: You are planning to make a profit?

Mr Verwaayen: I want to make one thing crystal clear, if you will allow me to. The Chairman of the FCC in the US, the market that I think, for many, is the most competitive and dynamic market, if you look to telecommunications, said a few weeks ago that he hoped that people would understand that broadband should not be dressed in the same clothes as the old Ma Bell. What he meant by that is that you see in the policies in the US there is no wholesale model for broadband because the feeling is marketing competition should do it. Why? Broadband is much more than DSL. There are four broadband platforms. You have 3G, which delivers a lot of broadband, you have cable, you have DSL and you have satellite, and the competition over time will be between those platforms. What we do is, we look very much on technology within one platform and then we look to one player, the only player that invests risk money from its shareholders, so far, if I may say so, that we have to justify. I would strongly recommend you read the analysts' report of what they think about that, and we are looking to a kind of microcosmos. The real market is much more than what BT does. The real market is end to end, what content providers do, what platform providers do, what technology companies do, a whole lot of home devices are now developed that give you all kinds of new services, that work of course with broadband but as well as with the broadband of the cable companies. So there is a new market coming. We do our share, we do more than our share, and we will continue to do that, because we believe strongly that we have to change from a narrowband company into a broadband company.

 

Q253  Sir Robert Smith: Are you involved in tendering in the Northern Ireland attempt to get 100 per cent?

Mr Verwaayen: We are.

 

Q254  Mr Berry: Eighty per cent coverage, a route-map for 90 per cent coverage. Some have suggested that the only way we are going to ensure 100 per cent is if a universal service obligation is imposed on BT. What would be your response to that suggestion?

Mr Verwaayen: A serious lack of understanding of the market, and, as I said just a minute ago, broadband is so much more than what we do. It would focus it simply on one part of broadband technology, which I think would not be helpful at all. Besides, as I said, that is about the development of services for the citizens of this country, business services that need to be developed, so banks need to be stimulated to make investments to make new services available. The Government could do a ton of things to help us on eGovernment services, so people really get interested and motivated to get onto the broadband wagon. It is not that people look only to broadband availability, it is also the take-up, because where broadband is available only five per cent of people take it. If you want really to develop this country, we have to make sure that we get a much higher take-up. That requires much more than simple availability, it requires investment in platforms, the creation of a new content service industry, and we have in this country end to end all the components, it is ready before us. The whole debate about BT and the obsession around BT, if you will pardon my focus on that, is not reflective of the real issue in front of us. The real issue in front of us is that we capture as soon as possible the opportunity that we have, as a country, to have all the ingredients of a new industry developing, and we have that in front of us, we can do that. It is not just access and then do nothing with it.

 

Q255  Mr Berry: I understand absolutely every word of that, and availability is not sufficient for what you are rightly enthusiastic about, but it is necessary. What is your scenario for the market dealing with the last ten per cent, as it were, that people focus on sometimes? If I were one of those ten per cent, I am not, thankfully, actually it is a very important question, I would like some idea, let us say I am in the worst five per cent, about when I am going to have access?

Mr Verwaayen: This is a BlackBerry. I get 200 e-mails a day, approximately. I answer them all myself, and almost half of that is about broadband. So, day in, day out, from morning till evening, I get the real voice of the population, and, of course, I do not get the congratulations from those who have got it, I get the people, and Alison gets the people, who say, "Come and explain to us why we aren't able to get broadband yet." In many places, it is also, "I'm living six and a half kilometres away from the exchange, why can't I get it?" We are, day in, day out, right in the face of the issue, and the only thing I am saying to you is, we are working very, very hard to make sure that we have it, within the limitations that also we have, because there are also limitations. It is not that all the policies work in the same direction, let me put it that way. Within the limitations that we have, we are doing, I think, a fantastic job, if I may say so myself. With the exception of Israel and, as the Chinese told me last week, China, we are the fastest-growing DSL market in the world, the fastest-growing, and we are growing also in coverage. It will take a bit of time, but we have not said no to anything yet. We have said yes to a lot of things, responsibilities, costs that we have to incur, and I have not seen anybody saying "Let me chip in." I get a ton of questions if we have price reductions, because if you give reductions here, somebody else says, "Hey, I want a margin squeeze test," which means that somebody else makes a projection five years out and tells you that you have to lower your prices. There are a lot of things that we have to do, and we are happy to do, and we will do it under the warm, enthusiastic support of a nation that understands that BT is one of its drivers for broadband.

 

Q256  Mr Berry: I thought that was a terrific speech, with respect. It does not quite answer my question but it was really great, nevertheless. Can I try one more time. Obviously, there is an issue, in terms of moving close to 100 per cent coverage, there is a real issue about to what extent things can be left to the market, and your anticipation is that relatively quickly it will be 95 per cent then 96, and so on. To what extent can that process confidently be left to the vigour of the market and to what extent do we need a bit of intervention to push it along?

