Select Committee on Culture, Media and Sport Minutes of Evidence

Examination of Witnesses (Questions 260 - 279)



  260. How are your negotiations with Ministers in getting these views across proceeding?
  (Mr Wallace) We get some hearing but I think they still believe that you can achieve some of these ends by regulation. We do not. We have tried the regulatory route and it is a structural problem. So we are still discussing it, but their view is that they do not want to rock the boat too much and they think that regulation can solve all the problems. We do not believe that because regulation is invariably reactive. So if we have an issue with BT, and we regularly do on their anti-competitive behaviour, we put in a complaint to OFTEL. It will often take them six to nine months to resolve it and they often come out in our favour, by which time the issue has gone away and BT has moved on. So you do not solve these problems by fiddling around with the regulation; you do it by structural change.
  (Mr Phillips) Just to pick up on that last point about OFCOM, that is a major issue that we need to consider because the burden of regulation is increasing and OFTEL are feeling increasingly under pressure to make determinations and resolve conflicts with other operators and BT and they are taking longer and longer to do it, not because they are inefficient but because they are needing ever increasing levels of resource to do that. Going forward, that clearly is a feature of a market that is becoming less and less competitive. The issue with Ministers and the Government so far, to my thinking, is one between short and long term. Our view is that medium to long term there is no solution except to look at the structure of this industry and work out where we are becoming less competitive and why the burden of regulation is going in the wrong way. Ministers that I have spoken to see a significant risk in the short term roll-out of broadband and the Government's e-Britain policy in looking at separating the local loop out structurally. There is concern that it will add delay to what already is a process potentially behind target and that BT will, frankly, make it difficult as a process for that to be undertaken. Cable & Wireless strongly advocate with Ministers and with OFTEL that this part of the industry is referred to the Competition Commission such that an independent view is taken and recommendations are forthcoming on the structure of it. That may or may not include the separation of the local loop, although we clearly think it would include that, but that would be for the Competition Commission. Our position is that we suggest Ministers refer BT. I sense there is some appetite to do that but I also sense there is a very large concern as to the way in which BT would react in the short term and about the added confusion that that would inject into an already delayed broadband roll-out.

  261. The proposition that you have that was destroyed by the change in wholesale prices, what would that have done to the broadband market over the next few years? What were you going to bring to the market in capacity terms?
  (Mr Wallace) We would have brought to the market in something like 200 exchanges around the UK an unbundled local loop. That is what we would have brought between Energis and Colt.

  262. Can you give me some perspective on that? How many exchanges do we have?
  (Mr Wallace) 6,000.
  (Mr Phillips) But the population coverage would be disproportionately high.
  (Mr Wallace) Obviously we would do it, again for economic reasons, in the most populated areas, so 20 per cent of the exchanges cover far more of the population where there would be genuine competition in the local loop, genuine unbundling of the local loop for the first time in the UK, and that now will not happen.

Mr Flook

  263. I have to declare an interest in that I am a direct shareholder in Cable & Wireless. I am a direct shareholder because I had you down as a pioneering company well ahead of the curve over the years. Unfortunately share prices are now 75 per cent lower than when I bought them.
  (Mr Wallace) Oh dear.

  Mr Bryant: It has just tumbled a bit further!

Mr Flook

  264. In the notes put together by our very able and effective Clerks you talk about "the light touch regulation having to give way to the minimum necessary"—these are quotes from your submission—"which may include a fair degree of hands-on enforcement of economic regulation." Just now you were saying to Miss Kirkbride that your medium to long-term structural plan is to try and get BT to give up the local loop. I am not convinced that is a possibility or a probability particularly since in the here and now we have a Communications Bill which may seek to give regulation. My problem is, could you not end up, in asking for one thing that is possible, with more regulation and being bitten by the hand that feeds you?
  (Mr Wallace) We have attempted to come up with what we think is the solution. The regulatory solution, from where we sit, clearly has failed. There is not an unbundling of the local loop in the UK. There is the theory and the fact that the regulations are saying there should be one, which is given EU support, but as businessmen you separate the theory from the practice and the practice is not there and no amount of regulation, in our view, will create that. I do not think this is OFTEL's fault. They have a huge challenge against any incumbent. The same is happening around the world. I do not think to blame it on OFTEL, which some have done, is a reflection of reality. If that is the problem we have got, it seems reasonable in our view, to come up with a solution and I do not think the solution is regulation. I really do not. That has been tried. We were behind the unbundling of the local loop and the regulatory changes that went with it. We supported it wholeheartedly. The fact is it has not worked. I see nothing in the environment that will make it work unless we do something reasonably radical. That is where we are. Whether that will provide a solution or the forces that be are prepared to go with that, who knows. I do think it is fair to say that we believe it will be a positive for BT, as do people like Earth Lease, because we do believe if you separated out a pure, natural monopoly you could raise a lot of the regulatory burden on the rest of BT. To me there is a very sensible and pragmatic solution that if we separate the natural monopoly the licensing authority will make life less regulated for BT in what is a very competitive part of their business. At the moment they are regulated everywhere. There is a solution that will ultimately benefit the shareholders of BT, as of course it benefited the shareholders of British Gas, and the value of those businesses separated has proved to be considerably more than the value of a vertically integrated British Gas. I think it is a solution that is beneficial to all parties.

