Joint Committee on The Draft Communications Bill Appendices to the Minutes of Evidence


APPENDIX 39

Memorandum submitted by Kingston Communications[68]

—OFCOM, THE NEW REGULATORY MODEL AND THE "ALTNETS"

  1.  This memorandum represents Kingston Communications initial reaction to the Draft Bill and associated major policy issues. We will make a detailed response on a variety of related and other matters to the Bill team as part of the formal consultation in due course. The Committee will also note a submission from Colt Telecommunications on behalf of the "Operators Group" which we fully support and endorse.

  2.  Much of the press and publicity coverage surrounding the publication of the Draft Communications Bill was all about broadcasting issues, not about "convergence" or "communications" policy. The main preoccupations seem to have been about media ownership rules and aspects of how the continuing availability of "quality" public service content can be ensured. These also seem to have been the major themes of the initial hearings of the Committee. From the perspective of the participants in the traditional "telco" sector, the ownership rules, in part at least, seem like yesterday's issue. Telecommunications players in Britain already work in a worldwide market both in terms of service scope and ownership. The ubiquity of e-mail has made the global reach of our services a day to day part of doing business for our customers. At the same time, the complete liberalisation of the telecommunications market has seen UK citizens making calls on networks not only owned by UK companies but also on networks controlled by US, Australian and other European based companies. Despite the lack of coverage of telecoms specific issues, the draft bill is no less significant for our sector. The key challenge during the legislative process for us is not the apparent headline issue of media ownership controls, but whether the end result of the Bill process and the consequent creation of OFCOM will actually reduce regulation (and make it more streamlined and effective) or merely replace it.

  3.  The draft bill is not as radical as the original Green Paper on "Converging Communications" first advocated. Rather than setting a benchmark for regulating converging communications and treating data, voice and picture transmission in a common way, the draft bill only nudges regulation along the path of convergence. For companies such as Kingston Communications who already deliver a converged service to our customers, the Draft Bill has not explicitly addressed the reduction of the complexity of regulation to the degree that we would consider appropriate.

  4.  However, there is a welcome broad thrust to simplify the regulatory structure and increase the reliance on general competition legislation, and there also appears to be an aspiration to be lighter in touch. Whether this combination will have the desired effect remains to be seen. An overly laissez faire approach to a competition law driven regulatory regime may not be effective in ensuring that the current competitive nature of the communications market is maintained. An incisive and rapid response to complaints needs to become the norm in order to ensure that competition is not irrevocably damaged or, indeed, foreclosed, by the actions of those operators with market power. Experience to date of OFT and OFTEL action, or inaction, under the Competition Act does not suggest that this will necessarily be the case. Stuart Prebble's recent comments with respect to the OFT investigation of BSkyB's provision of content to ITV Digital should provide a salutary warning about the likely effect of the slow pace of competition authority investigations.

  5.  Unlike broadcasting the core of telecommunications regulation comes from Europe. The UK had first mover advantage from the early privatisation of BT, and the liberalisation of the market through the 1984 Telecoms Act and the "Duopoly Review". This policy was then followed by the other member states through the agreement and implementation of a package of EU law, which will be shortly replaced by the five Directives that have resulted from the "1999 Review". The process of implementing these will still put the UK in a unique position, compared to our European neighbours. Whilst the new EU Directives have the effect of raising the coverage and standard of regulation in many member states, for the UK they could, and arguably should, significantly lessen the level of regulation currently enforced by OFTEL. For the UK market to remain competitive, it is vital that the draft Bill and its concomitant statutory instruments get this balance right and does not leave the UK over or wrongly regulated in comparison with the rest of Europe.

  6.  Telecommunications liberalisation in the UK has followed a general policy of primarily challenging incumbent suppliers through sector specific rules. These rules have existed whether or not competition in a particular market existed or obviously benefited consumers. The rules were there to encourage the market entry of challengers to the incumbent companies who had existed for many years without these benefits of competition. Eighteen years later the UK telecommunications market is a changed place. There are over 400 licensees of various types in the telecommunications market. New technologies and regulated access options, such as unbundling the local loop, ADSL and IP, have transformed the services delivered over telecommunication networks and global players now compete with the former UK incumbents. Kingston itself has gone from providing basic telephony services in one geographical area to competing across the UK for business customers across the whole range of communications services and providing our original East Yorkshire base of residential customers with television and interactive services as well as telephony.

  7.  This growth in competitive activity is the major success of this eighteen years of regulatory effort. This is something that policy makers should both take pride in and, perhaps more importantly, bear in mind when making decisions about the future regulatory framework. It is undoubtedly the case that it is this dynamic competitive environment that has led to the current broad range of services that are available to business and domestic customers. In particular, the vibrant and diverse "altnet" sector that Kingston is a part of has been at the forefront of many of the most important service developments that have done so much to change the customer experience and expectation. It has been responsible for a whole range of innovations at both the retail and wholesale level that have enabled the development of such services as "free" ISPs, a wide range of content related services accessed via so called Number Translation Services (NTS), and the successful market entry of a number of trusted consumer brands into the "indirect access" telephony market.

  8.  In turn, this innovation in competitive services has forced BT to respond, thereby diffusing innovation to a much wider population than just those served by the "altnets" or their customers. The activities of the "altnets" have also been critical in underpinning the City of London's role in financial services, where BT's own estimates indicate that they now have only a 20 per cent market share in call volumes. Elsewhere in the UK, locally focussed altnets such as Kingston, Thus and Your Communication have radically improved services available to local business clusters. It is clear, overall, that the "altnets" have had a significant positive impact on UK economic growth in the period 1995-2001. They have also had a huge impact on BT's efficiency, as well as on the range and pricing of services to consumers.