Mr Verwaayen: Could you try?

Ms Ritchie: I will try. I am the Chief Broadband Officer and I care deeply about broadband. In your biographies that we have had, I have spotted that, I think it is, you have got 24 exchanges in your constituency that do not have trigger levels. I understand fully how everybody in those areas feels when they have not got a trigger level, and I do think there is a requirement on BT to be clear and transparent about what it is going to do. I think we have done that. We have been very clear. To put this into context. Eighteen months ago we had 200,000 DSL lines. When we launched the pre-registration scheme, it was only July last year, and we have seen take-up grow significantly. To go beyond that 80 per cent I agree absolutely that we need to look at the next phase and come out and say what we will or will not do in those areas. What we cannot say to you today is what we will and will not do in those areas. To echo what Ben has said, we have teams of people who are looking at the economics around the last ten per cent, in terms of what we can do, in terms of what other technologies can do, particularly what partnerships can do, in terms of demand side stimulation, or supply side intervention. Broadband is a local issue and there is no one answer that says tomorrow we will do this, but for the Committee, in our presentation, or in our report, we have tried to demonstrate the different ways that we are looking at reaching that ten per cent, and recognising that, for each constituent, we need to give them an answer. Does that help?

 

Q257  Mr Berry: Can I try one more time. It helps enormously, but let me be quite specific. One thing that Government could do, a classic solution, and so forth, in specific circumstances, is subsidise the really difficult areas.

Mr Verwaayen: We do not ask for subsidies, we ask for partnerships. It is a different thing. Partnerships mean that you go in together, you say to SMEs, very important, you say to the local authorities, you say to an RDA, "We're going to develop a demand here. We'll bring the money, we'll bring the risk. Give me the demand and give me the demand in a form that I can deal with it." We are not asking for a monopoly, we are asking for a market.

 

Q258  Judy Mallaber: Are you able to assure us that the terms under which your retail broadband arm buys your wholesale product are the same as for all other ISPs? Inevitably, this is an area where there is likely to be a suspicion that you are taking commercial advantage, and Oftel did tell us that, I think they said something like, you have more to do to convince them that there is sufficient separation. If you have not yet managed to convince them, how will you convince us?

Ms Heal: We do have some very strict internal rules about how our retail arm deals with our wholesale arm, and they do operate at arm's length. We are very, very conscious of our responsibilities as a vertically-integrated operator, to make sure that we have transparent behaviours, and we have a very strong compliance department which looks at that sort of thing. Indeed, everyone in the company goes through extensive training to understand how to deal between the retail and wholesale arms. I can assure you that they are treated as an arm's length service provider.

 

Q259  Judy Mallaber: Why do Oftel have a problem with your explanations?

Mr Verwaayen: I have said this before so I have no problem saying it again here. If you are a competitor of BT, there is absolutely a golden rule, you file two complaints a week, because there is no downside to a complaint, only an upside. You never know what you may catch, and sometimes they catch a bird out of the sky which they had no idea they could catch, like a price reduction, or something else. We get tons of complaints. Most of the complaints end in nowhere land, and for £50 you can buy a complaint file from the local law firm. This became a complaints industry, and, I can tell you, I am amazed. I come from abroad. I have seen many telecoms in the world, it was my job to see in the world as many telecoms as I could, for a long time, and I have worked as the CEO of another telecom. I was amazed to find the regulatory regime, nothing of the making of Oftel, just from a mental point of view, that had to deal with a kind of no barrier, whatever you say it is okay, type of complaints regime, and many of my dear fellows in the industry say to me openly, "Hey, it's a business still available to me," and I understand that. Were I to be in their shoes, I fully understand it, it does not mean we have to react to it. We have, I think, a very strict regime, and even if we talk light regulation in this country it means that, under light regulation, for example, on these lines, we have still a document of 426 pages. I think there is enough evidence and enough regulation around to deal with BT, in whatever form you want.

 

Q260  Judy Mallaber: Presumably, Oftel have been over your whole regime for separation with a fine toothcomb?

