Select Committee on Culture, Media and Sport Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



Michael Fabricant

  200. That is the point I was going to make. Immediately after the questions, I am going to have to go out and go along the corridor to the OFCOM Bill. I am particularly interested in the spreading out of broadband, ADSL and other methodologies of broadband, and I read with interest the brief that you gave us in advance. I think it is worth repeating a couple of points which you can amplify on. I gather that BT has already equipped 1,010 exchanges with ADSL and that you have the potential of covering 60 per cent of the population, which is good news, although I gather in rural areas that is not so easy. I wonder, given that in the past this Committee has talked about the superhighway—and the superhighway is very, very dependent on the expansion of broadband communications in the UK—if you can explain what prospects there are to achieving something like 100 per cent coverage in the UK.
  (Sir Christopher Bland) Chairman, the prospects of 100 per cent coverage are somewhat distant. Although the 1,010 exchanges cover 60 per cent of the homes in the UK, only a proportion of that, a pretty substantial proportion, 90 per cent of that 60, are actually within sufficient reach today of the exchanges to get broadband. So you have to multiply the 60 by 90 per cent, that gives you 54 per cent coverage.

  201. I had worked that out!
  (Sir Christopher Bland) I need to remind myself. Although that is the coverage from the exchanges, the actual take up of broadband from those exchanges so far has been extremely limited, round about one per cent. So the exchanges are enabled but the take-up is low. While broadband, as we have pointed out in our evidence, is not the only measure of e-Britain and the speed at which our communications modernise, it is an important goal, and BT has, I think, an increasingly significant role given what is happening in the telecoms' world—and it has happened in the last year since you looked at this question—in making sure that broadband accelerates. What do we have to do within that universe of the 60 per cent of exchanges that are enabled? First of all, we have to address the question of prices. We have to address our own internal organisation and structures; we have to address with the regulators some regulatory issues; we have to produce very rapidly a broadband strategy that sets more ambitious targets for BT than we have had in the past and that takes advantage of technological change since we last met. We have a new chief executive who has been three weeks in the job but who comes from a broadband-literate background, and this is absolutely top of his agenda. So we are working very hard to address these issues and in weeks rather than months, I think, we should be able both to announce a programme and prices and projects that should have the desired effect fairly speedily.

  202. Of course both you and the new Chief Executive have inherited a position where BT is saddled with a very, very large debt. Is that going to slow up your project to e-Britain (if one can make that into a verb).
  (Sir Christopher Bland) Chairman, large is relative. At the half year it was a relatively modest £16,000 million. (You should try writing that on a piece of paper and see how far the zeros go to the east! It is an interesting prospect.) We have reduced our debt very considerably since last year: we have had the biggest rights' issue in the UK's history, £6 billion; we have sold our directories' business for £2 billion; we have sold Japan and Spain; we have raised about £12 billion through disposals. So our debt has come down but we are still paying £3 million a day in interest and we would like to see it come down further. But we are, at least relatively speaking, soundly financed compared with a year ago and compared with our other counterparts in Europe: if you look at the balance sheet of France Telecom, for example, we are in a more enviable position than they. So I do not think we would wish to shelter behind our level of debt to say that we cannot do a proper job by broadband. We can.

  203. One of the points you identified in the lack of take-up of broadband is pricing policy. Given that you do need to cut back on your debt, you need to make profits, do you have the flexibility now that you would not have had? Do you have, shall we say, the lack of flexibility because of the debt that you currently are suffering from? I mean, if you did not have the debt would you not have—I am not doing this very well at all—greater flexibility in your pricing policy?
  (Sir Christopher Bland) In theory, yes. But of course the implication of that is: could we take losses for a year or two? And the answer is: we are precluded from that, not only by our balance sheet but also by regulation. OFTEL does not allow us to sell products at below cost, so both our wholesale and retail prices have to be cost-based. What has changed in the intervening 12 months has been technology: the price of capital equipment has come tumbling down. We are also addressing our own cost base further and we are also addressing the interaction between volume, because if you postulate a broadband universe of X you have one set of prices and a broadband universe of four or five X , if you can roll out—and there is a relation, this is a price sensitive market—then you can bring the prices down. So we are working hard on that but those prices require regulatory approval and the regulator is being sympathetic. He plainly has the interests of a lower-price broadband product high on his agenda too.

  204. I wonder if I could ask Chris Earnshaw, who is really the specialist in this subject, is ADSL the only direction that BT is currently looking at for the delivery of broadband Britain?
  (Mr Earnshaw) No. ADSL is one of the key technologies. We are using it and other similar operators around the world are also focused on DSL. Of course the cable industry uses a different technology with cable modems. We have also been looking at and are trialing satellite-based solutions, which have the advantage of being able to reach the very rural parts of Britain, and we are very aware of the significance of broadband particularly to business, to small business, hence our initial trials have been in Northern Ireland and in the Highlands of Scotland. Those trials have gone very well and we are looking to extend the coverage of those in due course.

