Select Committee on Culture, Media and Sport Minutes of Evidence

Examination of Witnesses (Questions 240 - 259)



  240. So BT might say, "But there is nobody who wants to take on the challenge, there is nobody who wants to take on the financial commitment, and therefore there is not much we can do about it."
  (Mr Wallace) It is not a matter of desire. As I said earlier, we have a very strong balance sheet, we have huge funds for investment. That is not the issue with us. It was the difficulties that BT put in the way of operators like us. The initial problem of course was that they did not have a full list of names and addresses, the locations of the exchanges. When we got over that problem, we then found, believe it or not, that they did not have plans of those exchanges, so we could not tell whether there was room for the equipment or not, and so on and so on and so on. This delayed the process, and then, as I say, this, I am sure, purely coincidental price reduction on their part of the wholesale services made the business plan both impractical and unviable. It is not a matter of desire; it is that the economic model did not work—maybe accidentally because of BT's behaviour, maybe not. I have no idea what the motivation was.

  241. Let me just get it clear in my mind what you need to be able to do, because this phrase "unbundling of the local loop" is a piece of jargon which does not make much sense to me.
  (Mr Wallace) Yes.

  242. Basically you are putting a piece of equipment into the exchange which means that you are then able to sell on to customers who are served ADSL from that exchange.
  (Mr Wallace) Yes, we then use BT's copper wires. Effectively, technology allows us to use an element of those copper wires as if we owned it. That is what unbundling does. It means equipment but it does not mean we have to lay a duplicate local loop. It is a very neat technological solution.

  243. That has been required now, has it not, by an EU Directive?
  (Mr Wallace) Yes.

  244. Since, I think, last Christmas.
  (Mr Wallace) Yes.

  245. How much does it cost you to do an exchange?
  (Mr Phillips) We do not know because—
  (Mr Wallace) We have not done one yet!
  (Mr Phillips)—there is so little information coming from BT about the specific requirements and in those specific requirements are the specific costs involved. As Graham said, it is very hard to get details of the plans, it is difficult to determine exactly from BT what the arrangements are for the security of your equipment versus their equipment and so on and so forth, the additional measures for access that are required and so on. We do not have experience because the business plan that we put together was not ultimately one that we followed through.

  246. With more and more people now having mobile phones and perhaps using mobile phones instead of fixed lines, is that providing a challenge to you?
  (Mr Wallace) Mobile phones are without doubt competition in the voice market. I think using mobile phones for voice communications is a terrific way of working—I do and we do in business—but what we are mainly involved in are internet and data communications which will always be better over a fixed line. People who use mobile phones will know the number of times a call drops. If you are trying to use internet access over mobile and trying to download any volume of pictures or video, the technology of mobile is not adequate relative to fixed line. I think mobile is a great substitute for the voice local loop, but it is not in any way, in my view, a substitute for internet data or video access.

  247. So anybody building a business plan for the future on lots of people watching things on their mobile phones is in cloud cuckoo land.
  (Mr Wallace) We are not in that business, but ....

  248. And you are glad.
  (Mr Wallace) Yes. Mobile is great for voice but I think for data you need fixed line and in several cases you need fibre optic.

  249. You mentioned that you also had a major web-hosting business. We have talked a lot so far in this inquiry about broadcasting and a bit about telecoms; we have not talked much about the internet itself and some of the rights issues that I guess you are faced with. Are you happy with the direction that the Government is going in in terms of regulation with the internet and what that means for web-hosters?
  (Mr Wallace) I think so on the whole. I mean I think it does need a relatively light touch otherwise it will inhibit considerably the development of the internet and that seems to be the approach so far.
  (Mr Phillips) I think industry has a strong responsibility to set in place self-regulatory mechanisms that are satisfactory to Government, therefore the onus in the first instance should be on us, as operators, to put forward and to be seen to operate effective measures to control intellectual property, piracy and so on and so forth. I think the other thing also to reinforce is the need—I do not see there is a risk at the moment that this is being muddled—to distinguish between those that carry the information and those that own it. Those that transmit it, basically, are the network operators. They carry packets of information or the bits of data and should not have the same liabilities necessarily placed on them, from a content point of view, as those that own it.

  250. What happens if somebody discovers a child pornography site that might not ostensibly look like that when you take it on to host it? How does somebody tell you? How do they get it taken down? What happens?
  (Mr Phillips) They can approach us in a number of ways. They can go direct to us or they can go through some organisation like the Internet Watch Foundation and they can identify that we have hosted illegal content. As soon as that is flagged to us, then we have procedures to take that content out.

  251. This was raised to me by a 10-year old in a school in Porth last week: It is genuinely very difficult to know, as an ordinary consumer, how you go about that, especially because quite often, as far as I can see, many sites like this gather in e-mail addresses and spam to literally millions of people around the world. You try to delete the message and in the process you actually end up going to the web site. How can we make sure that a young person or parent or whoever can make sure that that site does go?
  (Mr Phillips) I think what you are saying is absolutely right. I think it is a huge issue and it is one that Cable & Wireless feels very strongly about and we are very much engaged in thinking through these issues and putting things in place to try and support the rights of parents and others to provide an effective block to content. One of the ways in which we do it is through having effective, independent procedures to alert the people that host content that they are hosting illegal content. The Internet Watch Foundation is one way of doing that. We need to reinforce and redouble the efforts of groups like that to get the awareness of the public up to the services of groups like that. The other one that is critical is the effective labelling of content. Cable & Wireless is a founding member of the Internet Content Rating Association (ICRA) and we have a public policy that strongly advocates all our customers self-rate the content they have. With ICRA we have developed rating guidelines in most of the commonly used web languages across the globe, so that parents and others who are accessing the content can put restrictions on what can be seen using the computer.

