Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 761 - 779)




  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 around Europe.

  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.

Baroness O'Cathain

  766. Including the United States?
  (Mr Green) Yes. The United States does not have unmetered national tariffs for businesses.

Lord Skelmersdale

  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.

Baroness O'Cathain

  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.

Baroness O'Cathain

  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 peak—in the evenings and weekends.

  771. We are talking about peak time.
  (Mr Andradi) In peak time Surftime is cheaper than in the US.

Lord Paul

  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.

Baroness O'Cathain

  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.

Lord Paul

  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 cheaper?
  (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.

Baroness O'Cathain

  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 from that.

  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, or not?
  (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 element.
  (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.

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