  265. Notwithstanding the views of your own advisers and those perhaps of BT, what is the consensus City opinion amongst investment analysts?
  (Mr Wallace) I think there was quite strong support amongst investment analysts for the Earth Lease proposition which would separate the local loop. Those City analysts who understand this industry realise it will probably release value by doing that. Earth Lease, with a fairly sketchy proposal, got quite a lot of City support.

  266. Not wishing, like the Chairman, to lead you or to try to lead you, if it is compelling, do you see that being a possibility? If the finances are there, why do you need government to tell you to do it when the financial angle on it could make it happen?
  (Mr Wallace) For a start, of course, BT have said publicly that they need to restructure, which will require changes in their licence. I think it is a point in time when the authorities and the Government do have some leverage over BT and I think this is a relatively new initiative because we all wanted to give time to see whether local loop unbundling driven by the Regulator would work. That is what we all did. We have now come to the conclusion over the last few months that it will not, so we have to move on. I think the Regulator does have some real leverage because BT do want to restructure it in several ways which will require licence changes.


  267. As you will know, this inquiry is an inquiry in preparation for the Communications Bill. I do not know whether you were here when I asked Christopher whether he believed that this was the right time to legislate. Do you believe that this is the right time to legislate or would it be better to wait?
  (Mr Wallace) I would reply in the same way as Christopher did. There is never a perfect time. Having started the initiative I think it should be completed in order to remove uncertainty. The way technology and the industry is moving it will always be against a background of total change so we probably need to get on with it and at least remove the uncertainty associated with the new Bill.

  268. The other question I put to him was about the Government structure and I managed to tease out particularly from Mr Morfett the view that the Government structure was not satisfactory or adequate, and both Christopher and Mr Morfett said senior Ministers were not involving themselves sufficiently and perhaps not informing themselves sufficiently about these matters. What is your view on that?
  (Mr Wallace) I would share that to some degree. The big issue is that the DTI in particular of course has such a huge remit that I am sure all businessmen feel their sector is not given enough attention. We certainly feel that. It is a fundamental sector to infrastructure and economic development which is lost in the DTI, quite frankly. That is not their fault; it is just a fact of life.

  269. Mr Alexander is a very bright young man. There is no doubt whatever about that. Without in any way denigrating him, is it satisfactory that matters should be decided at that level? Ought they not really to be at Secretary of State level in view of the fact that this is such a supremely important economic issue for the country?
  (Mr Wallace) We would say yes, it does need to be looked at at the highest level because of its importance to Britain. We are in the sector so we obviously think it is very important. Yes, I agree with that.

  270. If I gave you three wishes as to what should go into the Bill, what would your wish list be?
  (Mr Wallace) I will give you my one wish which is pre-the Bill and does not depend on the Bill. This whole issue of the way the natural monopoly in the local loop needs to be tackled should be referred to the Competition Commission. We have total confidence that if that happens they will come up with the same solution as us because to us it is such a logical one. It is not really a Bill issue but having been given the opportunity, that is what I would like to see happen because I think that would be a big step forward for the industry and customers in the UK.
  (Mr Phillips) My wish would be to see the burden of regulation decrease over time and I think the way to do that is to make it very much clearer which parts of the market require regulation and which parts do not and to focus the regulation on the parts that really need it and to free up the players, BT included, in the market when we do truly have competition.

