Memorandum submitted by Freeserve.com
Freeserve were very pleased to have the opportunity
to participate in the deliberations of the Joint Scrutiny Committee
As you will appreciate our primary concern is
to ensure that OFCOM is in a position to regulate the dominant
incumbent, in such a way as to achieve effective and sustainable
competition, particularly in the emerging Broadband market.
Commensurate with the Committee's request for
specific proposals, we have prepared a supplementary submission
which is attached, and which we trust you will place before the
Committee for their further consideration.
I am personally convinced from our experience
dating back to December 2000, when ADSL was first launched to
the consumer market, that an entirely new approach to regulation
commensurate with the increasing emphasis on Competition principles
rather than ex ante regulation is required if real competition
is ever to be introduced. The UK has a unique opportunity to establish
a truly world-class, competitive market for Broadband and therefore
it is imperative in our view that a focal point is established
within OFCOM if this is to be achievedhence our suggestion
for the establishment of a Competition Board, within the corporate
framework being developed.
We will of course be providing further, more
detailed comments in response to the consultation process, but
if the Committee seek further clarification on any of the issues
raised in our supplementary submission I will be happy to provide
Freeserve.com is the UK's largest internet
service provider (ISP) with close to 2.5 million customers.
We have been at the forefront of providing affordable
internet access to consumers and are the only ISP to be selling
broadband through high street shops rather than through web sites
and call centres.
It is crucial that the Parliamentary scrutiny
of the Communications Bill in its draft and final versions pays
adequate attention to issues covered by OFCOM, even when they
are not explicitly mentioned in the draft Bill (ie internet access
and the development of broadband).
As well as a new regulator, the UK urgently
requires a new approach to regulation based on tackling abuse
of market power. This must be at the heart of OFCOM's work.
BT's dominance in the residential voice telephony
market has provided it with an unmatchable advantage in terms
of selling broadband.
Marginal short-term gains, aimed at stimulating
demand, should not be allowed to obscure the long-term effects
that anti-competitive behaviour will have on the broadband market.
OFCOM should have a clear duty to act in the
long-term interests of consumers.
A Competition Board should be established within
OFCOM to ensure that competition issues can be given the expert
and detailed attention they require.
The Communications Bill should be explicit in
its support for the development of a competitive broadband market.
Freeserve.com welcomes this chance to submit
further comments following our oral evidence to the Joint Committee
on 13 June. Freeserve is member of the Internet Service Providers'
Association (ISPA) and in addition to this paper we support ISPA's
submission to the Committee.
Freeserve is the UK's largest internet service
provider (ISP) with close to 2.5 million customers accessing the
Internet through dial-up and unmetered narrowband as well as broadband
services. (Dial-up internet access is where the consumer only
pays for the price of the local call to connect to the internet.
Unmetered access is where the consumer pays a fixed monthly rate
for unlimited access to the internet with no call charges. Narrowband
is a connection through a normal BT phone line. Our broadband
service provides fast, always-on internet access through BT's
phone network for a fixed monthly fee.) We have been at the forefront
of providing affordable internet access to consumers and are the
only ISP to be selling broadband through high street shops rather
than through web sites and call centres.
Unsurprisingly much of the attention towards
the Communications White Paper and the draft Communications Bill
has focused on the implications for broadcasting and in particular
the regulation of content. This attention rightly reflects public
concerns, however it is crucial that the Parliamentary scrutiny
of the Bill in draft and final versions pays adequate attention
to issues within OFCOM's remit, even when they are not explicitly
mentioned in the draft Bill (ie internet access and the development
of broadband). While these issues may not be matters of immediate
public debate they are of substantial long-term consequence to
consumers and to the UK economy.
We welcome the establishment of OFCOM and the
framework set out in the draft Communications Bill. We believe
that the development of a converged regulator and converging regulatory
regimes is ambitious and highly innovative and has the potential
to make the UK's communications regulation amongst the strongest
in Europe. However, as well as a new regulator the UK urgently
requires a new and stronger approach to regulation. This is self
evidently true for the simple reason that 18 years after the privatisation
of BT and the creation of Oftel in order to develop competition
in the telecoms market, there is still a dominant operator which
controls access to over 80 per cent of homes.
The absence of a competitive market in significant
areas of the telecoms industry has been put down to a lack of
regulatory will in Oftel by some commentators, others have argued
that the regulatory will has been present but BT has been able
to run rings around the regulator and frustrate competitors. The
ongoing situation in telecoms regulation does not seem to reflect
the pro-competition regime the Government and Oftel have indicated
they wish to see. Increasingly commentators are now talking of
"regulatory capture" to describe the relationship between
Oftel and BT.
The local loop unbundling episode clearly demonstrated
how the absence of a clear regulatory purpose can allow anti-competitive
behaviour to go unchallenged. The time taken for decisions to
be made by the regulator allowed BT to gain a significant march
on its competitors to the point that the majority pulled out of
the process or suffered the affects of the dot.com downturn before
they could put their business plans into action. Freeserve was
not seeking to compete with BT at this level, but the lack of
competition between operators means that we and other ISPs have
no choice but to use BT to provide broadband to our customers.
