Select Committee on Culture, Media and Sport Minutes of Evidence


Memorandum submitted by Telewest Broadband

IMPLICATIONS OF DELAY TO EXPECTED LEGISLATION ESTABLISHING OFCOM

   Currently, we are expecting a draft Bill to be published by early summer (May) of 2002.

  If this is not the intention, we believe that it is important for the Government's intentions for any new legislation (and new regulatory structure) to be made clear. Since the achievement of many of the Government's objectives hinges on the investment climate, this should not be undermined by uncertainty over the future environment.

  In particular, if the objective of becoming a world leader in terms of broadband access is to be achieved, it must be recognised that, with most other countries having a similar objective, the UK will be competing on a global scale for risk capital. For it to attract this capital, it suggests that the investment climate will need to be more attractive in the UK than in other leading countries.

  In essence, the Government's current proposals for future legislation and regulation of this sector could significantly influence this climate. Therefore, the Government should either press ahead quickly with the expected legislation or decide to maintain the status quo. We prefer the former because, on balance, we believe that a single body should be better placed to judge the impact of its regulatory decisions across the supply chain.

DEVELOPMENTS IN POLICY SINCE THE COMMITTEE REPORT

  We believe that the Government's overall policy objectives are still similar to those that existed when the Committee last reported. There may be some changes of emphasis but, in our view, the key objectives remain as follows:

    —  to make the UK the most dynamic and competitive communications and media market in the world

    —  to ensure universal access to a choice of diverse, high quality services but particularly to public service content through all media.

    —  to safeguard citizens and consumers by protecting consumer's economic interests (by making key services 'affordable') and protecting citizens on the grounds of decency, privacy and freedom of speech.

  Within the scope of these overall objectives, the key areas of Government focus that impact Telewest are:

    —  Targets for conversion to digital broadcasting (and analogue switch off)

    —  Target for universal internet access

    —  Target for greater broadband availability

    —  The future role, and regulation, of public service broadcasting

    —  Media ownership rules

    —  The role of OFCOM

  We provide some views on each of these areas below.

DIGITAL BROADCASTING/ANALOGUE SWITCH OFF

  Telewest Broadband has over 650,000 digital TV customers and it plans to convert all existing analogue customers to digital by end 2003. Therefore, we would not expect to be an inhibitor to analogue switch off.

  In our view, the overall UK figure for digital take up at c.8,000,000 represents good progress to date and we anticipate similar growth in the near/medium term. Because this market is still quite new, we believe that it is premature to make subjective projections of take up over the second half of this decade although we do support positive action by stakeholders to maintain progress.

  As such, we are involved directly with the `Go Digital' project. and the Government's Digital Television Stakeholders Group.

  However, from our experience so far, we are concerned that progress could be slowed by the conflicting interests of different groups.

  We see the primary objective as conversion to digital transmission—in order to free up the existing analogue spectrum for potential re-use. We do not see the objective as replacing all existing analogue television sets with digital sets or needing to convince consumers to move to subscription services.

  Today, conversion to digital can be achieved through the use of a single digital set top box with the existing analogue sets acting as digital TV monitors. With internal cabling being able to cover additional sets as required, together with additional set top boxes, this situation could continue through the consumers replacement cycle.

  Whilst this is not a complete solution, it provides a path to a digital home today and with the developments in in-home wireless technology, it could still provide a solution in the future, until, at least, digital television sets reduce in price. But it is still not clear to us whether the correct route is to incorporate the relevant technology in the television set or, with the changing requirements for content and its delivery, to develop a `home terminal' serving dumb monitors with the required service.

  The use of digital set top boxes does not imply that consumers have to move to subscription services although any box, whether intended only for free to air in the first instance, should allow consumers to access both public service or subscription services as they require; ie even basic boxes should have interfaces that will allow consumers to `trade up' to whatever subscription level and platform they wish to use.

  However, we recognise that retailers and set manufacturers may have different objectives and the current promotion of digital sets, and the associated standards issue, clearly creates uncertainty in the market.

  We do not see any need to change the current target for analogue switch-off unless the Government's expectations for sale/re-use of the analogue spectrum change markedly.