  271. You may perhaps know that when we looked at this early in the last Parliament we recommended a bifocated OFCOM—we did not call it OFCOM—with one segment for content and the other for technology. Do you believe that that is the right way to go?
  (Mr Phillips) I think we share a concern that with OFCOM there will be a general mixing of the regulatory responsibilities of the broadcast content media side with what in many cases are very very technical requirements and understandings that are necessary to manage effectively the network and infrastructure side of telecoms. Yes, that is a concern that we have and it is a concern that is being made somewhat worse by the experience of the local loop unbundling. Yes, we would strongly advocate that we have a very focused and well-resourced element within OFCOM to focus on the technology.

  272. And I did remind the BT people that when Government first started getting actively interested in these issues under Mrs Thatcher the view was that the cabling of the country would be the way in which this technology would advance. Have you got a view as to why it is that the country is not predominantly cabled in the way at one time it was anticipated it would be?
  (Mr Wallace) I think one of the important reasons is the dynamic nature in the UK of satellite competition. I think BSkyB have stolen a march on the cable companies, both in terms of control of content, sport and films, and now with digital satellite they have the technology to deliver that content, which is as good but far more cost effective than cabling. We have got a particular position in the UK whereby BSkyB cornered the very content that people will pay for, which is on the whole unique sporting events and Hollywood movies, and that displaced the capability of cable companies to expand in the way it was originally thought.
  (Mr Phillips) It pushed them into the telecoms sector where they face the issues.
  (Mr Wallace) I think people will pay for entertainment but, on the whole, they are paying BSkyB for it, not the cable companies.

  273. The view was held that you were the best possible vehicle for inter-activity but we have moved beyond that now, have we not?
  (Mr Wallace) I think there are a variety of ways to gain inter-activity into the home and satellite is one of them but the ultimate access to the home for inter-activity will be the local loop.

  274. There has also been a certain amount of deriding of the concept of convergence as the way forward. I happen to believe myself that convergence is the way forward. What is your view on that?
  (Mr Wallace) We believe absolutely that convergence is a fact of life already. Ultimately, voice data and video will be delivered to both homes and businesses over one network. We are doing that already for several of our major corporate customers and the capital and cost savings are huge. All this information is, after all, only a series of bits and bytes. It will all come ultimately through one network to a variety of devices at the end of the day, television, PCs, mobile phones, but the networks themselves will be converged networks.

  275. Would you agree that we are already getting convergence through digital TV? If people want to avail themselves of it there are many, many ways, including e-mail and direct shopping, etcetera, in which you can do it now. Is it yet again the fact that we cannot always anticipate what is going to happen within the next few months let alone the next five years that presumably this Act, when it is an Act, will cover?
  (Mr Wallace) I do think that is right. There is strong evidence (because we see it) that you get an extra step up in usage if you go broadband. If you genuinely have a broadband connection in the home the quality of the video and the data and the speed normally doubles or triples the amount of time people use it. I think you are right, narrowband does supply interactively quite a lot of UK areas with services but the next step will await broadband in terms of truly rich content via the internet.

  276. In our last inquiry but one when we went to the West Coast of the United States we were introduced to the concept of "herky-jerky" vision. I take it you agree the only way we can get rid of herky-jerky vision is through broadband?
  (Mr Wallace) Ultimately.

Mr Bryant

  277. You just said something which is quite important, in terms of convergence, that it is going to mean that the route into every home and every business is going to be essentially one route. That puts an enormous onus on the person who is in charge of the route.
  (Mr Wallace) Absolutely.

  278. In many ways if Sky have become the organisation through which you decide how your e-mail arrives into your television, how you go shopping, and whether it is a walled garden or a genuinely open internet experience, all of these things, if all controlled by one organisation, there would still be a need for very robust regulation?
  (Mr Wallace) There is, but just to reiterate the point, digital satellite is a very powerful one-way medium. You can do some interaction but because it is asynchronous in terms of band width you can do a lot of very high-quality downloading of content but for true inter-activity it will be over a fixed line. You can do e-mail but you cannot do a lot of the truly interactive experiences that a fixed line network will give.

  279. The electronic programme grid or whatever it is that is the front thing that you see on that screen is going to be very, very powerful.
  (Mr Wallace) That is absolutely right.

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