  205. Would the costs not be prohibitive? Would there not be a huge restriction on the number of panels, if you like, that would be available.
  (Mr Earnshaw) It is a more expensive technology. We have been talking to both the DTI and the RDAs and with Europe about different funding models to enable us to deploy this technology. Sir Christopher said that the cost of DSL itself is constantly improving, it is becoming economic to employ it in smaller quantities in more rural situations, and we will take full advantage of that. There are other radio-based technologies, not yet reliable enough to deploy commercially, but we are trialing those, again with vendors from around the world.

  206. In your submission to us, you said to us—and it is quite relevant to the Committee I am just running off to—that the main OFCOM Bill must not be developed in the "closed" environment of Whitehall, looking good on paper but failing in practice—and where have we seen that before? Can you give us an example of the sort of provisions you would like to see in the OFCOM Bill that you think at the moment Whitehall is ignoring?
  (Sir Christopher Bland) I will ask Ian in a moment to expand on the consultation issues in particular that we think are current. The particular provisions that we would like to see are proper appeal provisions which exist under the Competition Act.

  207. I am sorry, I did not hear you.
  (Sir Christopher Bland) Proper appeal provisions against OFCOM's decisions. We think that is particularly important. Ian, perhaps you would comment on the consultation process.
  (Mr Morfett) Perhaps I could comment on both parts. In terms of the consultation process, I think the arrangements that parliament have proposed with a joint committee of both the Lords and Commons after the draft Bill is produced are very good and we will want to contribute fully to that. We would hope it is given significant time and significant teeth for amendments to be made. But I think even in the preparation of the draft we are seeing something of a closed door from both of the departments involved and we would like to contribute. I think that is not only BT; I think the whole industry feels that there are some strong points that the industry would like to get across before the draft Bill. In terms of the specific issues, Sir Christopher has mentioned appeals. I think the other one is that we would like to see a greater focus on deregulation as markets become competitive. At the moment, the principle of OFTEL is that it will look at markets as they become more competitive and will deregulate, but there is no requirement on them doing that and to be perfectly honest I spend a lot of time knocking on their door and finding that they are busy doing other things. I would like OFCOM to have a statutory obligation to review markets at regular intervals and withdraw from regulation as competition takes over. I think those would be the key issues.


  208. Before I call Mr Keen could I just ask you the question which derives from your answer to Mr Fabricant. Do you think that the response of the Government and indeed the drafting and formulation of the Government are hampered by the fact that the responsibility for this issue is divided between two departments?
  (Sir Christopher Bland) That plainly is an issue. As you know, we shared the view of your Committee a year ago that from a telecom standpoint there would be some benefit, considerable benefit, in having a unified departmental approach to these issues. Obviously there are wider issues than simply telecom's involvement, but we share that view.

  209. From your experience—which obviously is intense during this period—do you find that you are discussing these matters with the Secretaries of State in the Departments, with junior Ministers or with officials?
  (Sir Christopher Bland) I do not think we would claim that Secretaries of State have closed doors to us, no. We have access. They are busy men and women, but nevertheless we would not claim that. Ian, if you would like to expand on your experience in the last 12 months—rather more recent.
  (Mr Morfett) Yes, my experience would be more with officials of the Department. Whilst there is a generality, a readiness to talk in general terms, in terms of specific drafting of the Bill and talking about specific issues I think there is a closed door amongst officials at the moment. They are in purdah.

  210. From your point of view—and obviously you are a key player, a major player in this, and we have, if I may say so, underestimated your importance—do you think it would be more helpful if the two Secretaries of State, since we have to have two, apprised themselves in greater detail and intensity with these issues and discussed them with you?
  (Sir Christopher Bland) Yes.

  211. Do I draw from that—you are the last person in the world I am able to lead, let alone would try to do so—that the Secretaries of State are not doing that at the moment?
  (Sir Christopher Bland) I think I am too new to come to that conclusion. I think it would be unfair of me to say that. I think it is more that the purdah appears to have been imposed or agreed by officials and that tends . . . first of all, it is unnecessary. These matters need not be kept confidential. I think that the process should be opened up, and we will get a better Bill and a better Act in due course if the doors are open rather than closed. There is a natural tendency within Whitehall departments to shut up shop when they start drafting and actually you could argue that that is the moment that the doors should be opened, if anything, wider.

  212. From your experience—and, as you say, your two associates have been there longer and have had more experience of discussing these matters with Ministers—are the officials with whom you discuss these matters of sufficient seniority and are they, in your view, sufficiently appraised of the cutting edge of technology?
  (Mr Morfett) I think they are neither senior enough nor certainly appraised of the technology or the developments in the industry. One of our frustrations is that some of the features of the White Paper and potential features of the draft Bill will be set in the past rather than in the future. We would like OFCOM on a more general point to be rather more forward looking in some of its provision.

  213. I am interested to hear you say that, Mr Morfett, because when the 1996 Bill was going through I said in the House that the 1996 Bill was out of date before it reached the statute books. That, Mrs Bottomley, a good friend of mine in many ways, nevertheless resented. Would you say we are in danger of reaching that position on this Bill too?
  (Mr Morfett) You said earlier that you would be the last person to lead anyone, and I am not sure that I want to be led quite that far. I have not seen enough of the draft Bill to know, but when I see the draft Bill I will look at it very closely for that fear.

