Select Committee on Culture, Media and Sport Minutes of Evidence

Memorandum submitted by AOL UK

  AOL UK eagerly awaits the publication of the draft bill on Communications expected this spring. We welcome the vision outlined in the Communications White Paper of a combined regulator addressing the regulatory requirements of and the application of competition law to an increasingly converging communications industry.


  AOL UK endorses the consumer-centric approach to policy and regulation outlined in the Communications White Paper. In our view that approach should lead to regulation only where it is needed to ensure that consumers have access to services and content of their choosing.

  AOL UK welcomes the recognition in the White Paper that different channels require differing approaches to content regulation. In particular, as a global medium where both content ownership and content distribution cross national boundaries and where content is "pulled" by consumers rather than "pushed", we support the view that the internet suits a lighter regulatory approach than other media. We support the Government's view that partnership provides the best approach for the regulation of internet services and welcome the Government's support for self-regulatory schemes such as the Internet Watch Foundation.

  AOL UK believes that to achieve the proposals in the Communications White Paper, including greater competition in the telecommunications sector and support for the use of telecommunications infrastructure for future services such as Pay TV and other content services, an appropriate regulatory framework for infrastructure services which addresses market demand is essential.

  In particular, this would require the new regulator to be statutorily empowered and appropriately resourced to undertake a rigorous economic regulatory approach wherever the activities of monopolistic or oligopolistic market forces were restricting access to communications networks on open, transparent and competitive terms. This would at the very least maintain, if not extend, the existing principle that regulation is required where competition does not effectively regulate the market.

  The initial decision of the European Commission to concentrate its broadband efforts solely on Local Loop Unbundling (LLU) has impacted on the ability of regulators to respond more flexibly to market demand, which has progressively avoided basing downstream services on local loop unbundling.

  Nonetheless, despite this regulatory focus, the unbundling exercise has amply illustrated the difficulties regulators face when they do not have an effective set of powers and sanctions. Clearly the powers, sanctions and human resources of OFCOM must be sufficient for it to deliver on its responsibilities. In certain bottlenecks such as LLU and wholesale ADSL services, without robust regulation it should be expected that effective competition will not arise in at least the next five to ten years.

  OFCOM will enjoy a more technologically neutral set of regulatory powers when the new EU legislation is transposed, but must understand the lessons of previous economic regulators and develop processes that are robust and, where necessary, rapid in order to tackle any obstacles to developing and sustaining a dynamic market. The emphasis in the EU legislation on collective dominance and leveraging of dominant positions must be faithfully reflected in OFCOM's approach to markets.


  AOL UK believes that broadband technologies allowing high-speed internet and interactive services are and will continue to be an essential component of convergence. The communications and internet revolutions in the UK are dependent upon a roll-out of competitive access to broadband infrastructure. At AOL UK we believe that ADSL will offer a wider coverage for broadband connections than any other method given the current low penetration and significant funding issues affecting alternative carriers such as cable providers.

  If the UK is to rise to the Government's target (set out in UK online: the broadband future), "for the UK to have the most extensive and competitive broadband market in the G7 by 2005", success will be reliant upon effective regulation by the existing regulator, OFTEL. Thereafter, ensuring the provision of sustainable services will continue to be a major challenge for OFCOM.

  Provision of broadband access specifically through ADSL is a potent example of the importance of infrastructure regulation in the communications industry, demonstrating how an unsatisfactorily slow regulatory process is depriving UK business, citizens and consumers of the kind of "next generation" online services benefiting millions of their peers in other nations.

  Tardy regulatory intervention creates the very real danger that infrastructure owners are able either to obtain an unassailable first-mover advantage while the regulatory process struggles to find viable solutions for competitors or that the whole market is materially delayed while infrastructure owners hold back innovation because they are unable themselves to identify their own way forward. In either case, consumers are denied the choice and quality of services they deserve.


  AOL UK's answer is an unequivocal "yes". From our own research it is clear that unmetered narrowband internet access ("flat-rate" access) has significantly raised UK consumers' awareness of the benefits of broadband. Flat-rate access on narrowband offers consumers the experience of going online without having to "watch the clock" of minute-by-minute metered telephone bills; since the introduction of flat-rate access, usage of the AOL service in the UK has more than doubled.

  Broadband, offering the key benefit of being "always on", represents a logical step-up for flat-rate internet users who, according to recent OFTEL research already account for more than 40 per cent of all UK households online.[7]

  The AOL UK research found that 85 per cent of its members on the flat-rate price plan wished to move up to broadband (the comparable figure for those on legacy metered price plans was 69 per cent). Of those who indicated a willingness to move from flat-rate to broadband, 70 per cent said they were prepared to pay a premium for this service.

  There is therefore no doubt whatsoever in our minds that there exists significant mass-market consumer demand for broadband in the UK. But that interest will not convert into real demand at the current DSL price points in the UK (typically more than £40/month retail, compared to £40/month retail on the Continent).


  Currently, the critical problem for internet services providers (ISPs) in offering broadband services is not lack of mass-market consumer demand but the high cost of BT's wholesale ADSL product on which those services are based. The recently-announced price of BT's new "self-install" ADSL wholesale product (currently under trial) is closer to a level likely to enable ISPs to market consumer services, but still remains above the point where large-scale mass-market take-up is likely. Unfortunately, questions about the scaleability and robustness of BT's provisioning systems - which dogged the company throughout 2001 - have also still not been fully resolved.

  These supply-side factors have prevented AOL UK from nationally mass-marketing its broadband service to the mass market up to this point. However, as demonstrated by our research, substantial demand for broadband exists within the AOL UK membership base. Therefore as soon as the supply-side conditions are met AOL UK will begin fully nationally mass-marketing broadband in the UK.


  AOL UK fully understands the Government's commitment to the development of broadband as a universal service accessible to all across the UK. However, we would point out that the debate concerning the feasibility and desirability of broadband as a universal service is premature given the continuing supply-side problems inhibiting the launch of mass-market ADSL services in the UK.


  In AOL UK's view it is crucial to ensure key requirements are met in terms of infrastructure regulation in order for OFCOM to succeed in its role:

  The regulatory process put in place must enable OFCOM to act in a sufficiently timely manner

    —  OFCOM should contain staff sufficiently skilled and empowered to deal with the particular issues raised by the various bottlenecks and impediments to competition and in particular access to telecoms infrastructure

    —  OFCOM must be independent of Government

    —  OFCOM must refrain from intervention where effective competition or self-regulation renders regulation unnecessary

  The complexities inherent in infrastructure regulation, as demonstrated by the difficulties with broadband roll-out, require particular expertise and experience and therefore in the view of AOL UK it is important to ensure that OFCOM attributes the highest priority and devotes sufficient and suitable resources to infrastructure matters.

11 January 2002

7   Consumers' use of Internet Oftel residential survey Q6 August 2001. Back

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