Examination of Witnesses (Questions 240
TUESDAY 5 FEBRUARY 2002
240. So BT might say, "But there is nobody
who wants to take on the challenge, there is nobody who wants
to take on the financial commitment, and therefore there is not
much we can do about it."
(Mr Wallace) It is not a matter of desire. As I said
earlier, we have a very strong balance sheet, we have huge funds
for investment. That is not the issue with us. It was the difficulties
that BT put in the way of operators like us. The initial problem
of course was that they did not have a full list of names and
addresses, the locations of the exchanges. When we got over that
problem, we then found, believe it or not, that they did not have
plans of those exchanges, so we could not tell whether there was
room for the equipment or not, and so on and so on and so on.
This delayed the process, and then, as I say, this, I am sure,
purely coincidental price reduction on their part of the wholesale
services made the business plan both impractical and unviable.
It is not a matter of desire; it is that the economic model did
not workmaybe accidentally because of BT's behaviour, maybe
not. I have no idea what the motivation was.
241. Let me just get it clear in my mind what
you need to be able to do, because this phrase "unbundling
of the local loop" is a piece of jargon which does not make
much sense to me.
(Mr Wallace) Yes.
242. Basically you are putting a piece of equipment
into the exchange which means that you are then able to sell on
to customers who are served ADSL from that exchange.
(Mr Wallace) Yes, we then use BT's copper wires. Effectively,
technology allows us to use an element of those copper wires as
if we owned it. That is what unbundling does. It means equipment
but it does not mean we have to lay a duplicate local loop. It
is a very neat technological solution.
243. That has been required now, has it not,
by an EU Directive?
(Mr Wallace) Yes.
244. Since, I think, last Christmas.
(Mr Wallace) Yes.
245. How much does it cost you to do an exchange?
(Mr Phillips) We do not know because
(Mr Wallace) We have not done one yet!
(Mr Phillips)there is so little information
coming from BT about the specific requirements and in those specific
requirements are the specific costs involved. As Graham said,
it is very hard to get details of the plans, it is difficult to
determine exactly from BT what the arrangements are for the security
of your equipment versus their equipment and so on and so forth,
the additional measures for access that are required and so on.
We do not have experience because the business plan that we put
together was not ultimately one that we followed through.
246. With more and more people now having mobile
phones and perhaps using mobile phones instead of fixed lines,
is that providing a challenge to you?
(Mr Wallace) Mobile phones are without doubt competition
in the voice market. I think using mobile phones for voice communications
is a terrific way of workingI do and we do in businessbut
what we are mainly involved in are internet and data communications
which will always be better over a fixed line. People who use
mobile phones will know the number of times a call drops. If you
are trying to use internet access over mobile and trying to download
any volume of pictures or video, the technology of mobile is not
adequate relative to fixed line. I think mobile is a great substitute
for the voice local loop, but it is not in any way, in my view,
a substitute for internet data or video access.
247. So anybody building a business plan for
the future on lots of people watching things on their mobile phones
is in cloud cuckoo land.
(Mr Wallace) We are not in that business, but ....
248. And you are glad.
(Mr Wallace) Yes. Mobile is great for voice but I
think for data you need fixed line and in several cases you need
249. You mentioned that you also had a major
web-hosting business. We have talked a lot so far in this inquiry
about broadcasting and a bit about telecoms; we have not talked
much about the internet itself and some of the rights issues that
I guess you are faced with. Are you happy with the direction that
the Government is going in in terms of regulation with the internet
and what that means for web-hosters?
(Mr Wallace) I think so on the whole. I mean I think
it does need a relatively light touch otherwise it will inhibit
considerably the development of the internet and that seems to
be the approach so far.
(Mr Phillips) I think industry has a strong responsibility
to set in place self-regulatory mechanisms that are satisfactory
to Government, therefore the onus in the first instance should
be on us, as operators, to put forward and to be seen to operate
effective measures to control intellectual property, piracy and
so on and so forth. I think the other thing also to reinforce
is the needI do not see there is a risk at the moment that
this is being muddledto distinguish between those that
carry the information and those that own it. Those that transmit
it, basically, are the network operators. They carry packets of
information or the bits of data and should not have the same liabilities
necessarily placed on them, from a content point of view, as those
that own it.
250. What happens if somebody discovers a child
pornography site that might not ostensibly look like that when
you take it on to host it? How does somebody tell you? How do
they get it taken down? What happens?
(Mr Phillips) They can approach us in a number of
ways. They can go direct to us or they can go through some organisation
like the Internet Watch Foundation and they can identify that
we have hosted illegal content. As soon as that is flagged to
us, then we have procedures to take that content out.
251. This was raised to me by a 10-year old
in a school in Porth last week: It is genuinely very difficult
to know, as an ordinary consumer, how you go about that, especially
because quite often, as far as I can see, many sites like this
gather in e-mail addresses and spam to literally millions of people
around the world. You try to delete the message and in the process
you actually end up going to the web site. How can we make sure
that a young person or parent or whoever can make sure that that
site does go?
(Mr Phillips) I think what you are saying is absolutely
right. I think it is a huge issue and it is one that Cable &
Wireless feels very strongly about and we are very much engaged
in thinking through these issues and putting things in place to
try and support the rights of parents and others to provide an
effective block to content. One of the ways in which we do it
is through having effective, independent procedures to alert the
people that host content that they are hosting illegal content.
