Welsh Affairs Committee - Minutes of EvidenceHC 580

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House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Welsh Affairs Committee

BROADBAND IN WALES

Tuesday 11 October 2011

David Williams, Alastair Davidson and Julian McGougan

Phil Sheppard, Julie Minns and Richard Rumbelow

Rhodri Williams, David Clarkson and Matthew Conway

Evidence heard in Public Questions 61 - 121

USE OF THE TRANSCRIPT

1.This is a corrected transcript of evidence taken in private and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2. The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Welsh Affairs Committee

on Tuesday 11 October 2011

Members present:

David T. C. Davies (Chair)

Stuart Andrew

Guto Bebb

Geraint Davies

Jonathan Edwards

Mrs Siân C James

Jessica Morden

Mr Robin Walker

Mr Mark Williams

________________

Examination of Witnesses

Witnesses: David Williams, Chief Executive, Avanti, Alastair Davidson, Managing Director, Government, Mobile, and Enterprise, and Julian McGougan, Head of Public Policy and Regulatory Affairs, Arqiva, gave evidence.

Q61 Chair: Good morning. Thank you very much indeed for coming along to see us today. My name is David Davies. I am the Chair of the Welsh Affairs Select Committee. Could you give us an introduction very briefly and then I will ask Stuart Andrew to start off with a few questions?

David Williams: I am David Williams. I am the Chief Executive and founder of Avanti Communications. We have one telecommunication satellite in the sky currently providing broadband services to Wales and other countries and two more satellites on the way.

Alastair Davidson: I am Alastair Davidson, Managing Director of the Government, Mobile and Enterprise sectors at Arqiva. We run the television and radio broadcasting networks for the UK and provide a range of managed services to the police, fire and ambulance customers, with a range of other Government customers, satellite uplinking, and we also run some of the TV and radio multiplexes.

Julian McGougan: I am Julian McGougan. I am Head of Public Policy and Regulatory Affairs at Arqiva. I work in the corporate centre across all the business units.

Q62 Stuart Andrew: Could you start by describing what the current provision of broadband services is in Wales, particularly looking at the difference between the provision in rural and urban areas? We have had evidence from the NFU, for example, who are obviously concerned about access in the rural areas.

David Williams: We have live broadband services available in Wales today. Avanti is a wholesale service provider. We have a number of customers who are telecoms companies who buy from Avanti and then sell on to consumers. Any consumer in Wales today can buy a broadband service on Avanti’s satellite at speeds of up to 10 Mbps. 2 Mbps is the typical service. It is available, it is reasonably good value for money and it works pretty well. We have quite a few customers already in Wales. We only launched our first satellite a few months ago, but customers are already signing up and using it happily. I cannot speak for other technologies and plans, but there should be nobody in Wales who does not have broadband. It is available today.

Alastair Davidson: I guess we would have a slightly different view. Our view is based on the affordability of the service and also the full functionality of the service. To be able to use fast real-time services like video conferencing or gaming, or to upload printing publications rapidly, things like that, we think you need a fixed or terrestrial network at an affordable price. We have done a lot of investigation and found that there are about 90,000 premises in Wales that cannot receive a 2 Mbps service today. We would highlight 2 Mbps per second, like David, because we think 2 Mbps is a reasonable level of service that everybody should have. That is the kind of service you need to do everyday things, whether it is schooling and education, entertainment or business applications. 90,000 premises cannot get that today, and what we are here to tell you about today is how we think that could be supplied at an affordable price to all of those customers. Perhaps we will come on to it through the questions, but we would like to tell you about the trials we have done of a fixed wireless access to solve that problem.

Q63 Stuart Andrew: Of those 90,000 houses, presumably most are in rural areas?

Alastair Davidson: Yes; the majority of those will be in rural areas. The typical problem you have-and it could be a house, a small business or a farmer-is where premises are more than 3 km away from a BT exchange, then it becomes quite difficult technologically to provide those high-speed services at that distance over the copper connections.

Q64 Chair: Can I just put you on the spot, because you have painted quite a good picture there? The criticisms seem to be that, number one, it is costly. Could you give us the vaguest indication of what it would cost somebody to have the basic package? Secondly, there is a slight delay-latency-which prevents you from watching television or gaming. Thirdly, you have to be able to "see" the satellite, and this may not be possible in all instances, for example, whether or not weather and cloud cover affect it. Can you deal quickly with those?

David Williams: Sure. In terms of cost, consumers can get from our service providers a 2 Mbps broadband service for as little as £25 a month. It is a little bit more expensive than ADSL costs in the middle of London perhaps, but only by a few pounds. In terms of latency, this is something which competitors normally throw at the satellite industry, and what you need to understand is that every technology has its disadvantages. Fibre is impossibly expensive to build to rural areas. Fixed wireless networks do not exist. I have been financing telecoms projects for 20 years and I have heard them come and go, but none has ever been built to large scale anywhere in the world. My satellite network does exist today and you can have service today. On the latency issue, you add about 250 to 500 milliseconds for a signal to go up and down on a satellite versus across a telephone line in the ground or a wireless transmission; that is true. It does not matter if you are sending or receiving e-mail or browsing. I watched the Rugby World Cup games at the weekend across my HYLAS 1 satellite in my gym, so you can watch streaming television pictures. You can do anything that you do across any other terrestrial telecoms line. The only application where latency can cause a genuine difference in service quality is when teenagers are playing those murderous computer games on their Xbox.

Jonathan Edwards: That’s shocking.

David Williams: If a teenager or Mr Edwards would like to slaughter other people on Call of Duty, you can find a quarter or half a second difference in reaction times, but the Microsoft Xbox system aggregates users into latency pools, so you end up playing against people with similar latency. That is the only application where there is legitimately a couple of 100 milliseconds difference at least. But, on the flip side, we have Government customers who are using our satellites to pilot unmanned aerial vehicles which are engaged in real war fighting applications. So if the Department of Defence in America is willing to use our satellite capacity to control and command drones that are fighting wars, perhaps Mr Edwards could get used to the latency on Call of Duty.

Alastair Davidson: I am happy to expand on that. I agree with Mr Williams that there is a role for all the technologies here. The key for us is making sure that they are available to consumers at an affordable price point and delivering the right functionality. You just need to be a little careful of sweeping statements about murderous games. In my family, my children use Skype to talk to each other about their homework. I talk to my elderly parents at the weekend using an application called FaceTime. These are very respectable normal applications and they do require a degree of human interaction that would not work with latency.

David Williams: Wrong.

Alastair Davidson: Moving on from there, it is important that we look at the problem of broadband in its entire context in Wales. I understand that the BDUK funds have been used for an intervention across something like 600,000 premises, or between 540,000 and 600,000 premises, and we understand that a lot of the funds are being used to provide superfast broadband where it is economic to increase the amount of fibre provided. Our view is that some of those funds should be earmarked for those people in outlying rural areas who cannot get the minimum level of service. Our estimates are that you could solve the broadband notspot problem in Wales for about £30 million, which is a small proportion of the funds available.

Q65 Jessica Morden: For Wales, what do you think the priority should be? Obviously, you have given us your opinion. Should it be universal access or provision for superfast broadband?

