Memorandum submitted by Mr Tom Steinberg
1. The following points are made in this
Convergence is dependent upon a flourishing
The state of the UK broadband market
is of great concern.
Neither current policy, nor proposed
policy in the White Paper sufficiently address serious structural
flaws in the nature of competition in the UK broadband market.
That open networks provide a practical
and feasible method for invigorating the broadband market thus
greatly speeding up convergence.
1. Almost all convergence problems dealt
with in the White Paper are a consequence of the rise of broadband
technologies. The creation of Internet broadcasting and two-way
communications services present many of the new challenges addressed
in the White Paper. However, the White Paper does not reflect
the widespread industry view that broadband roll-out in the UK
has been and will continue to be seriously problematic. The primary
purpose of this submission is to warn that without action, the
White Paper could create the world's first truly converged regulator,
only to find the UK trailing unrecoverably behind the rest of
the world in terms of actual convergence.
2. Extreme delays in getting ADSL rolled
out have left Britain lagging notably behind other countries in
terms of both availability and the speed of services offered.
In March last year OFTEL reported that the UK was "last"
in terms of progress with ADSL roll-out compared to a variety
of major OECD nations.
A home in France or the US is six times as likely to be broadband
enabled as one in the UK, and in Germany it is three times as
A recent OFTEL study shows that average broadband costs are the
highest in Europe.The
UK also suffers in terms of the breadth of bandwidth offered.
Parts of America are already benefiting from the DSL technology
two generations ahead of ADSL, working at up to 7Mbit/s, whilst
in Sweden and Denmark services are available from private sector
firms, which are 20 times faster than those available in the UK,
for less than half the price.
Indeed, the UK's failure has been so acute that the very question
of whether we even have broadband at all has been raised. The
White Paper's own annex defines "broadband" as 2mbit
transfers per second,
yet there is no such service for residential customers available
anywhere in Britain at the time of writing.
The costs even for businesses of such a service are over £2,000
per year for ADSL, and over £10,000 for synchronous access
via a leased line, and it must be noted that these services are
not available in the majority of the UK. Giant ISP America Online
report that even after unbundling of the local loop, broadband
in the UK will be "amongst the most expensive in Europe".
3. It is a serious concern that discrepancies
in performance and price between Britain and elsewhere should
be so great. Without a healthy broadband infrastructure citizens
and companies in the UK will suffer. Businesses will be paying
over the odds for a sub-standard business tool: a fact which will
give other countries a competitive advantage over Britain. Consumers
will watch as the rest of the world surges ahead in terms of the
quality of home services provided. Socially cohesive tools such
as cheap video conferencing will remain out of reach of most of
the population. Thousands of associated technologies, such as
those which will form the basis of wired homes will be denied
because the one technology they are all reliant on, broadband
Internet access, is not available.
4. Signs of recovery are few and far between.
According to the BBC, "Telewest, NTL, Global Crossing, Worldcom
and KPNQwest are all scrapping their DSL plans".
Major complaints have been voiced by Microsoft, AOL and the Institute
of Directors. As this enquiry submission nears completion, Freeserve
and AOL are threatening to take BT to court over alleged anti-competitive
practices in the introduction of broadband. BT rolled out ADSL
nearly two years late, constantly making noises about a lack of
public interest, and now faces a back-log of allegedly over 100,000
orders. All the while it is offering a service which works at
only a quarter the speed of what the Government itself calls "broadband".
Cable modem operators benefit from the limited extent of the competition
they face and also offer similarly clocked services.
5. The Government should be extremely concerned
about the problems outlined above. Primarily they should be concerned
because the broadband situation in the UK threatens to undermine
the first and most important of the three key government objectives
6. "We will make the UK home to the
most dynamic and competitive communications and media market in
7. It may seem easy to dismiss all the above
as mild hysteria about teething troubles. It could be argued that
the roll-out of broadband in the UK has been tardy, but that this
was simply a case of bad management which could have happened
anywhere. Sadly, this is not the case. There are systematic reasons
to think that broadband in the UK will remain inferior unless
reforms are enacted. Both the problems and possible solutions
are detailed in the second section of this submission.
8. The issues listed in the previous section
are causally related to the structure of competition in UK telecoms.
There is too little competition in
the supply of bandwidth to homes and businesses.
Local Loop Unbundling will not provide
the optimal long-term solution for serving customers, although
it is helping in the short term.
Shareholder interests within BT are
currently shaped in a manner which is economically sub-optimal
for the UK.
9. At the moment, it is not in practice
possible to receive domestic or SME broadband services from more
than two operators in any one street. Indeed, until 1 January
2001 it was illegal to have more than one cable operator, BT aside,
in a single franchise area. This legislation, now repealed, created
a situation in which a duopoly was the expected form of competition.
It has taken many years for the lack of vigorous competition to
really start causing problems in the UK communications market,
but as the above section confirms, there are now indisputable
The Government Reaction
10. The Government understood that problems
were arising from the lack of proper competition, and OFTEL introduced
Local Loop Unbundling (LLU) as a solution. LLU has attempted to
rectify this problem by forcing BT to open its exchanges to the
use of other companies, at rental rates determined by OFTEL. This
allows companies access to the "last mile" of cable
which actually runs into houses and businesses, creating a diversity
of domestic service operators which would have been unimaginable
LLU's Systematic Weakness
11. LLU has a single fatal conceptual flaw.
The problem is that BT has a greater incentive to increase shareholder
value through minimising new investment and avoiding competition
than it does through improving its own services. This means that
when BT is given an order to open up a part of its network it
quite rightly will try to maximise shareholder value by delaying
competitors access to its systems for as long as possible, and
that it will try to bleed its existing assets for the maximum
time before investing in new technology. In practice this has
meant indefinite ADSL delays, delays in starting the investment
in the first place, delays in identifying and opening exchanges,
delays in producing figures and costs for OFTEL, even simple delays
in installing equipment for customers.