The Internet Watch Foundation is one way of doing that. We need
to reinforce and redouble the efforts of groups like that to get
the awareness of the public up to the services of groups like
that. The other one that is critical is the effective labelling
of content. Cable & Wireless is a founding member of the Internet
Content Rating Association (ICRA) and we have a public policy
that strongly advocates all our customers self-rate the content
they have. With ICRA we have developed rating guidelines in most
of the commonly used web languages across the globe, so that parents
and others who are accessing the content can put restrictions
on what can be seen using the computer.
252. I know that a lot of performing artists,
especially, obviously, musicians, have a specific worry about
web sites that use copyright material illegally. They would claim
that it is actually very slow and difficult, in particular in
Britain ( it is much faster in other countries) to get web sites
(Mr Wallace) Again, we fully cooperate within that
area because it is in our best interests to do so, as it is with
all sites. We want to encourage safe use of the internet by everyone,
children included. If that does not happen, our business will
suffer, so we are doing all we can and we are talking to Government
in this area. Increasingly sophisticated ways of labelling and
blocking sites are being developed. It is still a very new industry
actually. The technology will develop to allow us to do that probably
more quickly than we have in the past.
253. Without using this word pejoratively, is
this not really bluster? When we were doing our last inquiry on
this, among other things, we visited the appropriate Commissioner
in Brussels, and the view we arrived at, and the view that we
were guided to separately by the Commissioner, is that in the
end you cannot do anything about it, and that whereas content
regulation on terrestrial TV is something that could be done as
long as we have got it, in the end this is beyond control. It
is rather like if you watch, as I was doing over the weekend,
an American DVD and it has got this stern FBI warning at the beginning
about where you can play it and where you cannot. It is all rubbish.
In the end it is played wherever anybody wants to play it.
(Mr Wallace) I think it is very difficult to regulate,
but the industry is doing it in its own self-interest because
if you undermine the use of the internet and children and families
do not want to use it, our business will suffer, so it is in our
interests to be as active as we can. It clearly will never be
possible to give a 100 per cent assurance that no web site that
we would rather not be there is not there. However, we know where
our sites are located, they are not in the ether, they are in
our data centres, so we can access and remove illegal content
Chairman: I am sure that your sentiments
and objectives are totally admirable, but one of the things that
one needs to do in these circumstances is to accept that certain
kinds of content regulation are no longer going to be possible
and it is pointless to pretend that they are going to be possible.
After all, it is interfering, is it not, with hundreds of millions
of telephone calls? You just cannot do it. Even the most authoritarian
state cannot do it. Julie Kirkbride?
254. Could you expand a little further on your
opening remarks about how you would see an industry model for
the separation of the delivery of broadband versus those who make
use of it?
(Mr Wallace) I think the problem with the local loop,
that last mile which BT still controls and where over 80 per cent
of those lines are BT lines is that the model currently encourages
BT not to invest in it but to maximise price. That is what monopolists
do. If I were a monopolist I would do the same. So it discourages
investment in the local loop. If it were separate there would
be an entirely different model because, instead of using it to
subsidise their up-stream business, the manager of that business
would be encouraged to invest and broaden the appeal of the local
loop by investing to get more content onto that local loop, and
their business model would be investment and volume driven because
they are not a monopoly in the same way BT is, whose focus now
is purely price and limiting access. I think it could work. I
think it has; the gas industry is a good example.
255. Would this be another separation of BT's
business so that it would remain in BT's hands?
(Mr Wallace) We would prefer it if it were a totally
separate business and separate ownership and they would be encouraged
to invest and expand by selling to us and other ISPs and content
providers because it would invest in broadband. Then you break
that vicious cycle. The problem at the moment is that because
there is not broadband available to the bulk of the population,
there is no one devising content that really optimises broadband.
You have got to break that vicious spiral. Once you break it by
separating the company out, I think you will have a much more
vibrant broadband industry altogether, both on the content and
access side. I think there are some proposals by outside parties.
Earth Lease, for one, are suggesting you can have a separate business
model for a stand alone local loop which would be extremely successful
in its own right.
256. The 20 per cent where they are not owned
by BT, these are places like Hull where they have a separate exchange?
Why do we not see more Hull-type operations?
(Mr Wallace) That is a complete freak of historic
legislation. You do not see more because the economics of over
building a local loop once there is one there already do not work.
It is like any natural monopoly. If there is a natural monopoly
you cannot then make the numbers work to reproduce the natural
(Mr Phillips) Kingston were given a natural monopoly
(Mr Wallace) In that area, so that is a real freak
257. A 20 per cent of the market freak? Where
are the others?
(Mr Wallace) We do have some local lines as do cable
258. You managed to grab some off them?
(Mr Wallace) Yes, but this is after 11 years. We have
had 11 years of competition in the UK. They have gone down from
100 per cent to 83 or 84 per cent, so by any definition it is
clearly a natural monopoly. Despite all that competition, the
power of the incumbent overwhelms the competition.
259. Are there any models in other countries
that have been successful? Are we that good at broadband technology
here or really behind?
(Mr Wallace) In general terms, it is the same problem
everywhere, and I know the European Commission is extremely worried
about it as well because the same is happening elsewhere. Germany
is a bit further ahead in certain areas and behind in others,
but it is a general problem that the monopoly incumbent is becoming
more and more powerful because of that natural monopoly and competition
throughout Europe and the US is reducing very materially in this
industry. Christopher referred to it earlier. In the last 12 months
we have seen a number of bankruptcies around the world and if
this continues we will finish up exactly where we started 11 years
ago where the phone systems around the world will be run by the
incumbent ex-monopolist and competition will disappearwith
the exception of Cable & Wireless; we will still be there