David Williams: Probably universal access is the logical first step, but there are other regions that have already done this. Avanti participated in a project run by the Scottish Government a few years ago. The Scottish Government set down challenging requirements in terms of service level agreements for a 2 Mbps service, which included the use of applications like Skype. Our satellites are being used for voice and video communications, for example, in Scotland. 3,000 people registered with the Scottish Government as being in need of a 2 Mbps service. Avanti was handed that register of users, and within six months they were all installed, including many consumers on the outlying islands in Shetland and the Hebrides over the winter. We managed to install services for 3,000 consumers in a six-month period over the winter.

It is not difficult to get 2 Mbps broadband services into the hands of the most rural consumers, and it is important that everyone has 2 Mbps before Government get engaged in doing anything else. But, more importantly, I would like to make the point that Government crowd out the private sector. Wales in particular, has a heritage of promising or hinting or debating the notion of a large-scale Government subsidy. When private companies are expecting that Government will, at some point in the future, subsidise installations, those private companies do not invest. If I knew that there was going to be no Government subsidy at all in Wales for the next 10 years, I and my service providers would invest to make sure that everybody in Wales got a 2 Mbps service at the lowest possible price. As it stands today, my customers-the end user consumers-have to pay perhaps £200 or £300 for an installation, and my service providers will not invest in subsidising that down because they think there is the possibility that the Government is going to subsidise that. Government needs either to make a decision and spend some money or make a decision to not spend money, but do it quickly.

Q66 Jessica Morden: Do you think the UK and the Welsh Governments’ targets for universal broadband coverage are ambitious enough? What is your view?

Alastair Davidson: My answer would be no. A lot of the debate we are hearing is about how you can roll out superfast to as many people as possible as quickly as possible. We come from the world of television and radio, where Ofcom has asked us to provide universal coverage to consumers. We come from a heritage where we believe that people do have the right to get a basic level of service, and in our view you would roll out or have affordable broadband services to as many consumers as possible. Perhaps in David’s case the subsidy could be used to support the installation cost, but there is a danger that you increase the digital divide by pushing fibre as far as it gets and then you have a cliff edge, and those people who will never get superfast broadband have nothing because you have spent all the money on fibre.

Julian McGougan: There is a real risk, if I might add to that, if we know there is something we are not going to get. It would just be utterly impractical to deliver superfast to them, and the funds are not available. What we need to do is address that market. As Alastair said, there are 90,000 homes in Wales that do not get 2 Mbps now. All of those will get nothing. Some of those will get broadband dribbling in at 300 Kbps or 500 Kbps. A lot of you will know that from your postbags. The problem we have at the moment is that the debate, both in Cardiff and Westminster, is dominated by the idea of superfast, superfast, superfast. The idea is that anything that is less than that is somehow not worth having, whereas you heard in your first evidence session from the NFU, the CLA and from Disconnected Wales, that, if you have nothing, 2 Mbps is something well worth having. If you are a farmer struggling on 300 Kbps, then 2 Mbps is not only worth having, but if it is reliably received-and, as some of those witnesses made clear, it was the reliability of the connection that was more important to them than the absolute speed; you do not need much bandwidth to fill out a VAT return-it would be very useful if you knew the connection was going to hold till the end of the page and you did not have to start all over again. These sorts of things really matter.

What we have at the moment in the debate in Cardiff and Westminster is consumers standing outside a Ferrari garage with their noses pressed against the window and both Governments are saying, "You will have all of those soon." The problem is that some of those consumers are in line to get a Ford Focus. Not only are we not managing their expectations and saying, "You know what? You aren’t going to get a Ferrari but we have got something for you and we are going to ring fence the funds and address you separately." There is also a real problem that the lure of speed diverts too much money towards upgrading most consumers to Ferraris, and there is a real risk that when the pot runs dry some of those people who were in line to get a Ford Focus won’t get one because the money won’t be there. These will be real Welsh consumers who have nothing now. There is a real risk that they will still have nothing in 2015, but their friends two miles down the road will have the Ferrari they were promised.

Chair: That is a good analogy. We like analogies like that.

Q67 Mrs James: I want to look a little bit more closely at the coverage and speed and the aspirations of the 2 Mbps, which covered the point that I wanted to highlight. I happen to have very fast speeds because I am within 3 km of the exchange, but, once you go down beneath that 2 Mbps, you are cut adrift, because you can’t download your films, you can’t get on to the games that you want to play, and there are still far too many people in Wales who do not even have that 2 Mbps. We have talked about copper wire, cable, wireless, satellite, and the combination of things that needs to happen. How do you see yourselves all working together to create that, or do you see that as a function of Government, or somebody else leading on it, because, if we want to maximise the opportunities, we are all going to have to pull together and work together? Is it a matter that satellite would be best in Monmouth and in an inner city area like Swansea cable is the best thing? How could we address those differentials?

Alastair Davidson: You can use market forces to select the right products. We are not here to promote a single product today, but what would be helpful would be to have the right policy objectives and the right criteria for the evaluation of the procurements. Things like universal coverage of a minimum level of service need to be high up the list of criteria for the procurement. When you come to spectrum, for example, which can be an enabler to provide services, I think it needs to be high on the list of UK Government policy objectives to ensure that spectrum is available and mandated to reach all of the rural areas, because then you have all the enablers you need and you can leave market forces in the procurement. We can slog it out over function and price points with the people doing the procurement. When you talk to our colleagues from Ofcom later, they have made great strides in pushing forward mandated roll-out of spectrum beyond the old 3G licences, which were 85%. They are now talking about 95%. I would give them the challenge: why not go further? Why not push it out to 99%, and then you get this mixed economy of different products and solutions but you have the best choice when you do your procurement?

Q68 Mrs James: Do you think the consumer understands that? Do you think that is confusing for the consumer, because we have the big boys in it, the BTs, the Virgins, etc? How does the consumer grasp that perhaps BT is not the best opportunity for them?

David Williams: I think the consumer is confused, but I think Government is confused as well. I think the debate on broadband has been hijacked by companies that sit before you and ask you for something. They ask you for money, subsidy and free resources for spectrum, and you are not engineers or specialists and so you have to inquire and figure out what all this means. The debate has been hijacked by people who tell you that we must all have 20, 30, 50, 100 Mbps services. It is completely preposterous when there are people in Britain today who cannot get access to basic educational services and basic information about employment. A member of my own family was saved last year by a very simple telephone call that we made to NHS Direct, the information for which I got on the internet. There are people in Britain today that do not have access to basic services. It is ridiculous that we waste our time talking about whether the Government, which, let’s face facts, is not rich at the moment, should be spending money laying fibre. The Government should be making sure quickly that every single family in the UK, particularly low-income families, has access to basic broadband at 2 Mbps. I have plenty of customers in Britain who are buying a 10 Mbps service from me, but they will pay £45 to £50 for that. At minimum, every household in the UK needs a 2 Mbps service, and at £20 to £25, that is beyond the reach of some low-income families. My suggestion would be that Government focus on getting a 2 Mbps service into the hands of every household in Britain, and, if there are low-income families that cannot afford £20 to £25 a month, let us prioritise our spending there.

Q69 Geraint Davies: Following on from that, we are expecting the spectrum auction in November. To what extent do people feel that these coverage obligations are in any sense in conflict with a market-led approach, or do you see it as people thinking it is complementary? What is the balance?