  252. I know that a lot of performing artists, especially, obviously, musicians, have a specific worry about web sites that use copyright material illegally. They would claim that it is actually very slow and difficult, in particular in Britain ( it is much faster in other countries) to get web sites taken down.
  (Mr Wallace) Again, we fully cooperate within that area because it is in our best interests to do so, as it is with all sites. We want to encourage safe use of the internet by everyone, children included. If that does not happen, our business will suffer, so we are doing all we can and we are talking to Government in this area. Increasingly sophisticated ways of labelling and blocking sites are being developed. It is still a very new industry actually. The technology will develop to allow us to do that probably more quickly than we have in the past.


  253. Without using this word pejoratively, is this not really bluster? When we were doing our last inquiry on this, among other things, we visited the appropriate Commissioner in Brussels, and the view we arrived at, and the view that we were guided to separately by the Commissioner, is that in the end you cannot do anything about it, and that whereas content regulation on terrestrial TV is something that could be done as long as we have got it, in the end this is beyond control. It is rather like if you watch, as I was doing over the weekend, an American DVD and it has got this stern FBI warning at the beginning about where you can play it and where you cannot. It is all rubbish. In the end it is played wherever anybody wants to play it.
  (Mr Wallace) I think it is very difficult to regulate, but the industry is doing it in its own self-interest because if you undermine the use of the internet and children and families do not want to use it, our business will suffer, so it is in our interests to be as active as we can. It clearly will never be possible to give a 100 per cent assurance that no web site that we would rather not be there is not there. However, we know where our sites are located, they are not in the ether, they are in our data centres, so we can access and remove illegal content when notified.

  Chairman: I am sure that your sentiments and objectives are totally admirable, but one of the things that one needs to do in these circumstances is to accept that certain kinds of content regulation are no longer going to be possible and it is pointless to pretend that they are going to be possible. After all, it is interfering, is it not, with hundreds of millions of telephone calls? You just cannot do it. Even the most authoritarian state cannot do it. Julie Kirkbride?

Miss Kirkbride

  254. Could you expand a little further on your opening remarks about how you would see an industry model for the separation of the delivery of broadband versus those who make use of it?
  (Mr Wallace) I think the problem with the local loop, that last mile which BT still controls and where over 80 per cent of those lines are BT lines is that the model currently encourages BT not to invest in it but to maximise price. That is what monopolists do. If I were a monopolist I would do the same. So it discourages investment in the local loop. If it were separate there would be an entirely different model because, instead of using it to subsidise their up-stream business, the manager of that business would be encouraged to invest and broaden the appeal of the local loop by investing to get more content onto that local loop, and their business model would be investment and volume driven because they are not a monopoly in the same way BT is, whose focus now is purely price and limiting access. I think it could work. I think it has; the gas industry is a good example.

  255. Would this be another separation of BT's business so that it would remain in BT's hands?
  (Mr Wallace) We would prefer it if it were a totally separate business and separate ownership and they would be encouraged to invest and expand by selling to us and other ISPs and content providers because it would invest in broadband. Then you break that vicious cycle. The problem at the moment is that because there is not broadband available to the bulk of the population, there is no one devising content that really optimises broadband. You have got to break that vicious spiral. Once you break it by separating the company out, I think you will have a much more vibrant broadband industry altogether, both on the content and access side. I think there are some proposals by outside parties. Earth Lease, for one, are suggesting you can have a separate business model for a stand alone local loop which would be extremely successful in its own right.

  256. The 20 per cent where they are not owned by BT, these are places like Hull where they have a separate exchange? Why do we not see more Hull-type operations?
  (Mr Wallace) That is a complete freak of historic legislation. You do not see more because the economics of over building a local loop once there is one there already do not work. It is like any natural monopoly. If there is a natural monopoly you cannot then make the numbers work to reproduce the natural monopoly.
  (Mr Phillips) Kingston were given a natural monopoly in Hull.
  (Mr Wallace) In that area, so that is a real freak of history.

  257. A 20 per cent of the market freak? Where are the others?
  (Mr Wallace) We do have some local lines as do cable operators.

  258. You managed to grab some off them?
  (Mr Wallace) Yes, but this is after 11 years. We have had 11 years of competition in the UK. They have gone down from 100 per cent to 83 or 84 per cent, so by any definition it is clearly a natural monopoly. Despite all that competition, the power of the incumbent overwhelms the competition.

  259. Are there any models in other countries that have been successful? Are we that good at broadband technology here or really behind?
  (Mr Wallace) In general terms, it is the same problem everywhere, and I know the European Commission is extremely worried about it as well because the same is happening elsewhere. Germany is a bit further ahead in certain areas and behind in others, but it is a general problem that the monopoly incumbent is becoming more and more powerful because of that natural monopoly and competition throughout Europe and the US is reducing very materially in this industry. Christopher referred to it earlier. In the last 12 months we have seen a number of bankruptcies around the world and if this continues we will finish up exactly where we started 11 years ago where the phone systems around the world will be run by the incumbent ex-monopolist and competition will disappear—with the exception of Cable & Wireless; we will still be there of course!

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