Examination of Witnesses (Questions 761
WEDNESDAY 10 MAY 2000
761. Good afternoon, gentlemen. Thank you for
giving us your time. Thank you also for sending in the written
evidence which was very helpful indeed. It is good to meet you
at last because, either directly or indirectly, I think you have
been mentioned by most of the individuals who have either put
in evidence to us or have appeared before us. I must say, the
references have not all been complimentary. I do not know whether
that comes as a surprise to you or not but it has been principally
in the context of access to Internet and the cost of Internet
where people have had views to express about what BT has been
doing or not been doing. This afternoon gives us an opportunity
to probe you with some of those questions and gives you the opportunity,
along with the paper which you have put to us, to explain your
position. I might add that not everyone who has appeared before
us has been critical on those points. We recently took evidence
from the CWU who were content with the way things were going and
indeed were arguing that opening up the loop should not be rushed.
This brings me to the first question, which is on the local loop
unbundling. You have an agreement with Oftel on the timetable
of achieving that. We have now had the Lisbon Conference recently
in which a fair amount of time was spent in talking about unbundling,
setting targets. We have also had statements from the Chancellor
of the Exchequer. I am wondering if you could update us on where
you stand on the timetable you have agreed with Oftel and you
said in your paper that you were examining that. Oftel have submitted
a paper to us also in which they have identified this issue as
being one of some significance. Could you indicate if there is
likely to be any possible change in the original timetable of
going live in July 2001? Perhaps you would say how much liberalisation
within the market this is likely to introduce. In fairness to
yourselves, picking up points in your paper, you did mention the
obvious need for a fair return to the owner, to the generator.
Perhaps you would care to comment on that too and what kind of
mechanism you might see as being appropriate for ensuring that
there is a fair return.
(Mr Green) Thank you, Chairman. First of all, I am
delighted that there were at least one or two witnesses who did
say some complimentary things about us. A lot has been said about
the pricing on Internet and we would welcome the opportunity of
giving you our version. Perhaps we will come back to that later
on. In terms of Local Loop Unbundling, there are a few things
to say. The first is that the UK market is very different from
elsewhere in Europe because there is infra structure competition
here. Over 50 per cent of the population in this country already
has a choice of access provider for bandwidth and for Internet
access and that number is increasing rapidly. The local loop unbundling,
which is something that we have been pushing for very strongly
in Europe, is something which is critical to give people a choice
of access. It is less of an issue in the United Kingdom and also
on the voice telephony side I think you will find that the opening
up of carrier pre-selection itself will introduce probably significantly
more competition across the board for local loop unbundling. The
important thing about unbundling is that it will enable competitors
to come into the market place and go for the high-end residential
market and the high-end SME (Small to Medium Enterprise) market.
It is not going to open up a choice to the mass market consumer.
It is very much opening up of the business competition. In terms
of the timing, we are on schedule. There is a significant amount
of work to do to ensure that when competitors are putting equipment
in our exchanges it is done in a way which ensures the security
of the network and the exchange and that there is no electronic
interference between the different networks. That work is progressing
well. We expect to be able to meet the June deadline of next year
and to meet the milestones that are set on the way for that.
762. Are you sticking with the milestones in
advance? There are a range of agreements with Oftel.
(Mr Green) We are on target.
(Mr Morfett) And we achieved agreement on the licence
conditions with Oftel on time last month.
(Mr Green) It is an aggressive timetable and we both
recognise that it is aggressive but we are committed to achieving
it and we believe that we will. On the return, I think there are
a few things. We are not yet convinced that the investment that
we are making in the broad band network is going to be such a
slam-dunk financial return, for a variety of reasons. Investment
in telecommunications remains a speculative investment and that
includes, for example, what you have seen in relation to the mobile
licences. People assume that you just invest, put the equipment
in, and then the bonanza follows. That is not the case. It depends
on the extent to which the market is there. Our view is that because
of the billions that we are investing (we put in three billion
pounds last year and we are continuing at that rate) there has
to be an adequate return. We have agreed a rate of return with
Oftel as part of the licence conditions just agreed, that my colleague
Ian Morfett referred to, which gives a return of 14.5 per cent
initially, moving down to 12.5 per cent at the end of the four
year period. That is an agreed return. I have to say that I still
think it is low for a return on investment in this kind of industry.
