Memorandum submitted by Video Networks
I am writing in response to the Select Committee
inquiry into the unbundling of the local loop. The submission
attached presents Video Networks and its interactive television
services and sets out the importance of the unbundling of the
local loop in relation to our business.
To the best of our knowledge, we make more use
of ADSL technology than any other company in the UK, and have
been using ADSL technology longer than anyone else in the UK.
We have observed recent debates on unbundling
the local loop with both interest and concern. Our interest is
that of a provider of interactive services through ADSL technology
provided over BT's upgraded local loop. Our concern is that over
recent months the debate has focused on the interests of different
network operators, rather than on the interests of the consumers
of the service.
We are strong believers in competition, but
we would like to see more focus on the benefits of competition
for consumers such as reduced tariffs. We believe that the best
means of ensuring rapid progress is to focus on consumer interests.
We have set out our own initial approach for solving some of the
problems that currently obstruct progress in providing a ubiquitous
Video Networks Ltd is the leading video-on-demand
(VOD) and interactive television company in the UK. We are able
to provide our services over BT's local telephone lines once they
have been upgraded to a broadband delivery channel using ADSL
Our HomeChoice service, the first consumer TV-on-demand
service in Europe, is available in London, and uses ADSL technology
to pipe content to customers.
At present we are the biggest users of ADSL
technology. Our ability to roll out our own service is dependent
both on the upgrading of BT's local exchanges and the introduction
of lower tariffs through increased competition. We want to reach
as full coverage as possible across the UK but are obviously constrained
by the current state of ADSL development.
We are also one of the most experienced companies
in the sector: we have, in fact, been delivering VOD and interactive
television services through ADSL technology continuously since
1996. Video Networks piloted its service over BT's ADSL network
from July 1998 to September 1999, having previously operated a
pilot in Hull from December 1996 to July 1999. HomeChoice was
launched in North West London in October 1999.
Our company will be one of those most likely
to benefit from the roll-out of ADSL and from the tariff reductions
that should result from increased competition in the operation
of the local loop. We are developing new and innovative services,
which will help to position the UK as one of the leading countries
for e-commerce and t-commerce as well as for interactive television
services and video-on-demand (VOD).
As well as our services in the UK, we are planning
three pilot schemes for VOD in Germany with Bertelsmann Broadband
Group, using DSL technology to deliver content in Hamburg and
several other German cities. We have since signed a memorandum
of understanding with Bertelsmann to establish a joint venture
in Germany. There are significant opportunities for international
exploitation of our proprietary software and systems developed
here in the UK through our licensing models. We are in discussion
with several other potential partners in Europe and elsewhere.
OF ADSL TO
The cost today of providing a real VOD service
through ADSL technology to a customer is well above the likely
revenue that customer will generate. For instance, the price we
are paying BT to run VOD over its ADSL is £625 per customer,
with a monthly rental charge of £60 per line under a three-year
contract for a minimum of 15,000 lines. This is equivalent to
£42.85 million to provide the service to just 15,000 homes
over three years. That amounts to a cost-per-subscriber of just
under £80 per month, against an average revenue that is unlikely
to be above the £30 per month level.
Only unbundling can bring greater network competition
and result in a better deal to the consumer. We believe that only
greater network competition will result in a reduction of BT's
current excessive prices. And lower tariffs will result in lower
prices for the end-consumer. We therefore believe that it is very
important that meaningful competition is encouraged. Competition
provided by substantial network operators in the development of
broadband services, in which the local loop will play an important
role, will enable these goals to be achieved.
As you can understand, upgrade and unbundling
of the local loop are key to swifter roll-out of our distribution
system. National coverage is definitely our primary aim, and we
need to provide our services to households across the UK as soon
as possible. To date, we have experienced delays with regard to
BT's upgrading of its local loop network. We are in continuing
discussions with BT, and with Oftel, over a variety of issues,
not least to address the apparent technical and operational problems
that the company claims to be encountering. If we are unable to
increase the rate of installation of our services, our subscribers'
growth rate could be constrained.
Unbundling is key to ensuring competition which
can lead to lower tariffs of our services. At present BT has 6,000
local exchanges and is letting alternative suppliers into only
360 exchanges. BT has already stated that it is unable to move
faster than the timetable already set by Oftel for July 2001 for
allowing alternative suppliers into their exchanges. However,
there is concern that BT could not be able to meet even this deadline.