David Williams: It is not an issue for me. Every technology has a strength and a weakness. My great strength is that satellites cover 100% of the territory. Satellites do not have quite as much throughput as a cable, for example, but, then again, they are cheaper. You have to balance all the strengths and opportunities. For me, universal coverage is largely irrelevant; we already do that. What is important is that Government prioritise making sure that every family has a basic broadband service. Avanti does not need subsidy for that. I would rather the Government get out of the way and stop talking about subsidy. We do not need subsidy; I do not want your money. If it is going to spend another couple of years debating this issue, I would prefer for Government to get out of the way and just let market forces lead the charge.

Q70 Geraint Davies: I understand that, but is 99% coverage a deterrent to some market entry and, therefore, possibly undermining competition?

David Williams: Not in my part of the telecoms industry, no, I do not think so.

Q71 Geraint Davies: What do you think, Mr Davidson?

Julian McGougan: I will take that. As Alastair said, we have universal television and universal radio as a basic level of service in this country. We have universal postal services and basic BT telephony. These are all market interventions. Universal coverage, universal service, is not a new market intervention. All Governments have to balance letting the market rip and leaving a large number of people unserved and delivering what are seen as utilities, basic rights to the majority of people, at a basic level. Broadband is now being seen as one of those basic rights, not just here or in Europe, but in the UN as well, and your postbags will reflect that.

If we look at the mobile phone licences, because I think it is the 4G spectrum auction you are referring to, the 1G and 2G licences had 99% population coverage obligations. That was quite onerous. It did not stop the networks being built out or consumers taking up those phones, even though they were paying for the network roll-out. Huge sums of money have been spent investing in that and subsidising handsets, and millions of consumers were very happy with it. There are still lots of notspots in Wales, hence the Chancellor’s recent announcement of £150 million. That is very nice to have, but, none the less, it is a 99% coverage obligation and virtually everyone gets it. On 3G they slipped a bit and they only set an 85% coverage obligation, and that is measured by the UK. That means in Wales you do not do as well as England and Scotland, I am afraid.

We have been saying to Ofcom consistently on the 4G that they should learn from the mistake of 3G, especially as data is now far more important than ever was when the 3G licences were auctioned, when, frankly, those who got the licences had to work out what the consumers were going to do with the data. Now we know. With 4G it is faster and more reliable. Data is what it is all about and that is what consumers want. It is essential that that is available universally, as 1G and 2G were, so make it a 99% coverage obligation. You do not have to have that coverage obligation on all of the licences. Provided it has enough spectrum attached to it, one of the licences will do, which is what Ofcom has proposed, but that 99%, taking us back to where we were with the 1G and 2G, was when, ironically, phones meant rather less to consumers than they do now.

The other thing we have said very clearly to Ofcom consistently on this is: measure that coverage obligation by nation, look at the disparities of 3G coverage between Wales and England and Scotland and learn from that. Put a 99% coverage obligation and measure it by nation so those benefits are spread equally. Ofcom now has more time to think about this, because the auction is being delayed due to operator in-fighting, which is a source of great "unfortunateness", but they have time to think about this and time to get this right.

Chair: I am probably going to move things on a bit more quickly now.

Q72 Jonathan Edwards: Thank you, Chairman. May I ask a couple of questions if I am not too late? You have already touched on your work in Scotland, but can you expand on the exact role of the Scottish Government in terms of that project?

David Williams: Certainly. The Scottish Government were very proactive and found a solution quickly. They determined that getting a 2 Mbps service into the hands of the most rural families and businesses was their number one priority. They advertised in Scotland and asked those families and businesses that had a pressing need for a solution to make themselves known. 3,000 registered and then the Scottish Government came out to the market with an open tender, invited all and any technologies to bid.

There were bids from Avanti for satellite, from some wireless companies and from people who proposed to get subsidy for cable. Avanti won. It was selected on fitness for purpose and cost. Avanti took the list of registrants. We phoned them all up and said, "You have registered you want service. The service is now available." The Scottish Government paid for the installation cost. A couple of hundred pounds is what it now costs, although three years ago, it was higher. The Scottish Government paid for the installation cost and then the end-user customer signed the service contract for a £25-a-month tariff. Avanti then arrived, installed the satellite dish and away they went. We did that on an old-fashioned satellite. Subsequently, Avanti launched its first high-speed broadband satellite last November, and we quickly drove round Scotland and upgraded all those customers to the new system, and I am happy to report that they are all very happy using the full range of internet services that you would expect to use on any other technology. It has been a very successful project.

There are some other Government organisations that are doing similar things. Some of the county councils are moving forward quite aggressively with their own projects. I applaud Kent county council for being very quick off the mark. They have already placed a contract which Avanti is involved in, and other county councils around the country are doing the same. Some are moving quickly, some are not, but, despite the business I am in, this really is not rocket science.

Q73 Jonathan Edwards: What is the maximum speed you are going to get from satellite with the newest technology?

David Williams: The maximum speed that our satellite will provide is about 260 Mbps, but that is for an industrial scale product. With a consumer modem that costs about £200 to install and the maximum speed is 10 Mbps.

Q74 Jonathan Edwards: Have you been holding trials in Brecon?

David Williams: It is not really a trial, to be honest. There is an Assembly Member called Kirsty Williams who was very proactive in making a noise about broadband when she came to see us. I was frustrated with the slow pace of development in the broadband debate. So we just went and installed some customers for free in Felinfach, including in a magnificent inn called The Griffin. There are half a dozen customers in Felinfach who just got free installations from us. They are paying for their service, but we did it to make a point, just to say, "It’s here, and if you want it you can have it now."

Q75 Jonathan Edwards: Has there been any analysis of that?

Geraint Davies: Did Kirsty get it free?

David Williams: I do not believe Kirsty got anything for free from Avanti and, if she had, I am quite certain she would have declared it.

Q76 Chair: What about listed buildings? Do you have any problems putting satellites on to listed buildings?

David Williams: Yes. There are some restrictions that cause problems in 0.1% of buildings in the UK. If a building is listed, one has to seek permission to put a satellite dish on the roof. It is possible to get that permission, but there is an approvals process. If a building is in a conservation area, there is a slightly lighter approvals process. Just returning to your question a while ago, there is a look-angle issue. In Scotland, out of 3,000 installations that we did, there were something like 17 locations where we could not see the southern sky because of the existence of a very tall building or a forest. There are a small number of locations where you have a look-angle problem, but it is a tiny number.

Q77 Chair: Your pitch, as it were, here today-and we can check this out, but you are putting this on the record-is that you could install broadband tomorrow in all but a tiny handful of buildings where you cannot see the southern sky. You could do it tomorrow; you do not need anything else.

David Williams: Yes. I would give you a guarantee that we could install a 2 Mbps broadband service in at least 99% of the notspot homes in Wales and have them working quite satisfactorily within a few months-surfing, browsing, watching videos, playing most computer games, using Skype, doing most of the things that they need to do.

Alastair Davidson: Just to highlight it, David did say there would be a £200 installation cost. Even in David’s rosy picture of the world, we have to think about whether consumers can afford that service, and therefore you do come back to whether there should be support for subsidy for universal coverage.