  9.  However, the future for the sector is not as secure as it could be. The overall downturn in market sentiment with respect to telecoms has meant that most "altnets" have been unable to continue investment in their networks. The collapse of many "dotcoms", and a general slackening of demand in the market, [69]has led to a rapid slowing down of growth for many "altnets". This in turn has triggered a continuing wave of consolidation across the industry, with some business failures, as excess capacity has been squeezed out of the market. The negative effects on the "altnets" have been exacerbated by customers tending to take a more conservative attitude towards supplier decisions in the light of these market conditions. Some smaller corporate clients have been switching back to BT, whilst some of the larger ones may be in the process of re-emphasising their existing BT relationship.


  10.  Should policy makers and regulators be concerned about this? If these trends continue there is a real danger that the pressures on "altnets" increase and further market consolidation may result. There are already signs that BT is becoming more aggressive in targetting the key "service provider"[70] sector of the retail market. This is evidenced both by the creation of a new sales team within BT Wholesale, and the launch of a number of new products. Many of this new sales team were recruited from "altnets" such as Kingston who have been most successful in responding to service provider requirements. This flexible and proactive response to market demand from Kingston and others has been instrumental in developing the strong and vibrant reseller sector that has had such a profound effect on the retail consumer market for telephony and associated services over the last two years. It should therefore cause real concerns to the regulator if BT were to actively target service providers with "new" product initiatives that may be potentially discriminatory, as they now seem to be doing. Since the eventual users of these products represent one of the most effective and dynamic sources of competition to BT's own mass market retail offerings, such behaviour should properly be considered as being potentially anti-competitive by its very nature. If BT were to become the dominant supplier of services to the "service provider" sector, it would be in a very powerful position to determine the eventual shape and viability of competition through gaming behaviour. Sustainable competition at the retail level through the service provider channel can only be ensured by effective competition at the wholesale level. This requires the continuing participation of the "altnet" sector in that market.

  11.  Despite this obvious threat, the response of the regulator to date has been disappointing and lacked incisiveness. This behaviour is characteristic of OFTEL over the recent past, with clear failures of the regulatory process such as the LLU debacle being the most obvious examples. Why is this? Our belief is that OFTEL has become encumbered with a burden of regulatory bureaucracy, partly through an overly zealous application of the existing EU framework. This has tended to divert resources away from critical projects and to obscure real strategic objectives, through the over emphasis of inappropriate or tactical "performance indicators". Our concern is that the creation of OFCOM, as proposed in the Draft Bill, will not sufficiently lighten this burden of regulatory bureaucracy, and may result in further dilution of strategic focus. Indeed, over the next 12 months, with the dual burden of planning for OFCOM's creation and the implementation of the new EU framework, the situation may actually get markedly worse.

  12.  In this context, there should be public recognition in government that it is possible that BT's dominance in the telecoms market may increase. Consequently, it is also likely that the positive economic role of "altnets" may reduce. [71]This cannot be in the best interests of the UK economy. Without the continuing competitive pressure that this sector provides, it is likely that BT will revert to a policy of short term profit maximisation, in part because of shareholder pressure. This would result in a scaling back of capital investment programmes, and a reduction in service innovation. This could seriously jeopardise the achievement of the Government's own objectives with respect to the "e-enablement" of the economy and its citizens.

  13.  As a result, we would suggest that the opportunity be taken during the debate over the Draft Bill to establish a clear strategic vision for OFCOM's telecoms regulatory activities. This should shift the emphasis back to detailed scrutiny of BT Wholesale/BT Ignite activities to ensure that no predatory behaviour occurs, and current levels of competition are not eroded. This must be accompanied by a clear commitment to ensure rapid response to competition issues and a willingness to act incisively and effectively. This should include being prepared to contemplate more radical solutions to an enduring market failure, demonstrated by reinforced BT dominance, such as the structural separation of its core network assets from its retail operations. This is an issue that a previous DCMS Select Committee report on the sector had recommended for further evaluation. We are aware that Cable and Wireless plc are making a separate submission to this Committee on this matter and would generally endorse their views.

June 2002

Annex

KINGSTON COMMUNICATIONS

  Kingston Communications (HULL) PLC is a rapidly expanding UK communications company. It has provided service to the people of Hull since 1904 and today offers telephony services to over 185,000 customers across East Yorkshire.

  Kingston Communications offers the ground breaking interactive TV service KIT, which provides digital TV, content on-demand, local information and TV shopping. The company has also recently launched a portfolio of broadband internet products providing fast internet access for business and residential customers across the region.

  Kingston inbusiness, the Group's national business-to-business division offers end-to-end managed communications solutions including voice, data and mobile services. This division is complemented by seven regional metropolitan fibre networks and a long distance broadband network, which was lit in May 2001.

  The Group's global satellite division Kingston inmedia provides broadband applications that enable organisations to create, manipulate, store and distribute multimedia solutions.

  Last year, the company topped the OFTEL approved customer survey, "Comparable Performance Indicators" for Customer Service for the twelfth consecutive time. The group employs around 2,500 people, and its recently announced preliminary results for the 2001-2002 financial year showed turnover up by 40 per cent year on year at £316.3 million, and group EBITDA up 85 per cent year on year at £29.1 million

  For further information, visit our website at http://www.kcom.com/





68   An overview of Kingston Communications background is provided in the Annex. Back

69   Which may be partially due to a general lack of business confidence in the immediate post September 11 period. Back

70   Those providers of telecoms services to consumers who do not, themselves, have a PTO licence or network. These include a number of major retail brand owners in additin to some significant new entrants. Back

71   Given current overall market growth rates, it appears that BT's own revenue growth targets can only be met if the aggregate "altnet" market share reduces significantly. Back


 
previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2002
Prepared 5 August 2002