One of the issues, which the regulator is going to have to address
longer term, is that if it wants to encourage, not just BT, but
our competitors to invest in the network and does not ensure that
an adequate return can be made in a competitive and speculative
environment, it is likely to discourage investment.
763. Can I just respond to your point about
the level of competition here without unbundling? The view which
has been expressed to us is that there is not enough competition
and I may as well tell you that that will be appearing in so many
documents and has been put to us by so many witnesses who have
come before us that it has been slowing down progress, that when
you say that we are in a different position from other parts of
Europe, that is true, and we would like to see liberalisation
there. Is there anything particularly you would like to see the
Government doing there or perhaps this Committee saying ought
to be done in Europe?
(Mr Green) Perhaps I can make a couple of comments
and then ask Ian Morfett, who is our Director of Regulatory Affairs,
to say whether there is anything specific that he would like to
add. The Government has been supportive of our position in Europe.
We believe that the price of the unbundled local loop in Germany
for example has to come down significantly. You will actually
pay more for an unbundled loop, than you do for the retail price,
to take the line at the moment. Elsewhere in Europe the regulatory
regime is not as robust and enforced as it is in the United Kingdom.
(Mr Morfett) The terms of the 1999 review from Brussels
on telecommunications are appropriate and we are comfortable with
them. The key issue is that they should be applied consistently
by Member States around Europe. Despite some of your other witnesses'
reservations the United Kingdom market is the most liberal in
Europe and probably in the world. There is significant competition
here and BT's market share has come down quite rapidly in a lot
of segments and in a lot of product areas. There is competition
at every level of the network and carrier pre-selection will be
introduced later this year. Local loop unbundling is coming next
year, in line, I have to say, with the Lisbon Summit which talked
about local competition by the end of this year and local loop
unbundling, which was something that Tony Blair was able to support
and we were able to support, so I think competition is strong
in the United Kingdom and needs to be enforced by local regulators
764. Could we come on to pricing?
(Mr Green) Have we answered your question adequately,
Chairman, on the competition because we could give you some more
detail on some of the competitors who are larger than us, in for
example Internet access?
765. We shall be coming back to some of these
points. Surftime pricing, unmetered pricing. Allegations have
been made that certainly business is paying for peak time higher
rates than they ought to be doing and that this is slowing down
the progress of the spread of e-commerce in the United Kingdom.
(Mr Green) I will ask Ben Andradi, our Chief Operating
Officer with Openworld, which is our Internet business, to give
you the detail on that. I will just tell you that we can give
you some written evidence if you want, that Surftime will be the
cheapest in the OECD.
766. Including the United States?
(Mr Green) Yes. The United States does not have unmetered
national tariffs for businesses.
767. They do not need them for this purpose.
(Mr Andradi) In terms of context, Internet access
prices based on the research that we see around, is just one of
the aspects of getting on to the Internet. There are a whole variety
of other issues and reasons why people subscribe to the Net. One
of the barriers is the cost of a PC. If you buy a PC it is still
a thousand pound investment. Coming back to Internet access and
the research that we have, certainly in OECD for offpeak access,
our £9.99 BT Internet offer is today one of the cheapest
in the OECD countries. This has been substantiated by external
research. They indicate when you look at Surftime, and we had
independent consultants, Ovum, look at this and compare it, Surftime
is cheaper even in peak times compared to some of the US tariffs.
We think what we have today both in terms of Surftime and other
retail packages is very competitive.
768. What you are actually saying is that the
combination of Surftime and the Internet access is actually cheaper
than in the United States?
(Mr Andradi) It is more complicated than that because
if you look
769. But that was the statement you made; that
is the statement that Mr Green made, that actually it was cheaper.
(Mr Green) I was just confirming that I thought that
was right because you seemed a bit incredulous.
Baroness O'Cathain: I am incredulous on the
basis of the evidence we took in the United States, and it seems
to turn on its head the statements that have been made by other
people so I wanted to make sure that we know the facts.
Chairman: I do not think there is any question
about off peak. It was about peak time performance and the charges
for peak time performance for business.