David Williams: Let me just correct that. £200 is the cost of the modem. My service providers choose, in most markets, to subsidise that themselves. With every telecoms service there is an installation cost. My service providers in most markets choose to subsidise that down and to recover it in the subscription. When you buy an iPhone from the mobile phone shop you do not pay the £600 that the iPhone costs. You might pay an activation fee, but then it will be recovered in your service charge. One of the things that is stopping my service providers from subsidising that cost down is the notion that there might be a tsunami of cash coming out of the Welsh Government to pay for subsidy. No rational business will itself invest if it thinks that Government are about to do the investment for it, which is why I say make your decision quickly, please. Invest or do not invest. Either way, industry will step in and solve your problem. Your challenge is whether you want to do it quickly and you want to help the lowest-income families.

Q78 Mr Walker: I just have a very quick question for Arqiva. You have talked about this 99% obligation and you think that is the way forward. What level of investment would be needed for your technology to provide that 99% coverage?

Alastair Davidson: Using 4G spectrum to provide the fourth generation services and installing a small antenna on the outside of a building to get the optimum coverage would cost £30 million for all the notspots in Wales, and about half of that is on the CPE-the modems and the installation-and about half is on the network. The advantage is that it would use about 111 masts, of which we have identified 107 already existing. We did a trial of this technology. I am proud to say the first LTE 4G trial in the UK was in Preseli in Pembrokeshire. It was a very successful trial, with 30 Mbps peak information rates just from one set, and you can have up to three on a mast. The consumer reaction was amazing. We were just doing field trials and we had the folk from the local café, people outside the village hall and the owners of a print shop coming up to us. They were asking us when we were going to make the service live and whether they could take it. The guys in the print shop could not run their business properly because they could not upload files and graphic images quickly enough. There is definitely a demand-an appetite-for it.

Q79 Mr Walker: You said in your written submission that the impact of the trial was not lost on the Welsh Assembly Government. What shift or response have you seen from the Welsh Assembly Government as a result of that trial?

Alastair Davidson: It is definitely a part of the procurement. Now they understand what is possible, the peak information rates being sought in the procurement reflect that. What I am not clear about, and that is why I am making the point today, is what their criteria are for deciding on the solution, and that is why I would urge that people listen to the universal coverage requirement.

Q80 Mr Walker: I have one last question, following up on Mr Williams’ point. Do you think that your company could invest in this amount and subsidise it by what is charged to customers rather than having to have public subsidies for getting to 99%?

Alastair Davidson: No. Realistically, I think there is a need for public subsidy. I hear what David says, but it is an immutable law of economics that, if you ask the service providers to subsidise the cost of the installation, they are going to up the service charge. Rather than keeping the market clear of competitors for satellite, I would prefer to see some subsidy so that everybody can afford the service.

Chair: We seem to agree that everyone should have access to the service, even if we are not in complete agreement about the best way to achieve that. We also seem to agree that everyone could have the service and that it is just cost that is the issue, so that is good. Thank you all very much indeed.

Witnesses: Phil Sheppard, Director of Network Strategy, and Julie Minns, Head of Public Policy, Three, and Richard Rumbelow, Head of Corporate Affairs, Everything Everywhere, gave evidence.

Q81 Chair: Thank you very much indeed for coming along. Perhaps you could quickly introduce yourselves. I am David Davies, Chair of the Welsh Affairs Select Committee. Do make yourselves comfortable while you are here.

Richard Rumbelow: Good morning. I am Richard Rumbelow, Head of Corporate Affairs for Everything Everywhere, which is the UK holding company for the Orange and T-Mobile brands in the UK and was formed in July of last year. In addition to what we are going to be talking about today, I just thought I would make a note that we have our customer contact centre in Merthyr Tydfil, which has about 700 employees, and, in addition to that, through our 30 or so retail stores across Wales we probably employ up to another 150 people.

Julie Minns: I am Julie Minns. I am Head of Public Policy at Three. Three launched services in the UK in 2003, having acquired our licence in the 2000 3G spectrum auction. We are currently the UK’s largest provider of mobile broadband.

Phil Sheppard: Good morning. I am Phil Sheppard. I am Director of Network Strategy at Three, looking after the technical and economic strategy for the network.

Q82 Chair: Thank you very much indeed. Could I start off by asking you, Mr Rumbelow, just out of interest, how you find Wales as a place to employ people, because, obviously, as well as doing an inquiry into broadband, we are looking at inward investment generally and the two areas overlap? Are you finding Merthyr is the place to be?

Richard Rumbelow: We have been in Merthyr now for just about 10 years, and, as a result of other changes in the local economy there, we are now the largest private sector employer in Merthyr and in the area. I have to say the quality of the people we have within our operation there is excellent. They perform to a very high standard.

We have worked very closely with local employment agencies and others to make sure that is the case, and it is a continuing challenge to make sure that we have the right people coming through the door, both as first-timers to work but also a significant number of people who are returners to work. Because of the nature of the work we do, it is attractive for those who are also looking for part-time work, so the balance and profile of the people we have in our contact centre is wide. Clearly, there are other opportunities to help provide more local skills within the employment work force and encourage that through education. As one of the sectors where we rely specifically on high-calibre people in a sector, we would like to see some of that reflected in the local education and skills training process that we get through, simply because our customers require more sophisticated services, the devices are more challenging for them to use, and, therefore, we have to be more clear in the service that we provide.

Q83 Chair: I pick up a hint there that perhaps you are not entirely satisfied with the education of some of the people that are coming forward.

Richard Rumbelow: We are very happy to provide the core skills and training that we need in our service centre. We are looking for a basic level of skills competence to come through that we can train up, and sometimes it has been difficult to identify at that point of entry the relevant skills. I am just talking about basic maths education and social skills engagement. We are happy to do the rest. As a good employer we would do that, but it is getting those people through the door with those initial competences that we can then train up for the future. But, as I say, in terms of the overall performance of the centre, it is doing extremely well and that is a reflection of the quality of the people within the Valleys area. The Committee is very welcome to visit should it be in Wales at some point in the future.

Q84 Mrs James: Just as an add-on, are you not tied in with any of the local colleges or education centres?

Richard Rumbelow: We are, and I would be happy to supply the Committee with information regarding local initiatives. I do not have them to date or with me at the moment, but I am happy to supply some of those reference points for you. We do have, and have had for a long time, a history of working with local schools and also with Jobcentre Plus and other similar agencies in getting people interested in work, and also providing other facilities, such as driving people to come into the centre for job placement, work placement and other experiences where they can understand how a modern employer works.

Q85 Chair: Could any one of you explain to us in very simple terms-not for my benefit, of course, but perhaps for anyone else’s-why Ofcom’s coverage obligations should not be raised in the forthcoming spectrum auction?

Julie Minns: Our position is that Ofcom could increase the coverage obligation beyond 95%. We certainly believe 97% indoor coverage is achievable. That is based on our current infrastructure of 13,000 masts across the UK. The key thing for us is being able to acquire sufficient low-frequency spectrum in the auction. To get to 97% is achievable, deploying that low-frequency spectrum across the current infrastructure. To go beyond that becomes a choice as to whether you allocate Government subsidy to plug that remaining 3% for indoor coverage or you take a decision on a lower value of the spectrum licence that would be auctioned, but that is 97% indoor coverage. You could get a much higher population coverage if you looked at outdoor coverage, and you could certainly get up to 99%.

