Select Committee on Culture, Media and Sport Appendices to the Minutes of Evidence



  14.  Other witnesses claimed that the "problem" in the UK was what they said was the natural monopoly that exists in the local loop. They also claimed that the local loop is not unbundled in the UK in practice and that potential competitors to BT withdrew from the unbundling process because of a combination of what they said were enormous practical barriers that BT put in the way, and the introduction of cheaper wholesale prices by BT.

  15.  Those same witnesses were then gracious enough to admit that there were no examples of other countries that were any better placed in this regard.

  16.  We are disappointed with the tenor of these comments. The fact is that the UK has a clean bill of health as far as its local loop unbundling process is concerned. Only last week, on 20 March, the European Commission announced that it had decided to open formal infringement proceedings against Germany, France, Ireland, the Netherlands and Portugal with regard to the way local loop unbundling is offered in those countries. This is the second-wave of infringement action from the Commission for failure to implement its local loop unbundling requirements. On both occasions the UK has been recognised as fully compliant. The media and our competitors may make much of Germany as the exemplar of a country where LLU has been offered—but the fact is that it is Germany which is in the EU dock, and not the UK.

  17.  BT invested over £50 million in preparing for unbundling, on the basis of what turned out to be hugely inflated forecasts of demand from potential operators. The downturn in the economic outlook for the telecommunications sector and the subsequent lack of availability of capital undoubtedly played a part in reducing demand, but it seems clear that the economics of the market and possible commercial models had not been fully understood by operators when they made their initial estimates. However, BT has been ready to take orders for unbundled loops at every one of its UK exchanges since January 2001.

  18.  The suggestion that potential users of unbundled loops were dissuaded from proceeding because of cuts in BT's Wholesale prices demonstrates again the complexity and conflicting pressures that are inherent in the multi-layered competitive market we have in the UK. Service Provider competition is predicated upon other companies offering their services over lines provided, but still owned, by BT. Local loop unbundling, on the other hand, is designed to allow competitors to take ownership of BT's lines and then sell services over them. These are two different models that the regulatory rules require be run side by side and, clearly, price changes in one will impact upon the other. There has, of course, been significant pressure on BT to reduce the cost of its wholesale broadband products in order to stimulate service provider activity. This has now happened. The major changes in the projected cost base which have given the scope for these announcements are not in the components which comprise the unbundled local loop. BT has made a significant investment in the unbundling process and the prices for local loops are actually determined by Oftel and not set by BT.


  19.  There has been comment in the press recently about the fact that AOL, uniquely amongst major ISPs in the UK, benefits from a UK Customs & Excise interpretation of VAT rules which means that they do not have to pay VAT. The benefit to them in the narrowband world has been calculated as being £30 million per year. This effectively means that a US-based competitor is being subsidised by UK taxpayers to export value-add services out of the UK. It should be noted that no other EU member state interprets AOL's activities within their boundaries as falling within the scope of this exemption—the benefit to AOL is a UK-specific one. AOL thus receives a substantial financial advantage which it then uses for marketing purposes in this country. If the VAT exemption persists, the potential benefit to AOL in the broadband market will be even greater since the individual VAT saving will be higher. Whilst BTopenworld is not a party to current legal action on this issue it does have concerns about the potentially damaging effect this anomalous position will have on competition in the UK broadband market at a time when such a tax subsidy could make the difference between profitable and loss-making activity.

26 March 2002

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