Mr Verwaayen: I am glad you say structural separation, because I know, of course, that is a topic which many people think of, especially in the academic world. I have four points about that. First of all, I would recommend strongly you see the OECD worldwide study which has just been concluded, which says there are clear downside risks and no obvious upsides. Leaving aside the OECD, because that is another body which does this type of study, I want to give you four elements why I think structural separation is a very bad idea, and, the more we talk about it, it is not helpful. First of all, structural separation ends innovation, because if you are looking just to a network of lines circulating but no end users you cannot take to your investors a risk about behaviour of end users, you have other parties that have to take that risk. Those parties that take that risk do not know what the risks are from a network perspective. Since you do not have end to end, innovation becomes very tough. BT never would have invested a billion pounds, or so, in broadband in a separated regime. Second, if you think that it will reduce regulation, it will move regulation, because you are going to have to define where the network ends and the retail starts. Let me give you, in new technology, an interesting dialogue. In new technology, you do not have a separate network for voice services and a separate network for data services and a separate network for video services. What happens is your end user equipment will decide, in three years' time, whether my e-mail to you is an e-mail, or maybe you can listen to my e-mail because you decide on the equipment here that it is a voice call. Where does the network end? In my hands? So are you going to put that all into the network, or you make another artificial separation of the network? It may have been a great idea 20 years ago, when the networks were defined with an end point. Nowadays networks evolve into what is called PDA, personal devices. Thirdly, and lastly, if you want to get investors to take the bill and not you, as the Government, which I strongly advise you to do, there is no investor in the world that will invest in a separated company, because it misses the ability to react. I hear all those calls for the debate around structural separation. Most of them are quite interesting, if you see who the sender of the message is.

 

Q261  Chairman: You said earlier that you have three, maybe four, competitors in infrastructure: 3G, cable, in which, in the UK, there are two players, satellite, and yourselves. With the exception of 3G, which at the moment still is in its earliest stages, you have two cable companies in a pretty parlous financial condition, and you have satellite technology, which probably is prohibitively expensive at this time, in the sense that they would have great difficulty in getting the prices down to levels that people would be prepared to accept, as far as using satellite to carry broadband is concerned. In the UK context, you are in a reasonably strong position, a dominant position. Would you agree with that?

Mr Verwaayen: No, not at all.

 

Q262  Chairman: Let me put it the other way round then. If you are not in a dominant position, if you are not in a strong position and you are relatively weak, - - -

Mr Verwaayen: Strong, yes, not dominant.

 

Q263  Chairman: If you are not as dominant as you would like to be, you are still the biggest beast in the jungle, at the moment. As far as I can see, you have a privileged position. You can set the terms. For example, we have had repeated complaints today from players, the ones who throw up an issue, or two issues, a week, maybe more often than that, but for the purposes of today, they were saying that you charge what they regard as excessive prices for people to move within the spectrum range, to shift from one thing to another. They say that you have a privileged position, which they think you abuse, in terms of the use of the infrastructure. This may be what other people are saying, and they would say that, but the fact is it does raise questions with us about whether or not infrastructure should be linked. Of course, we have electricity, we have gas, we have water, in the United Kingdom, and I know that you have raised the technological possibility of there being the fusion of the various means of communication, I wrote them down here when you were talking. The truth of the matter is that what you are talking about, in the energy business, for example, is not radically different from the possibility of what you are saying. I think that some of us are not really that impressed by the special pleading that you have been making. I am not suggesting necessarily we should have it, but I am not that impressed necessarily by your special pleading?

Mr Verwaayen: You do not have to be impressed. I am just stating some facts. The fact is that gas is not as complex as telecommunications. Every service has a different technology around it, billing is different, presentation is different. Gas is a standard product that goes through a pipe. It was interesting you did not use Railtrack as an example, which has far less of a complexity than telecommunications, and we have our hands full to make that work. It is tried nowhere in the world, because everybody who studied it came to the conclusion it is undoable, and I gave you just three other points why it is undoable. Your first assumption is wrong, and I am very sorry to hear that. What you say to us is that you think still that, based on our narrowband market that we have, we have a kind of dominant position in the broadband. That is absolutely untrue. Broadband is building something new, and you build it today on one thing, that is the access network. Everybody in this country can get access to the access network, and everybody else you could ask to come here today, give testimony and ask why they do not spend a billion pounds of their shareholders' money with no return yet. You could argue that with everybody.

 

Q264  Chairman: The fact is, of course, you do that because you have been in a privileged position from the point of privatisation?

Mr Verwaayen: We have not been in a privileged position. Our shareholders believe that there is a market for us, that, if we do our job well, we can earn for them a decent future. That is why we do it. It is not because we are in a privileged position, because that would mean that, without the access network that we have today, we could not do it. We can, like everybody else, like some people are doing.

 

Q265  Chairman: Who are doing this on this scale that you could afford to do it in the UK?

Mr Verwaayen: They choose not to put in the money on this scale, but I can tell you, in the world, there are people investing in other countries with fresh money and fresh companies in DSL. There has been a whole flurry of DSL companies around the world.

Q266  Chairman: Why are we not getting access to this capital in the United Kingdom? Is it because such is your dominance that you shut them out, or discourage them, not necessarily shut them out?