Richard Rumbelow: We have a similar view. The nature of the spectrum discussions that industry and Ofcom have been having for some time has centred on what is relatively economically achievable, and it is generally assumed that around a 95% figure is relatively comfortable to achieve. The ambition for what 4G can do, particularly in terms of coverage, has entered into the conversation, and quite clearly there are pressures for that figure to go much higher than 95%.

The challenge is going to be in what way and how is that additional amount of coverage going to be funded and who has the responsibility for that. As Julie has indicated, it is possible to get higher than 95%, but it is a question of the economic value and the social costs of providing that service, which will provide, in the end, the decision as to what Ofcom wants to do in terms of coverage obligations. But the history of the sector has been that, in the spectrum that we have used to date, whether it is for 2G services or 3G services, we are extremely efficient users of radio spectrum and have gone well beyond what we have already been expected to achieve in terms of coverage across the UK. As a sector that has shown and demonstrated investment in the spectrum we can do it; in terms of coverage we can do it; the nitty problem here is just whether 95% is currently the right figure that should be set up, given the economic cost to go beyond that.

Q86 Chair: Perhaps I can say that we are not specialists here, so do try and put it across in simple terms if you can. One thing that I want to know is this. I use my mobile phone, as most people do, to access the internet occasionally, but I would not consider this a substitute for a fixed-line connection, or even a wi-fi connection. Are you really saying, as mobile phone operators, that we could have a mobile connection that becomes a substitute? Are you trying to compete, in other words, against fixed line and wi-fi connections, or do you see yourselves as simply being able to offer something like this, only perhaps a bit faster, for people with mobile phones?

Phil Sheppard: I think I can attempt to answer that one. The reality is that there is a range of services. You have fixed line, mobile and satellite, as mentioned earlier. They all provide different capabilities at different costs, so we have customers who use mobile broadband as their only broadband connection. For example, students may not have a fixed line and may not wish to do so, so it is very convenient for them. The speeds we are getting now from the latest technology and mobile support are in excess of the 2 Mbps figure that we were talking about earlier. What we have found is that the speeds are quite acceptable to most users for what they wish to do, and the technology and the spectrum will allow us to improve that speed from around the 2 Mbps figure up to the 4 Mbps or 5 Mbps figure when we get the new spectrum; and this is real average speeds rather than just a headline peak.

Q87 Chair: That is very good, but it does not quite answer the question, which is really a yes or no. I think the answer to the question is yes, you do see yourselves as offering something that will compete and that can be offered instead of a fixed wire or wi-fi connection. Is that right? You see yourselves as a competitor to BT, Avanti and the satellite operators.

Phil Sheppard: I think I am saying that for some people in their own economic circumstances we compete, and for some people in locations where fixed line is just too expensive we compete. For the rest we are perhaps more complementary.

Q88 Geraint Davies: On that same point, in a world where people have access on an iPad through a mobile phone system, Vodafone or one of yours, would that not be perhaps a more economic way of getting that extra 3% than doing all these wires and satellites and all the rest of it?

Phil Sheppard: There has been quite a good study of this in the broadband stakeholder group, which has looked at the economics of the various different technologies. You usually find that fixed line is quite economic for very high speed up to a certain percentage population coverage. Mobiles then start to become an even more cost-effective way of doing things, and then, at the very end of it, perhaps the last 1% or 2%, because that figure is debatable, satellite starts becoming a feasible thing. It is not a one-off answer; it is to choose the right technology and put the money in the right technology for the best benefit you get overall.

Q89 Guto Bebb: Just following on that issue, and then specifically asking a question of Three, your written evidence stated fairly clearly that in your view there were some areas which were impossible to cover on a commercial basis. What is currently stopping the private sector from providing that service to the final third of the country?

Phil Sheppard: If you take Wales in particular, it is quite a challenging geography to cover. The population is distributed, it is highly rural and there are a lot of hills which stop mobile and other coverage. Up to a point, we as a commercial company and other companies can provide increased coverage, so we are planning to continue to invest in Wales and grow the coverage there. At some point it becomes very expensive to provide a mast or a site. If there are only a small number of people in that area, then the economics do not work out very well, and in that end case, if you like, that is perhaps where the Government subsidies can come in. But we still think there is a great deal to be gained if we have a competitive market with several operators working, but they compete against each other to drive that coverage out, perhaps not all the way to 100% but certainly a long way towards it, and then, once we get to that point, perhaps there are a few areas that need to be subsidised.

Q90 Guto Bebb: Just to clarify then, in comparison with some evidence that we have heard this morning, your view is that there is a role for Government subsidy for the final 3% or 4% of the population who are very difficult to reach.

Phil Sheppard: I think, certainly for rural areas, particularly in countries like Wales, yes, there is. There is a role for that subsidy to finish off that coverage.

Julie Minns: The key thing at the moment is that neither we nor Everything Everywhere have the low-frequency spectrum, which is the spectrum that is the best for providing rural coverage. Just to give you an example, if you deploy a network using low- frequency spectrums, that is either the 900 currently held by Vodafone or O2, or the 800 that will be auctioned in next year’s auction, your deployment costs are roughly three times less than deploying a network on the spectrum that we currently hold, which is much higher frequency at 2100. Our concern at the moment is that you do not have a competitive market. You have the two operators here today without access to low-frequency spectrum, and, therefore, the competition perhaps is not as optimal as it could be. If next year’s spectrum auction achieves what Ofcom set out to achieve, which is a competitive, four-player wholesale market, the market should push coverage to more rural areas in Wales than is currently delivered, and I think that allows you as a Government better to target your subsidy. There is a risk at the moment that, if you look at the £150 million that was announced last week, some of that, if you deploy it today, could go into areas that arguably the market will serve post the spectrum auction.

Q91 Mrs James: Are you not expecting it to be a competitive bidding process next year? We do not think that people are going to want to take that very low spectrum.

Richard Rumbelow: We expect it to be in a competitive position as it currently stands. We have some disagreement with some of the rules and levers which Ofcom want to put in place as to the entry rules that are going to be allowed for the operators, given their current spectrum holdings. We would just like to see a more level playing field in that position before the auction takes place. Hence, I think that is why Ofcom have given themselves more time to consider some of those technical arguments before formally coming forward with what the spectrum rules will be and the auction taking place next year.

Q92 Guto Bebb: I am picking up some degree of concern, possibly, at the way the Government are going about this situation. In terms of the strategy the Government are adopting, are you supportive in general terms or do you have real concerns?

Richard Rumbelow: In terms of the overall Government strategy, I think it is absolutely essential that the UK Government have a very clear and very precise policy when it comes to broadband, simply because it is a necessary economic instrument and infrastructure, and it has been replicated across Europe in terms of similar Government action, both in terms of providing spectrum and getting spectrum to market, and also in terms of stimulating investment in other technologies too. It is absolutely critical that the UK Government carry that action forward. In our specific part of that, what has hijacked the speed of that is getting the low-frequency spectrum to market. Had we had that completed two or three years ago, which was a possibility at that time, then we would not be here talking about an auction next year; we would be here delivering 4G services now, and that is the significant difference in time scale that we are now facing.

Q93 Guto Bebb: I have one final question, and I am going to be very parochial now. I represent a very rural area in North Wales and I am just interested in the work that Three have done in Ceredigion and Powys. Are there any lessons there for us to take on board in terms of mobile coverage, because some community councils in my constituency would be very interested to know whether you do have the answer to the issue in question?