The parameters of the products we offer are dictated entirely
by BT, limiting choice, innovation and service.
We are concerned that the regulator seems unable
to effectively prevent anti-competitive behaviour from the dominant
incumbent which has retained its dominance since it was handed
a state-funded monopoly in 1984. For further competition to develop
in the network access sector a more rigorous approach based on
tackling abuse of market power must be at the heart of OFCOM's
work. This requires the Communications Bill to contain carefully
crafted objectives along with balanced and appropriate powers.
The risk of not adopting a new approach is that the lessons of
unbundling the local loop will not be learnt in relation to other
forms of broadband access.
A specific example of where we see the wrong
balance being applied may be seen at Section 69 (Conditions about
network access pricing etc), where in our view there should be
a positive obligation on OFCOM to impose conditions to prevent
price distortions arising, not as presently drafted, an obligation
not to impose conditions unless certain criteria are met. This
lack of a positive duty to promote competition may even run contra
to the duty to fulfil community obligations set out in section
4 of the Bill.
The key reason why Oftel's approach to regulation
has been unsuccessful is that it has prioritised short-term headline
gains over longer-term sustainable measures that enable competition
to develop. Although price cuts by a dominant player may in the
short term please consumers, in the long term consumers are best
served by a number of players competing on price and services.
It is for this reason that we would like to see a clear duty for
OFCOM, and a primary goal against which it can be evaluated, of
acting in the long-term interests of consumers (Clause 3(1)(a)
in the draft Bill). Such a duty would empower OFCOM to act with
more clarity and more swiftly to prevent abuse of market power
by dominant players.
Another area in which the new regulator needs
to be strengthened is in the knowledge and expertise of its staff.
When dealing with an entrenched dominant player, a regulator needs
to have a great deal of in-depth knowledge which can only be gained
from experience in the regulated industry. OFCOM must equip itself
with industry and competition law experts rather than simply expecting
professional civil servants and economists to match the knowledge
of those with years of expertise. This will require OFCOM to be
able to be flexible in terms of the pay scales it can offer to
prevent its best staff being poached by those it regulates.
To harness this level of expertise to proper
effect we recommend that a Competition Board be established within
OFCOM to ensure that competition issues can be given the full
and detailed attention they require. This Board could follow the
model of the Content Board with a panel of experts being chaired
by a non-executive member of the OFCOM Board. This level of expertise
and ability to focus would also ensure that OFCOM's decisions
are made faster and are more robust. Robust decisions are important
to ensure that decisions are less open to appeals and legal challenges
which further slow down the process of effective regulation. The
Board would in effect ensure that there is a constant process
of evaluating the level of competition in the market rather than
needing to wait for drawn out investigation and referral processes.
That having been said, we believe the Appeal process should take
no longer than 90 days.
A Competition Board would also be able to address
and manage, the issues of concurrent powers between OFCOM and
the Office of Fair Trading. At present concurrency does not act
as any sort of check on the competition decisions of Oftel, in
spite of the fact that Oftel has not used its considerable powers
under the 1998 Competition Act once. We would hope that the OFT
continue to act as a check on OFCOM, but a Competition Board would
make this role less crucial and less onerous.
It is to be hoped that the strengthening of
the regulators duties and the establishment of an expert board
to examine and take action on competition, will rectify what we
increasingly perceive as Oftel's laissez-faire attitude
to the application of competition law.
The development of broadband is the crucial
factor for convergence. Without mass, affordable high-bandwidth
internet access content cannot be viewed and customers and citizens
cannot interact with innovative private and public services. This
market must not be allowed to be dominated by a single network
BT's dominance in the domestic voice telephony
market provides it with a huge advantage in terms of broadband.
This is not simply because it is able to leverage the familiar
BT brand from voice services to its own ISP, BT Openworld, but
because it already controls the customer relationship to an extent
that competing ISPs and voice telecoms services cannot hope to
match. BT asserts that its wholesale, retail and ISP businesses
are separate and relate to each other on an equal basis to competing
companies. However, despite rules aimed at preventing cross-marketing
BT continues to collect information through its retail business
which can be used to leverage its own ISP service on its existing
customer base. An example of this is BT's "Census" circulated
to the majority of its residential customers which collected market
data about customers' use of internet services, satisfaction levels
with their ISP and interest in broadband. This clearly sought
to gather information from BT's residential customers in circumstances
which cannot be matched by BT's competitors. 
BT's latest announcement in relation to broadband
is that it will begin offering a "no frills" service
directly through its retail arm (as opposed to through BT Openworld)
and billed on the normal domestic telephone "blue bill".
BT's dominance in the domestic telephone market makes this package
unmatchable by any other player in the ISP market. The statements
to the Committee by the BT CEO clearly demonstrate an intention
to manage BT as a single, integrated company.