Mr Verwaayen: This is money that is not easy to discourage, because they go where they can get a return. It may be that our price system here is such that they do not think the low prices we have here are attractive for them. It may be that the business models they are looking for are not as attractive. I would like to invite you not to take a kind of very simple perspective that says if you are in telecommunications you have a dominant position as the incumbent, and therefore the next wave of technology that you have is also dominant. It is simply not the case. These are decisions. We could very easily live with a company that would not take the risks and go forward, we could do that, we could make that choice, it would be a stupid choice, it would not be my choice, it would not be my company, but you could, and some companies do make that kind of choice.

 

Q267  Chairman: The point was made earlier to us by the regulator that he was not yet happy with the extent of separation. You were not in the room, and I am paraphrasing, but basically that was the point he was making, he did not demur from it when it was put in other ways. One of the things which has happened in the United Kingdom, when there has been the infrastructural break-up of the kind that has happened in electricity and gas and other areas, when the Chinese walls have become more robust than they were in the past, some businesses have said, "Well, we don't think really it's worth the effort to work in this," and they split them into different parts.

Mr Verwaayen: Let me ask you a question. What are you after? What is your definition of success? I think that is a very important question that the UK should ask itself. If we look to telecommunications, what is your definition of success? Is that a vibrant market, with all kinds of innovative new services, where people can start businesses overnight and create new value, or is it "Let's get the market share of BT down"? I think a lot of those questions that you raise now I have heard from others, and clearly the agenda was "We measure our success by the likelihood that the BT share goes down," which in my view is a very narrow view of what a real market should look like. You should be technology-neutral and player-neutral. Are we having a market in which people can start new business? The answer overwhelmingly is yes. If you look to the European comparison, this is the most competitive market in Europe. Are we to have a market where people have all kinds of choices in businesses, in the way they set them up? The answer overwhelmingly is yes.

 

Q268  Chairman: Could it be more competitive if you had a lower share and other players had a bigger share?

Mr Verwaayen: It would be a less innovative market, because we would not have the ability to innovate below what I will call direct returns to shareholders.

 

Q269  Chairman: You are not the only innovator in the world. You have not got a God-given right to innovate, for goodness sake?

Mr Verwaayen: Absolutely not, but you need size. You need a certain size to take risks.

 

Q270  Chairman: Often that is a global factor, it is not something that is dependent on a single market?

Mr Verwaayen: Absolutely right. So you could ask France Telecom to come in, as they do, in certain markets, and you could ask some of the Americans to come in and invest, as sometimes they do, and you can see how far they will invest. You cannot say to us, with millions of UK shareholders who depend also on our performance, "I'm going to make regulations based solely on limiting your market share to allow others to flourish." They have to compete like we do, they have to convince customers with better service and lower prices, as we have to do, that is a fair market.

Q271  Chairman: Still we come back to the point where we would part company, that we do not think necessarily that the integrated character of the business that you run at the present moment... I am merely putting this forward. We will produce a report which will be based on the evidence, but I think it is worthwhile testing the argument that a number of people have brought to us, that your organisation, because of its size, because of its strength, because of its historical position in the United Kingdom, is an arrogant organisation, which is able to influence the market in ways which are not consistent necessarily with competition?

Mr Verwaayen: I take a position against that absolutely, being arrogant. I am representing here 108,000 people, who live in the UK, work in the UK, and they work here in the UK, and we measure our customer satisfaction against all our competitors by an independent agency on a product-by-product basis. You can say that we have wrong policies, I will accept that as your verdict and your opinion. I will disagree, of course with respect, but I am not going to accept, for 108,000 people who work in BT, that as a company we are arrogant. One hundred and eight thousand people, day in and day out, try to deal with more than 100 million customer contacts a month that we have, and I can assure you that we are doing our utmost every day, and many times we are successful, to outperform any of our competitors. I will gladly send you the report that we have about customer satisfaction.

 

Q272  Chairman: I was not making the point about arrogance on an interpersonal basis in relation to the way your staff deliver their services to customers. I was talking about the behaviour of the company in a market situation where they are dominant, and that is a different issue altogether from delivering services, and I hope you will understand that I draw that distinction?

Mr Verwaayen: Okay; thank you. I appreciate that.

 

Q273  Chairman: To be honest, this has been an innovating discussion, and it is one which I think ought to be had. We have taken a lot of evidence today, and I realise that you have had your colleagues in the room and they will be transmitting the messages back, and it would have been remiss of us had we not challenged you on these central points.

Mr Verwaayen: I enjoyed the debate very much.

 

Q274  Chairman: The fact is that our report will reflect all of the evidence, not just the last half an hour of discussion, so we will leave it there. If we need additional information, we may well get in touch with you. I imagine your office library will have a copy of our report, but I would be very happy to see the one that you mentioned, if you could send it to us?

Mr Verwaayen: Thank you very much. We will do that.

Chairman: Thank you.