UNIVERSAL INTERNET ACCESS

  In our view, universal (dial up) access to the Internet is available now and take up is impacted primarily to consumers' personal circumstances.

  The vast majority of consumers already have access to a telephone, or to a location that can offer internet access. Increasingly, homes will not require a personal computer to achieve access, as it will be provided via the television set, computer game consoles and mobile telephones. Therefore, we do not believe that any additional regulation is required in this area.

  However, we recognise the desire to reduce the cost of internet use and we have sought to do this through the introduction of flat rate tariffs. We continue to keep pricing under review.

BROADBAND

  We acknowledge the Government objective that the UK should have "the most extensive and competitive broadband market in the G7 by 2005, with significantly increased broadband connections to schools, libraries and further education colleges and universities."

  Telewest Broadband sees itself as a key player in delivering this objective (although not one that will deliver universality alone). Currently, Telewest has broadband access network available to c.25 per cent of UK consumers and has seen its broadband customer base increase from 7,000 to 70,000 during 2001. Together with ntl's coverage and that of BT's ADSL based service, around 65-70 per cent of UK consumers have access to a broadband service.

  Despite this, there is still unsatisfied demand outside of the main areas of population and, although this demand will ultimately be met by existing and/or emerging access technologies, it will not necessarily occur at a pace that meets the Government's 2005 target.

  However, the Government's broadband expectations can be interpreted as either the leader in availability or in usage or best in both. And it is not entirely clear over the role it should play.

  Telewest has been a member of the core Broadband Stakeholder Group (BSG) that submitted its report to Government on 30th November 2001. This Group considered the broadband issue from supply and demand side perspectives as it saw a need to consider actions to address both availability and take up.

  From the supply side, we believe that the Government's underlying target is to provide higher bandwidth, local access infrastructure on a near universal basis as quickly as possible (to support economic development and social inclusion across all regions). In this respect, universal coverage could be achieved by a combination of wired and wireless transmission technologies—fixed, mobile and satellite. However, there are some areas where the market cannot make a commercial case for investment in broadband access at present, particularly to provide a higher speed return path to complement high speed delivery to the user.

  In terms of demand influences, it is argued that prices are too high and/or that there is no compelling content or service to drive more rapid broadband take up, although we believe that there is an increasing willingness to pay for the `always on' and `high speed' access to the internet. The recurring question, notably from the investment community is `what is the killer application that will support broadband investment?'

  In this respect, we believe broadband itself should be regarded as the killer application—ie the 'new electricity' driving the development of new unforeseen services—which will allow applications and services developers to have the confidence that adequate bandwidth will be widely enough available to justify development.

  If Government believes that `broadband networks will transform communications between people, homes and businesses and will offer to businesses exciting opportunities to provide new services', this must occur nation-wide to be of most benefit to the economy.

  A major conclusion of the BSG was that the capital investment required to extend the reach of broadband access is substantial and, in the current economic climate, very difficult to obtain.

  Therefore, we are faced with a Government objective that really requires the supply of broadband access to precede the established demand for higher bandwidth services, whilst the investment community does not appear willing to commit to anything that does not show a committed revenue stream.

  One approach is to allow the market to progress at a pace that investors will support (and we can only see this situation improving and progress accelerating). Alternatively, Government must consider whether it should take a role to support infrastructure provision in the same way that it is looking to stimulate usage, notably through public sector procurement and other fiscal measures to stimulate connection to, and use of, broadband services and the development of broadband applications.

  One option is to consider, together with the investment community, whether different lending criteria should be applied for funding such infrastructure projects. In this respect, one recommendation of the BSG, not accepted by Government, was the possible use of fiscal incentives (possibly in the form of R&D tax credits) for the provision of broadband local access infrastructure.

  Another BSG recommendation was that the industry should try to make better use of existing infrastructures. Since a significant requirement for capital is in primary infrastructure (ie ducts, buildings, masts and poles), which supports the transmission infrastructure (ie fixed cable or wireless based systems, including satellite), the sharing of ducts, poles and buildings would reduce the need for capital, which could be better deployed for the provision of transmission systems and other network components.