As well as allowing the company to side-step
provisions on discriminating in favour of its own ISP business,
this package illustrates how questionable the assumptions around
BT Openworld's business plans are. This "no frills"
service which would offer broadband connectivity without an ISP
will be sold at only £1.99 per month cheaper than the BT
Openworld service "with frills". Given that BT will
be able to use its existing customer care, technical support and
billing systems to support this service, it is clear that either
this price is uncompetitive and should be much lower ormore
realisticallythat BT Openworld must be losing millions
of pounds in its broadband offering. Given BT Openworld's £102
million loss (EBITDA) it appears to us that the BT Group is following
a loss making strategy in order to squeeze competition out of
the market. BT is of course the only company who can follow this
strategy as it makes money from the wholesale fees that BT Openworld
pay BT Wholesale regardless of the price the consumer pays.
These developments have been welcomed by some
as BT playing its part in developing the broadband market. However,
the short-term gain of marginally lower prices should not be allowed
to obscure the long-term effects that this behaviour will have
on the industry and the broadband market. OFCOM must be equipped
to prevent this sort of cross-subsidy.
When examining these issues Oftel has stated
that BT should be able to exploit the economies of scale it has,
however it must not be forgotten that BT's scale is due only to
the fact that BT was once a state funded monopoly rather than
being the result of competitive commercial risk taking venture.
The latest figures on broadband connections
released by Oftel on 12 June would seem to justify our concerns.
The figures indicate that since the reduction in wholesale rates
BT's share of the broadband market has rapidly increased although
a lack of transparency means it is difficult to be precise about
the rate of growth in market share they are currently achieving.
The biggest risk to not changing the UK's regulatory approach
is that broadband will develop with a dominant monopoly supplier
and thus a private company will become the single gatekeeper for
all domestic users of broadband and consumers and public services
will become beholden to that company. Furthermore, dominance in
a market inevitably stifles innovation, but it is innovation of
services and pricing that is vital for a new market to take root
and grow. Consequently, not tackling BT's ability to dominate
the market will set the UK broadband market back years in relation
to our competitor countries, and as we currently rank 22 out of
30 in the OECD broadband ratings
we do not have that far to fall.
Clearly the biggest loser in a non-competitive
market is the consumer who will be forced to pay higher prices
and put up with a single, lower level of customer service. There
are also important economic and social consequences. The damage
to UK competitiveness of failing to develop a modern communications
infrastructure for businesses cannot be quantified at this stage,
but common sense dictates that availability of broadband services,
which are in the first instance demanded by businesses, will begin
to affect inward investment decisions. Furthermore the "broadband
economy" (ie the development and demand for broadband services)
will be stuck in a catch 22 where neither demand nor supply will
be able to develop. For those companies or organisations which
are looking to develop broadband services, there will be no choice
but to use BT, their lack of choice in price and service will
ultimately be detrimental to the consumers of their services.
The supply/demand catch 22 will be particularly harmful in rural
and less-prosperous areas, as a lack of competition for customers
will mean that there will be no commercial incentive for a dominant
operator to invest in providing services in these areas. Freeserve
was in active discussions with a number of companies interested
in providing broadband in rural areas through local loop unbundling.
However, due to the continuous regulatory and commercial delays
from Oftel and BT these companies disappeared before LLU ever
got off the ground.
The cost of failing to foster competition in
the broadband market is clear. This is why the Communications
Bill must be explicit about enhancing competition and encouraging
A LONG TERM
We believe that a change in regulatory approach
and regulator is necessary, but is only part of the solution.
If the communications industry in this country is to flourish
it requires a long term solution rather than the long list of
quick-fixes we have endured. The inescapable fact is that no matter
how expert and strong a regulator is, competition flourishes through
deregulation rather than regulation. The use of ex ante
regulatory powers to try and enforce competition on an incumbent
which is so large as to be unmatchable by any competitor merely
prolongs the agony of market failure and regulation aimed at encouraging
competition simply begets more regulation. In its current form
BT can never stop being a monopoly as there is never going to
be a competitor with a national network able to provide a universal
service. A key task for OFCOM will be to examine the structure
of the market to ensure that competition is being maximised. In
the meantime for competition in the broadband market to develop,
strong, expert and speedy regulation is required.
The Communications Bill is an ambitious and
groundbreaking piece of legislation, however the opportunities
afforded by a wholesale revision of regulation in the communications
sector must not be missed, nor should important sections of the
industry be overlooked. OFCOM must have the strength and expertise
to tackle the problems created by having such an unmatchable and
dominant company within an industry. We do not want to see the
situation where the UK requires intervention from the European
Commission in order to make our domestic markets work. Finally,
it cannot be emphasised enough, that the future of broadband in
the UK depends on the Communications Bill creating a strong, expert
and speedy competition regulator.
110 Distributed by BT Consumer Division in Spring 2002,
sections C and F. Back
Although BT has offered a packaged billing system to its competitor
where they can charge for their services through the blue bill,
this is obviously highly problematic for companies who are understandably
reluctant to give up their direct relationship with their customers. Back
The Development of Broadband Access in OECD Countries,
Organisation of Economic co-operation and Development, 20 October
2001, www.oecd.org/pdf/M00020000/M00020255.pdf. Back