Alan Keen

  214. On one point Michael Fabricant raised about the debt. It is wonderful to be a member of the Government party when national debt was reduced so generously by the various companies. Did they really bid too much?
  (Sir Christopher Bland) Oh, yes. Along with everybody else—everybody else in Europe, come to that. You see it was a very difficult decision because it was: "Either we are in this business or we are not" and there was in those days a heady atmosphere in the telecoms' sector, with endless merchant banks queuing up to lend telecoms' people money and encourage you to bid. But, yes, far too much. The French have recognised it by lowering the prices. I doubt whether our Chancellor is likely to be as generous.

  215. I agree. Was it skill by the Government that managed to get the prices so high? They could have done it in a different way, could they not?
  (Sir Christopher Bland) Yes. It certainly was an extremely skilful process if the objective was to maximise the take from the auction. But somebody in the end winds up paying for that. I mean, it is not a free shot. It has extracted money from the telecom sector that the mobile business, which we are only really partially in now, will have to extract from somewhere. That "somewhere" is only one place and that is the consumer. So I think the long-term impact of what in the short-term was a triumph is rather more complicated. But that is where we are.

  216. Obviously you have been spending the whole of your waking hours and probably some of your sleep hours concentrating on BT, but it would be a shame, when you are in front of us, if we could not get an overview from you with your vast experience in this sector. Would you like to give us an overview of the whole situation, including the BBC, and looking forward to the new Communications Bill.
  (Sir Christopher Bland) I would be pretty cautious about giving an overview. That is what this Committee does better, I think, than I do. The overview I would share with the Committee is that there has been extraordinary commercial turbulence in the telecom sector in the last 12 months. Both in the United States and here companies have gone into Chapter 11, have gone into liquidation, have announced profit warnings in succession, have announced that they have breached or are in danger of breaching their banking covenants and the landscape is very, very different to that which it was 12 months ago. Partly because BT got its act together early, partly because it has a strong core business that generates cash, it is, I think, in a good position to continue both to do well for its shareholders and do well for UK plc. I think the advantage of having a strong incumbent—not a dominant incumbent but a strong incumbent—is greater now than it was 12 months ago because I think the alternative networks, the new companies, are by and large in danger in many cases of becoming or already have become busted flushes. In particular, broadband will only roll out rapidly not only through BT but very substantially through BT. It will be BT I think that gives real impetus to this new technology now. You cannot look to other people, to cable companies or to the wholesale unbundlers, to do as much of it as you might have expected a year or even two years ago. The landscape has changed. It will change back. They will not disappear for ever, but right now BT is in a different position, a more important position.

  217. BT will, if not lead the way, involve itself in delivering content, we understand.
  (Sir Christopher Bland) Chairman, my remarks about content were much misinterpreted. It was assumed that because I had a background at the BBC and London Weekend that meant that BT would inevitably become a broadcaster. My last proper job was Chairman of National Freight Corporation, but BT is not about to become a freight forwarder or a major supplier of logistic services. It was a simplistic analysis. BT's involvement in content is along a spectrum. At one end of the spectrum there is simply being a distributor of content; at the other end of the spectrum there is the theoretical possibility that it could be actively involved in making or purchasing content. I think that end of the spectrum is highly unlikely. I do not think that BT has the skills or the background or the desire to enter that highly competitive market. Its contents activities are much more likely to be through partnerships, and we have partnerships already. We were involved with both BSkyB and ITV Digital in distributing as a special offer to our customers their digital services in the autumn of last year, so that sort of partnership will continue, but BT as a broadcaster is, I think, in simplistic terms not very likely.


  218. In one of your replies to Mr Keen you said that the situation today is very different from what it was a year ago. Insofar as you are able to look forward, would you say equally that the situation a year from now would be very different from what it is today? If so, in what way?
  (Sir Christopher Bland) In a moment I will ask Chris to comment on the technological changes that he sees as most likely in the shortish time-span that might affect the landscape. I think in a year's time the commercial landscape will have changed. A great deal of refinancing is needed and that will take place. In quite what form that will happen is unclear, whether it is in certain cable companies, equity holders being diluted and bond holders winding up owning the company, or through refinancing, or through takeovers, or, as we have seen in the case of Global Crossing and Chapter 11, being bought out of Chapter 11, partially by, in their case, I think, Hutchinson. Those sorts of things in a year's time will have happened and they will, one would expect, produce a different and a greater financial stability within the telecoms' markets.

  219. To be blunt, do you think that it really does make sense for the Government to be about to legislate? Do you think it would make better sense for the Government to propose, itself, more of the kind of potential developments you have just been saying and wait to legislate? Or do you think from that point of view, in view of the fact that change is constant on this, that there will never be a good time to legislate or never be a better time to legislate?
  (Sir Christopher Bland) I think the latter. There is never an ideal time to legislate. But, equally, in a fast-changing market you might as well get on with it once you have decided to legislate. Otherwise you would simply wind up waiting for ever.

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