Phil Sheppard: Historically, in the last three years we have achieved considerable expansion in coverage with our joint venture with Everything Everywhere to improve coverage. Powys, for example, has gone from 24%, which was very low, to 70%, which is still not huge in terms of coverage, but it is a significant improvement. We do, as I mentioned, intend to continue to expand the coverage in Wales with further sites. I do not know what the number will be for Powys at this moment in time, but it will improve.

Q94 Geraint Davies: You have made some slightly veiled criticisms of the mechanisms for the spectrum auction and Ofcom. We are about to ask questions of Ofcom. Are there any points you would like to make to us now that you might want made to Ofcom?

Chair: Bearing in mind they are sitting at the back.

Geraint Davies: You could make them as hand signals.

Julie Minns: I can sense the pens coming out behind me. The key thing from our perspective is that we support Ofcom’s proposals to maintain a four-player wholesale market. We think the benefits of competition have been quite considerable for UK consumers. What is going to be key in that is ensuring, as Richard has alluded to, that each of those four players has access not just to sufficient spectrum but a sufficient mix of spectrum. In urban areas, it is going to be key to have sufficient high-frequency spectrum; to cover rural areas, it is going to be key to have access to low-frequency spectrum.

Three disagrees with Ofcom’s current proposals on the amount of low-frequency spectrum that they believe each of those four operators should have. I am sorry to introduce a lot of numbers here, but Ofcom’s proposals are that two times 5 MHz would enable you to achieve 95% coverage at 2 Mbps. We disagree with that. We think you could not achieve 2 Mbps off two times 5 MHz. We believe you need two times 10 MHz of low-frequency spectrum in order to get 2 Mbps across a minimum of 95% of the population, and that is the key point from Three.

Chair: I suspect we won’t be in any position to pass judgment on that one.

Mrs James: Is that to the power of 10?

Q95 Geraint Davies: Is there a suggestion, so I have got this right, that Vodafone already have some frequencies that you do not have access to, and that, in some sense, on entry to the competition, there are different incentives and different benefits and different games may be played in order to keep people out at whatever cost? It is not a proper competition.

Richard Rumbelow: There is a significant legacy of how the operators came to have the spectrum holdings they have today. Some of those spectrum holdings were granted without an auction process back in the early to mid ’80s, and also there has been an auction process subsequently for that. The capability of what you do with that spectrum is now fundamentally important, because that spectrum is being liberalised and therefore you can do more with it in terms of the high data bandwidth capacity that we are talking about here in terms of giving people mobile broadband services. The spectrum width you have at certain frequencies has greater capacity to provide the level of service that you want to provide to customers and the degree of coverage that is now being required of us. Therefore, those who have low-frequency spectrum have a distinct advantage over those who have high-frequency spectrum, given the costs of roll-out, coverage obligations, etc. It is the levelling off of that playing field in terms of who owns what which is absolutely critical to the arguments about how the auctions take place.

In other countries in Europe, for example, there has been a mandated decision by regulators to force that change where there are seen to be differences in spectrum holdings of those operators concerned. In other countries in Europe they have gone through a process of re-allocating spectrum from one operator to another to provide that balance in the marketplace before the auction has taken place. In the UK, we have not gone through that process and some of the technical discussions that we are going through with Ofcom at the moment are centred around trying to bring some balance to who has what currently to make the economic investment in the future sensible and practicable.

Q96 Chair: Mr Rumbelow, you are basically saying that you have been disadvantaged by the liberalisation of the 900 MHz licences, but others might claim that you hold the largest share of the spectrum, so you have certain advantages elsewhere within the system. How would you respond to that?

Richard Rumbelow: As a result of the merger, certainly the amount of spectrum that Orange and T-Mobile bring to the table was, in terms of pool, large, but, as part of the arrangement in terms of the consolidation between the two, we are required to give spectrum away as part of that merger process. It is not just about the amount of spectrum you have; it is about the frequency level or where it is in the spectrum band that is important, and it is not so much the volume of where it is on the spectrum band that is critical, and that is why the arguments and discussions with Ofcom are on those points of detail.

Q97 Chair: Did you or the companies that now form your company not know when they bid for the current licences, around 10 years ago, that the liberalisation was going to take place 10 years later? Did they not bid for a specific period of time?

Richard Rumbelow: I think I am correct in saying that at the time the 3G auction was done, 10 years ago, the frequencies that were held for 2G services were only designated for 2G services. It was subsequent to the 3G auction in 2000 that a European directive came out that allowed that liberalisation of other spectrum to be made available, and that came into force in the UK at some point during the course of last year. The decision to liberalise was post the 3G auction in the UK. At the time of the auction we bid purely on what we knew at the time: 3G spectrum at certain frequency bands, and at 900 MHz 2G-only services.

Julie Minns: At the time of the 2000 auction, the indications were that the next spectrum auction would happen ahead of the liberalisation of existing spectrum. The view was that you would have had a level of spectrum allocation before you had the freeing-up of those legacy spectrum bands for 3G services. That is not what has happened, and it is partly as a result of the delay in the proposals for the 4G auction. The original timetable would have had the auction take place last autumn. Now we are looking at an auction next autumn, and in the interim we have had liberalisation in January. That does mean that Three, which only has the 2100 MHz spectrum, does not benefit from any of that legacy spectrum. We hold 10% of the spectrum in the market, yet we carry 50% of the mobile broadband data across our network. We are very keen for the 4G auction to happen quickly, because we need that spectrum to meet the growing demand, and, certainly by the time we get to 2015, all the predictions are that more people will be accessing the internet on their mobile devices.

Q98 Mrs James: Are we just hearing here companies that are protecting their own interests or making an appeal now that there is a fairer allocation in the future, whereas there was a land grab, was there not? That is what happened in the earlier auctions. People made a lot of money and spent a lot of money and there was a market share that they were then guaranteed. What you seem to be saying now is that everybody should have a little bit of this and a little bit of that, and I am not quite getting it.

Richard Rumbelow: There are a number of points on that. First, by any measure, the UK market has been one of the most competitive markets in Europe for our sector. That is widely recognised. You have also had some of the largest European players in the UK market who have invested consistently over that period of time, and I think that needs to be welcomed and recognised, and we want that to continue, which is why this spectrum auction is particularly critical, just to ensure that there is, from our point of view, a rebalancing of what currently is in existence, but also, given three things: first, a sudden uptake and the clear direction of traffic, in that mobile is here to stay as a critical mobile broadband product for consumers, not just for those who cannot have access to fibre but for a generation of people for whom mobile will be their only option of choice in terms of how they have broadband services.

Q99 Chair: If your coverage is 95%, which is what you are aiming for, even if it was 97%, which is what some have suggested, there would still be 3% or 5% who would not get mobile coverage. Is it not likely that that would probably be the same 3% to 5% who are also going to find it very difficult to get a fixed line broadband link, because it is going to be people out in isolated rural areas, not near an exchange and not near a mast either, generally?

Richard Rumbelow: In terms of coverage, that is where the nub of the question is. Part of that is, do we go beyond 95%? Where will the pitch be?

Q100 Chair: Those you do not reach are likely in many cases, though perhaps not all, to be the same ones whom BT and Virgin cannot reach with their cables and wires, are they not?

