Memorandum submitted by Kingston Communications
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
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
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
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, 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
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
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
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. 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.
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
68 An overview of Kingston Communications background
is provided in the Annex. Back
Which may be partially due to a general lack of business confidence
in the immediate post September 11 period. Back
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
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