THE REGULATION OF PUBLIC SERVICE BROADCASTING

  Since public service broadcasters have a combination of market power and a privileged position, there is a need to ensure that, if they abuse these positions and act anti-competitively (either consciously or unconsciously), they face the same controls in the new era as commercial broadcasters; ie they should be subject to the same competition law as the rest of the industry and should probably be more tightly regulated that smaller, newer companies.

  In terms of the objectives of diversity and plurality, as mentioned above, the public service broadcasters (as well as other broadcasters with market power) should have obligations to provide diversity. We believe that the issue of diversity should be considered independent of plurality as we believe that diversity can be regulated but plurality requires a willingness/ability to invest and to operate within a market.

MEDIA/CROSS-MEDIA OWNERSHIP

  Our primary concern in the current debate relates to the Government's wish to retain existing foreign ownership rules. For Telewest specifically, we do not see that a rule that allows BSkyB to own a terrestrial broadcaster, but excludes Telewest from doing the same thing, is appropriate.

  In any event, we would question whether the current foreign ownership rules are relevant or sustainable given the need for the UK to attract global capital. Notwithstanding the reciprocity issue, particularly in respect of the USA, we believe that the difference in scale between the two markets does not justify retention of reciprocity and could work against the UK's interest.

  Plurality can only be achieved if there is a willingness and ability to invest whereas diversity can be achieved through legislation/regulation, irrespective of ownership of the regulated entity. In essence, if any entity has a position of dominance or significant market power, it can have obligations to meet certain objectives (such as the universal service obligation in the telecommunications area).

  Cross-media ownership must be possible, subject to the ability of the competition authority to control abuses by those having dominant positions in one or more markets, and where market power in one area might be leveraged unfairly in another area.

  There may be some problems in the application of competition law in the new media, notably in the definition of relevant markets and the speed with which it could be applied to curb a major abuse, but we see the application of competition rules as a preferable option to too prescriptive regulation that can be difficult to monitor.

OFCOM AND THE ROLE OF REGULATION

  Whilst we note the Government's concern that the market will not deliver some of its objectives, it is equally true that market management, through the use of regulation, will create its own problems in such a fast changing sector. We are firmly of the view that the market should be as unfettered as possible, because of the uncertainty over how the future will evolve, and that competition law principles should be predominant.

  If we accept that achievement of the Government's main objectives hinges on the investment climate that exists within the UK, it follows that the regulatory framework and other Government policies must create a climate for such investment.

  The current regulators have a very important role in creating the right climate and it follows that proposed OFCOM will play an even more vital role

  While we have supported the creation of a single regulatory body, although preferably with a single reporting line to Government, we have some concerns about its potential remit and the exercise of its powers.

  It is essential that the actions of OFCOM, in fulfilling its central regulatory objectives, does not inhibit innovation and competition by undermining the business planning of the various players in the market. We believe that the quest for an effectively competitive market can be inhibited by regulatory provisions. Sometimes, further regulation may be introduced, possibly to adjust for the effects of previous regulation, when the aim should be to withdraw.

  Therefore, to guard against potentially distortionary action, the regulator should not take action without full and transparent consultation, and should have a statutory duty, similar to that of Government, to carry out impact assessments of any new regulation, which would both review the impact on the regulated entity (ie the target of the regulation) as well as assess the direct and indirect impacts on other industry players (and, hence, on the development of the industry as a whole).

  We believe that OFCOM should have a primary duty to promote investment and competition and ensure that its duty to protect consumer's interests does not result in short term benefits that lead to medium term disbenefits.

  For example, the objective of providing `access at affordable prices' is a sensitive issue. Clearly, Government recognises that the use of existing services and the take up of new services (both public and commercial) will depend upon the cost of access and use. However, this is equally recognised by the commercial companies in the market, who need to price services at a level that will both drive take up and recover costs of provision.

  In recent times, subsidy of new services, such as digital broadcasting (and mobiles), has stimulated take up but cannot continue indefinitely. Similarly, unmetered access for internet use has also seen the introduction of various pricing packages, some of which have been `loss leaders'. This suggests that price regulation must be treated very cautiously to allow new pricing structures and commercial models to develop.

11 January 2002


 
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