It should also be pointed out that the terms
on which BT will make available unbundled local loop circuits
and associated services are not yet finalised.
Evaluation of the options for action should
be mindful not only of the practicalities of implementation in
BT's local exchanges and their implication on the physical local
loop, but also of the provision of high-capacity networks required
to connect those exchanges to service providers' facilities. These
are referred to as back-haul networks.
In order to take full advantage of the speed
offered by DSL technologies, the capacity they offer between local
exchanges and the customers' premises needs to be matched by back-haul
networks having much greater capacity than BT's current inter-exchange
core transport network. The technology to implement such capacity
using optical fibres is not only readily available but also continues
to be developed, so that BT's existing buried duct infrastructure
can be expected to fulfil the capacity requirements with relatively
minor further investment in civil infrastructure.
The development of a policy for competition
needs to be mindful of the possibility that the implementation
of a comprehensive alternative back-haul network for a new entrant
could require a large quantum of investment and take significant
time. This could therefore act as a deterrent. In view of the
existence of BT's inter-exchange core infrastructure, and of the
high capacity potentially available using optical fibres, it could
be economically inefficient to require new entrants to build comprehensive
alternative civil infrastructure for back-haul. The construction
of such alternative infrastructure would also take a long time
to reach large numbers of residential customers.
Even with Local Loop Unbundling, there could
therefore still be a competitive bottleneck in the back-haul segment
of the network. If regulation encouraged competition in that segment,
this could, perversely, keep costs high, reflecting the stand-alone
costs of the construction of new back-haul capacity. Efficient
and cost-effective exploitation of the opportunities offered by
high-speed network access could require resolution of this potential
problem. Oftel is probably in the best position to address it
by regulating interconnection between alternative carriers' networks
on the one hand and segments of BT's fibre optic network terminating
in local exchanges on the other.
In considering this, it should be noted that
there is not an intrinsic cost problem here. Fixed costs dominate
the total cost of an optical fibre link of any significant distance.
The incremental cost to increase the capacity of an existing fibre
optic link is relatively small, and continues to fall as optical
communications equipment costs fall generally, as technologies
such as dense wavelength-division multiplexing are developed and
as greater integration of broadband transport and switching equipment
progresses. The problem if it occurs, is more likely to result
from the manner in which BT could allocate its total costs across
Economic choices by competitors need to be guided
by the greatest possible transparency in costs, and the regulator
can encourage this by unbundling not only the local loop but as
many of the underlying components in the delivery chain as possible.
The provision of consumer-grade high-speed networks
requires careful planning to produce consistent quality and timeliness
of delivery at an affordable cost. It entails investment in a
substantial trained workforce, capital and systems to support
large-scale operations. A prerequisite for such planning and investment
is clarity and stability in the regulatory environment. It is
also doubtful whether more than a few large operators can plan
and execute such a strategy successfully.
In Video Networks' view, the process of allocation
of space in telephone exchanges should be motivated first and
foremost by the need to make high speed network services available
to consumers at affordable prices as soon as possible. The process
should provide for fairness among all possible applicant operators
as secondary to this paramount motivation.
Video Networks has proposed consideration of
a licensing regime for DSL-based higher bandwidth access networks.
This could operate by awarding licences by auction to, say four
operators on a basis as follows:
licences offered on a national or
regional basis with minimum build requirements;
licences to be granted for a period
of say, five years during which no further licences would be awarded;
bidders to fulfil pre-determined
financial and technical criteria;
bidders to fix a tariff schedule
for the period of the licence with guaranteed caps; and
licences to be awarded solely on
the basis of the lowest tariffs.
A regime of this sort was recently adopted in
Israel for the provision of a second national cellular telephone
license. The competitive bid was won by a company that guaranteed
keeping tariffs within pre-specified levels. The result has been
a rapid fall in cellular telephone air-time prices, both those
of the incumbent and of the new entrant.
Oftel has said to us that it does not have the
powers to conduct such an auction. If this is the case, then we
believe that a very simple legislative change is needed to allow
this. This should be undertaken as a matter of urgency.
Slow incremental roll-out of ADSL services will
set Britain back against other competing nations, not only in
terms of telephone services but also computing, fast internet
access, digital broadcasting, e-commerce, t-commerce. The means
to address this situation is through focussing on the interests
of consumers who wish to receive new and innovative services of
the kind that can be developed by ADSL.