12. For a case study about the perverse
incentive that BT has not to invest, examine ISDN. Most companies
in a competitive market have an incentive to invest to develop
products that will allow the company to survive. In the UK broadband
market, BT faced an opposite incentive. High business pricing
of the ageing ISDN technology created a huge incentive for BT
to hold back ADSL as long as possible. Revenues from a single
metered ISDN line, online all day in a small business are over
£6,000 per year. ADSL, even at British pricing levels, offered
small businesses a superior alternative at about one quarter the
cost. BT consequently delivered ADSL as late as it could without
being formally censured. In order to exploit every last penny
of ISDN revenue. Why did BT not invest sooner to beat the competition?
The answer is that it knew that over the vast majority of the
country there were no competing products from cable companies
that were better or cheaper than ISDN. Why invest to avoid competition
that isn't there?
The Carrot and the Stick
13. BT can only be given an incentive to
do anything by two means. It can be regulated (the stick) or it
can be forced to increase shareholder value (the carrot). Regulation
cannot provide the same level of incentive as increasing profitability
and shareholder value can. This is because in a large company
like BT, the fate and remuneration of the staff are closely related
to the profitability and share value of the company. Most BT employees,
for example, are shareholders in BT, and all employees' wages
are ultimately determined by the profitability of the company
as a whole.
14. Regulation forces employees of a company
to work against their own financial interests. OFTEL has discovered
at enormous cost to the British people that trying to force BT
to work against its shareholder interests is almost impossible.
BT has a permanent advantage over the regulators, which is that
every bit of information about BT that is needed to make regulation
comes from BT itself. OFTEL's "trench warfare" of trying
to obtain information to facilitate LLU over the last summer makes
perfect sense when seen in the light of employees' and shareholder's
Re-framing Shareholder Interests
15. Asking any company to act against its
own interests is always likely to produce hesitation and obstruction.
In the case of BT the problems for regulators that it can legitimately
produce are vast, thanks to the complexity of administering a
communications network. The Government should therefore commit
itself to basing its broadband policy on a market in which shareholder
interests are complementary rather than contradictory to the aim
of making the UK the most IT enabled nation in the world. The
alignment of shareholder and consumer interests is best achieved
through the idea of the open network.
16. An open network is one in which the
best shareholder interest is for the network infrastructure to
be thrown open to as many service providers as possible. The analogy
of an open network is real estate. Like a property owner, the
owners of an open network provide basic infrastructure which other
companies then use for their own businesses. In the case of an
open network the property is a network, possibly of dark fibre,
and the tenants are any company that would like to use the network
to offer bandwidth, deliver services, or both. Returns on investment
are lower than for vertically integrated telecoms, but considerably
more secure, attracting a different type of more risk-averse capital
investor, a type of investor that there are considerably more
of following the dotcom slump.
17. There are two possible ways in which
such a market containing open network services could come about:
BT's network, which is already in
the process of being spun off into its own company, could be made
fully independent from BT service providers and beholden to its
own new set of shareholders.
At least one new network (local or
national) could be laid which would be operated by a company which
had no shareholder interests in operating services over it.
18. The former proposition seems the more
feasible. For a start BT's network already exists, avoiding the
necessity of duplicate infrastructure investment. Second, in order
to break itself up, BT must receive permission from OFTEL. This
puts OFTEL in a powerful position to make demands from BT, one
of which could be the division of shareholder interests into clearly
19. Nevertheless, the second proposition
does have its own advantages. No consent is required by BT for
a new network to be set up, although BT is bound to lobby against
a creation likely to offer far faster and cheaper bandwidth services
than BT currently provides. Nevertheless, the problem of large-scale
duplicate investment in infrastructure should be seen as the barrier
to entry that it often is. It should not be forgotten that four
mobile telecoms networks have set up their own highly expensive
infrastructures when to an outside observer one might have seemed
20. The best possible solution as far as
consumers are concerned would be to have the greatest possible
number of rival open access networks, as this would encourage
competition between network providers as well as between service
providers operating over those networks. However, there is no
doubt that infrastructure costs would probably lead to the creation
of just a small number of networks, with high levels of network
competition only found in particularly dense areas.
21. The UK is in danger of having all the
regulatory structures in place for a converged communications
market with little actual convergence to go with it. It is therefore
urgent that ways of dealing with the misalignment of shareholder
and consumer interests are looked at by the Government. An open
network in which true competition between service providers could
take place, against the background of a willing and enabling infrastructure
provider would hugely improve the UK's chances of being able to
call itself a leading wired nation.
22. There is one last reason to think seriously
about the communications market once LLU is finally finished.
It is the danger that without a bold move to deal with shareholder
conflicts, each network upgrade to a new generation of communications
technology will be just as slow and tortuous as the move from
ISDN to ADSL was. This could mean that every generation of new
technology will see the UK slipping further and further behind
countries in which there is strong competition, or even worse,
behind countries which never even privatised their telecoms industries
in the first place.
3 http://www.oftel.gov.uk/competition/ds10400.htm. Back
http://www.communicationsWhitePaper.gov.uk/by chapter/anxd/index.htm. Back
This awkward fact has been smoothed over during the drafting of
the White Paper; it uses the non-standard phrase "High bandwidth"
to describe current, government endorsed schemes such as BT's
ADSL service which run at less than 2mbit. Back
http://news.bbc.co.uk/hi/english/sci/tech/newsid 1067000/1067473.stm Back
David Edmunds, head of OFTEL described relations with BT as "trench
warfare". http://www.theregister.co.uk/content/archive/14754.html. Back