770. And it is still cheaper than anywhere else
in the OECD?
(Mr Andradi) For peak time Ovum research confirms
that it is cheaper than what is available in the US. That is Surftime
is cheaper. Most of our customers have access to that in off peakin
the evenings and weekends.
771. We are talking about peak time.
(Mr Andradi) In peak time Surftime is cheaper than
in the US.
772. When you are comparing peak times, are
you comparing with the United States when they have given all
the business discounts etc, or is it just the basic price? If
you are cheaper, why is it that everybody has the impression that
BT is very costly?
(Mr Green) That is a really important question.
773. That is the point.
(Mr Green) All our customer research shows that people's
perceptions of the cost of telecommunications in this country
are significantly higher than reality. There is a massive time
lag because prices have come down so dramatically and so fast
over the years that people don't realise what the price is. At
a conference last September I asked a number of ministers and
Members of Parliament on a one to one basis how much they thought
it cost to access BT Internet over the weekend, I think we said,
to spend something like six hours on the Internet, and the nearest
came within 150 per cent of the cost. There is a perception issue
which we recognise and which we have to address. There are difficulties
in comparisons. These are statistics and I think you quite rightly
ask what is the basis for the comparison. The best thing I can
suggest, Chairman, is that we can send you the research that we
have, which was done by Ovum who are an independent telecommunications
consultancy, and you can see for yourself. That is the basis on
which Surftime, we are told, will be competitive with the United
States prices for access.
Chairman: We would welcome the paper.
774. First of all, you are talking about the
weekend and non-peak rate. I am talking about the business rates.
Secondly, BT is such a huge organisation with wonderful PR and
so on. Forgetting the information you can provide, why is that
you cannot sort out the public perception?
(Mr Morfett) I think we should mention the Surftime
launch is on 1 June. Surftime is not available to customers today.
It has been announced but it will be available from 1 June.
775. You are saying from 1 June you will be
(Mr Green) The question I was asked was about Surftime.
I thought you had obviously known about the Surftime project and
that is what I was addressing.
(Mr Morfett) I think we should be clear about Surftime.
Surftime is a world-beater and it will be the first time that
a European company is offering unmetered access.
776. So it is not actually at the moment cheaper
in the US for business?
(Mr Morfett) Not today, no. We are three weeks away
Baroness O'Cathain: Did you hear that, Chairman?
It is not cheaper at the moment.
777. No; this comes in on 1 June and goes to
£19.99 per month for unmetered peak access.
(Mr Green) Yes, that is right, for business customers.
We are already cheap in OECD terms at off peak times.
778. When was this research done that you are
going to send us? How up to date is it?
(Mr Green) It is very up to date.
(Mr Andradi) It is very recent. It was done literally
two months ago.
779. Because I think again in your paper you
made reference to the high cost of purchasing PCs. This presumably
is factored into the cost, is it, in determining comparators,
(Mr Andradi) No. This is based on access costs which
is where a lot of the debate is. I was just making the point,
Chairman, that if you ask customers why they do not go on the
Net, access is one of the reasons. The PC cost is another huge
(Mr Green) There is one other aspect of it, and that
is that a lot of our research suggests that it is not the cost
of the Internet access; it is the fact that it is metered and
that therefore when people are on it they do not realise how much
they are building up in terms of a bill. We bill quarterly rather
than monthly, which is an issue, and therefore they can get a
nasty surprise at the end of the quarter. That is one of the reasons
why we devised Surftime which is designed to give people assurance
that however long they are on they will not be incurring metered
charging. I think that a combination of the reduction in price
plus the flat top charging should make a significant difference.
You asked before about what Government can do. I think there is
an issue that if general statements are continually made that
it is expensive to access the Internet in the United Kingdom,
it will deter people. The reality is that my son will spend more
on the Coke that he drinks when he is on the Internet than he
will on his telephone charges. You can spend 24 hours on the Internet
at the weekend for less than you spend for 90 minutes at a football
match or to go to the cinema in some places. If the general political
environment is that people are saying that it is expensive for
people to access the Internet, that reinforces that view. We think
it is actually very good value for money compared to other means
of access to entertainment or to information.