Pricing is key to low-cost widespread availability
of these services and this depends on an effective and competitive
regime which sets pricing at its heart.
Current uncertainty is preventing large network
players from adopting comprehensive business plans for the large-scale
development of national services. The prime reason for this is
the uncertainty in the process of allocating co-location space
in BT exchanges. Network operators currently do not know in which
exchanges they will have space.
This is damaging not only to those network operators
but also to us and others who wish to provide a wide range of
exciting new services to consumers, and damaging to the government's
objectives of combating the digital divide and ensuring the widest
possible access to digital interactive services in the home.
HomeChoice was launched London-wide on 26 September
2000, offering a broad range of content. There are currently around
HomeChoice programming is available to subscribers
on-demand through the television set. It enables interactivity
and content personalisation and offers:
VCR-like controls, including functionality
to stop, pause, fast-forward and skip to any point of film or
timeshifted viewing of a number of
programmes, including news, current affairs, sporting eventsthese
can be watched whenever the viewer wants and are available through
our service only minutes after the original broadcast has ended;
family friendly viewing: each member
of the family has different access codes and therefore children
are protected from adult viewing at any time; and
tailored content: each viewer can
create his/her own portfolio according to personal requirements
Video Networks' "real" VOD is radically
different from what is presently on offer with DTT, digital cable
and digital satellite technologies. At present cable operators
in the UK offer their customers "near" VOD which, unlike
our "real" VOD, allows customers to access films and
other content only at scheduled times and without the full VCR
functionality we provide. Other digital PAY-TV operators (both
terrestrial and satellite) offer interactive services that lag
behind our level interactive functionality. However, we expect
competition in the market for VOD to intensify and increase in
the near future.
Customers get a free set-top box, and pay a
one-off installation fee of £40. Services are made available
in a combination of pay-per-view and subscription packages.
Films are available on a pay-per-view basis
to all subscribers. FilmChoice, the largest VOD library of films
in the UK, offers more than 1,000 movies, ranging from £1.99
to £3.49 for a 24-hour period. These are available on the
service six months after they appear in video shops.
Television programmes and music videos are available
to subscribers in packages.
We currently offer:
SoundChoicemore than 1,000
music videos and karaoke;
travel, home and garden and performing arts;
events past and present, a wide range of sporting events including
Wimbledon; we offered coverage on a time-shift basis of every
soccer match in the recent Euro 2000 tournament;
KidsChoicedrama, cartoon and
and wildlife programmes;
and period drama; and
club covering aerobics, relaxation and healthy eating.
Subscriptions start at £6 a month for one
service, and £12 for three. Additional services cost £1
a month each and £17 for all eight. Subscription is for a
minimum of a year.
Access to NewsChoice and HighStreetChoice are
included with subscription. NewsChoice offers daily news on a
timeshift basis from the BBC, ITN, ABC, CNBC and Bloomberg. HighStreetChoice
is a new home shopping service featuring Shop the popular TV shopping
channel. It will allow customers to order products and services
from featured retailers.
Additionally, HomeChoice offers a PC-based "always
on" Fast Internet Service running at 115 Kbps. This costs
a flat fee of £20 per monththere are no extra call
charges and a second line is not required. This allows customers
to access the Internet through telephone lines and their PC much
faster than through a traditional modem and without incurring
We have a wide range of agreements in place
with key rights-owners including film studios such as Warner Bros,
Buena Vista International (including Disney pictures) and Sony
Columbia Tristar, broadcasters such as the BBC and Channel Four,
and independent TV producers, and independent distributors such
as Kenwray, Carlton International and specialised "Bollywood"
distributors and music producers like Video Performance Ltd and
BMG. We also have rights to a number of films fro the pre-1956
We expect to offer an e-mail to television service
in due course. We also plan to introduce a competitive virtual
shopping mall, interactive advertising, television e-mail, multiplayer
games, voice telephony and video conferencing. We have agreements
in place or signed letters of intent with Invest TV, Travel Channel,
Shop! Home shopping (Littlewoods), Gameplay and Domino Pizzas.
We trialled similar services during our pilot in Kingston-upon-Thames,
with partners such as Lloyds TSB, Boots, and Kingfisher plc chains
including B&Q, MVC and Comet.
We will also add to other innovative products
and services, such as our ClubZebra interactive virtual fitness
club, a joint venture with LA Fitness plc and BUPA.
8 November 2000