Richard Rumbelow: In terms of the UK market, everybody accepts that there has to be a blend of technology in terms of the way people have broadband services. It is absolutely critical that we have a fibre network that supports the mainstream of what people want to do. It helps us too, because that capability supports our network capability and functions too, particularly in the more rural areas. However, I think it is widely accepted that this is not a one-technology solution to provide, if you like, a universal-type service to people. It is a blend of technologies and people will mix between those technologies, either according to where they live or because of their own lifestyle and choice. One thing that is certain is that mobile is going to play a more critical part in how people access broadband services in future, simply because it is in many cases both an economic choice because of the pay-as-you-go facilities that we offer and/or a lifestyle choice as well, and it gives businesses a lot more flexibility than we see currently.

Chair: We have run out of time on this fascinating subject. Can I thank all three of you very much indeed for coming along and giving evidence today? We now look forward to hearing what Ofcom have to say.

Witnesses: Rhodri Williams, Director, Wales, David Clarkson, Technical Adviser and Project Manager, Competition Technology, and Matthew Conway, Director of Regulatory Development and Nations, Ofcom, gave evidence.

Q101 Chair: Good morning. I am David Davies, Chair of the Welsh Affairs Committee. Some of us know each other very well, but perhaps for the record you could quickly introduce yourselves and then I will ask Geraint to start off this session.

Matthew Conway: I am Matthew Conway. I am the Director of Regulatory Development and Nations at Ofcom.

Rhodri Williams: Rhodri Williams, Ofcom’s Director in Wales.

David Clarkson: Dave Clarkson. I am the Competition Policy Director who specialises in broadband.

Q102 Geraint Davies: I want to open by asking about this relationship between universal access to broadband versus superfast and what the balance should be, but, following the last conversation, could you comment on the spectrum auction as well, in relation to the impression at the last auction that the Government just wanted to come in and maximise the revenues alongside providing a competitive framework for the future? Obviously, there has been some criticism from the last witnesses. To what extent are the priorities clearly about virtually universal coverage and, alongside that, the superfast versus getting loads of money for the Government? Would you comment on that?

Matthew Conway: Let me begin, then maybe Dave can pick up fixed and I will come back to mobile. The starting point is that universal coverage is a matter for the Government. It is for the Government to decide how far services should go beyond the point where the market is not going to set them. That is what the legislation requires. We are a key part in implementing the universal service, whether that is expressed as a fixed service, as it currently is, or if the Government ever chose to designate a mobile service as part of the universal service; we are clearly part of the implementation. However, the fundamental definition of what it is that every citizen in the UK or a certain percentage of the citizens in the UK should get starts with the Government. Dave might want to pick up on fixed and then I will come back to mobile.

David Clarkson: Certainly, with regard to the case in terms of fixed, the universal service obligations currently only apply to telephony, and there is a provision in there as well for what is designated as functional internet access, which stems from the dial-up modem days, which is specified at 28 Kbps, so, clearly, not even current broadband. Broadband to date has largely been a commercial phenomenon. All of the current generation, and, obviously, superfast which now we are moving into as well, is commercial up to a point. But, as we all know from plans from BT and Virgin, it looks like over the next few years those plans are not going to lead to universal coverage, in many respects, analogous to some of the early stages of broadband roll-out 10 years ago, where the roll-out was going as far as people believed was commercially possible. There were some Government interventions at the time, and, if you mix that up with changing perceptions and costs, it got to almost complete coverage but not quite.

Matthew Conway: Mobile has never been expressed in terms of universal service in quite the same way. All the way up to two years ago, the kind of coverage obligations that had been imposed by the Government when they awarded those licences was not universal in the kind of terms that you would expect from fixed telephony or terrestrial television, for example. Even the 3G licences that the Government auctioned in 2000 only had at the time 80% coverage obligations, and the Government direction to us, which picks up a number of these issues that went through Parliament at the back end of last year, envisages a coverage obligation of 90%. The issue of universality becomes particularly live in the context of the 800 MHz and 2600 MHz spectrum that we are going to be auctioning next year. We have started from an analysis of what you might be able to cover using 4G technologies over that spectrum, using the existing infrastructure, and that is where, essentially, our proposals for a 95% UK-wide population coverage obligation came from. We have heard, not least possibly from some of you, and certainly from many other parliamentarians and others, that that obligation should go further. That is one of the key issues that we are looking at now, and it is one of the reasons why we announced at the back end of last week that we would be re-consulting before we finalise the auction rules.

As a regulator, we are required by law to be proportionate in what we do. We ultimately cannot impose obligations on the cellular industry that, if you like, would cost more to deliver than the benefit that would be derived, and I should be clear that that is not just economic benefit. Our duties are to citizens as well as consumers. Our definition of benefit is a total welfare one, but, beyond the point at which we judge essentially that further obligations would be a net cost to society, our ability to intervene runs out. In that context, it is very interesting that the Chancellor announced last week £150 million for extending mobile coverage, so that is the point at which our responsibilities and abilities to act have to hand over to the Government to intervene.

Chair: Thank you for that. That is a good opening statement. I am just looking at the time and am conscious that we probably need to go through the questions that we have quite quickly, if that is okay.

Matthew Conway: Can I just make one more point of clarification? It would be utterly illegal for us to run a spectrum auction to maximise proceeds to the Government. Our duty is to optimise the use of the spectrum, full stop.

Chair: That is a good point. Can I bring in Jonathan?

Q103 Jonathan Edwards: It is just a quick one on this 95% threshold for the 4G. I take it there is some sort of mapping exercise. What sort of geographical areas are likely to miss out?

Matthew Conway: One of the issues that we noted in the consultation was that, if you set a crude UK-wide coverage obligation, it is easy to reach large parts of the country by ignoring large parts of the country. Northern Ireland is the classic example. It is part of the UK and part of existing coverage obligations. 3G coverage there is much lower than it is in the rest of the UK. We did ask in the consultation whether we should set sub-UK coverage obligations so that to a large extent we would mitigate large areas being sacrificed in order to meet the overall coverage obligation. We got a lot of responses and a lot of very positive responses, so that is one of the things that we absolutely need to look at.

Q104 Guto Bebb: Do you feel as an organisation that, in terms of increasing competition within the broadband market, access to the BT structure is very important? Would you agree with that?

Matthew Conway: Absolutely. One of our duties is to further the interests of citizens where appropriate by promoting competition. It is in our DNA.

Q105 Guto Bebb: That brings me on to the second question. Are you of the view that BT are playing fair on this issue, because we have had a lot of evidence which would indicate otherwise?

David Clarkson: In terms of competition to BT, there are a number of different models of competition. There is what we would call intermodal competition, where there is complete end-to-end competition against BT’s network. Virgin Media is a good example of that in the fixed space, but, obviously, its coverage is geographically limited. Potentially, if mobile is coming into the market and being a more direct substitute, that can offer intermodal competition as well. However, there is another form of competition which is based on access to BT’s network in some way, and, certainly for the current generation of broadband services, one of our main intervention points there was a process of local loop unbundling, where other operators can get hold of the BT telephone lines. That has certainly proved to be very successful, with high coverage in the UK and high take-up.

With the current superfast broadband roll-out, you can no longer rely on the old telephone lines; you need more fibre, essentially, in the BT network. There are effectively two remedies. One is sub-loop unbundling, which is a very similar process to local loop unbundling, but it takes place at the street cabinets rather than the exchanges, thus shortening the line lengths and increasing speeds, and the other is by getting access to BT’s duct and pole infrastructure. The duct and pole infrastructure remedy was introduced a year ago when it was first put in place. It is new, so there has been a process of industry agreeing the products and the processes to support that. In fact, just last Friday, revised prices were put into the market. Where we are now, we think we have the right products/processes in the market and now there is a question of the fundamental economics.

Q106 Guto Bebb: Can you just clarify something on the revised prices, because some of the evidence we received earlier in this inquiry indicated that the competitors were of the view that possibly the pole and duct access prices being offered by BT Openreach were four to five times what they considered to be the actual cost? In view of what you have just stated in terms of the new prices announced last Friday, has there been any significant change?

David Clarkson: We have not been able to speak to all the people concerned yet to get first-hand views of what their views are of the announcements on Friday. Going back to some letters and commentary which appeared in the press a few months ago, there are two different types of product being made available. There is one which is the ongoing rental product of access to the infrastructure, which is, how much do you pay BT to rent some part of its duct, and there is a cost of its duct network which can be reconciled to its regulatory accounts. It is heavily depreciated because it has been there for so long. From the numbers and the methodology that BT shared with us, and doing some background bottom-up tests on what the costs of a new build is, the prices look quite reasonable-quite good even, I think.

Some of the commentaries earlier in the year, and I think Virgin Media released a press release on Friday as well, related to what are ancillary services. This is to do with things like duct unblocking, building new bits of duct where there is a problem because of lack of space or there has been a collapse, and things like that. Our understanding of how this product is structured is that it is a very hands-off process from BT. The CPs who use BT’s ducts and poles actually go out and survey the ducts themselves. They work out what they want to do. They do it themselves, subject to using accredited engineers. A lot of these ancillary services, 95% plus, you could ask BT to do for you, but, equally, you are at liberty to do it yourself, or, indeed, employ your own contractors to do it. So there has always been less focus on those from the industry group who are developing these processes.

Q107 Guto Bebb: I have a final question on Ofcom’s responsibility. Have you made any analysis of the other options that are available in a Welsh context to deliver broadband to those notspots, in effect? Have you done an analysis of satellites versus fibre, for example, or anything along those lines?

Matthew Conway: I do not think we have. That is getting into the area where the Government, and the UK Government in particular, have observed that the market has stopped rolling out and it sees a case for Government intervention. This is all the work of Broadband Delivery UK. They have been reasonably open, as they see that there is a role for a mix of technologies. They want to take a service-neutral approach to that. It is a Government process. I think we would entirely support that. Trying to specify the precise way in which we will deliver a service is probably not the best way to deliver value for money, even assuming you get the service you want.

Rhodri Williams: I will just add that there is considerable evidence from the Welsh Government’s Broadband Support Scheme, which is currently up and running, that they have used that blended approach of providing wireless and satellite broadband to those people who cannot access anything beyond 2 Mbps now. The scheme started off at ½ Mbps and provided £1,000 per user. It has now gone up to 2 Mbps. It would not really be possible to do that in the short term if you insisted on using either fixed wire or cable to do it. It can only happen now by using other technologies.

Q108 Chair: Can you just explain something to me, Rhodri? If you can install satellite for £200-or was it £400?-which will give every household in Wales broadband access, why does it need to be up to £1,000 per user? According to one of our previous witnesses, anyone in the country, bar half a dozen who have trees in the way, could have 2 Mbps via a satellite for, I think we were told, a £400 maximum installation fee.

Mrs James: A total of £30 million, I think.

Rhodri Williams: The question really is one for the Welsh Government, as to why they have chosen the figure of £1,000 per user. I think that is the maximum they would pay. Obviously, they would not pay £1,000 if the cost of the installation was £250 or £400.

Q109 Chair: Have there been instances where anyone has had to pay more than £400?

Rhodri Williams: I do not know is the answer to that.

Chair: It is an unfair question to you. Forgive me.

Q110 Mrs James: Just looking at the notspots again and the pick-up in Wales, there is a lower than average take-up on broadband in some urban areas of Wales, so have we evaluated this? Do we understand why?

Rhodri Williams: We have certainly done quite a considerable amount of research in that. We have material that is published in our annual communications market report and also studies of media literacy in Wales, and take-up, clearly, is influential in that. What that shows is that in densely populated urban areas, particularly those areas that are not the most economically thriving parts of Wales, take-up falls below the average. Merthyr and Blaenau Gwent, I think, off the top of my head, are probably the two lowest unitary authority areas where the take-up is low, despite the fact that availability is quite high, but that in a sense is not a surprise. That follows the same pattern in other parts of the UK as well.

Q111 Mrs James: We heard evidence earlier that this is one of the key areas that we could address through Government and through the Welsh Assembly. It is how we get the more economically challenged households in Wales and in the UK as a whole at least a 2 Mbps speed access, because now, for education and all other areas, it is vital. How are we going to address those challenges?

Rhodri Williams: Again, to encourage take-up is not something that falls within Ofcom’s responsibility. As I say, we do a lot of research and we co-operate with anybody who is interested in that area but, again, it is an area where the Welsh Government specifically has a programme of work addressing that point and, as it moves towards the procurement of superfast services, is also looking to ensure that whichever contractor is contracted to provide those services will take part in demand stimulation activity, not just putting in the cables.

Q112 Mrs James: But, you know, Rhodri, superfast is not really relevant when you cannot even download photographs. If I send photographs to one of my friends in Monmouth, she will take 20 or 30 minutes to download them, and I would not say she lives in a particularly rural area. Most people would be very happy just to get the basic speeds. If you are in a notspot area, anything has got to be better than what you currently have.

Rhodri Williams: The Broadband Support Scheme should be able to solve every single one of those cases. There should not be anybody in Wales who cannot get that service, other than going through the process of applying for the grant, getting it approved and getting the service installed. Once that is done, then anybody in Wales should be able to access at least 2 Mbps. So far, if I understand it correctly, about 1,600 applications have been processed, but the take-up is ongoing and will continue to be ongoing, I take it, until everybody who needs to have that service has it.

Q113 Mrs James: So you think the Government-set targets and the coverage are realistic and we can achieve them?

Chair: A quick yes or no will suffice there.

Rhodri Williams: Yes, if they are prepared to put the money in.

Q114 Jonathan Edwards: I think Ofcom designates mobile and satellite technology as complementary rather than mainstream. Does this indicate that the regulator is prejudiced towards fixed-line technology?

Matthew Conway: I am not sure I would recognise the designation, so, no, we are not prejudiced in the slightest. As I said, we would very much prefer to focus on outcomes and to the greatest extent possible be service-neutral in how those outcomes are delivered. No, I do not think we are biased at all; quite the reverse. We try to be as studiously neutral as we can.

Q115 Chair: Mr Williams, have you had many complaints about British Telecom from independent suppliers of broadband who have had difficulty getting access to the infrastructure, within Wales?

Rhodri Williams: We certainly have not had many complaints in Wales. Sometimes there are delays when a provider maybe of wireless services needs to utilise BT’s network for backhaul purposes, but I would not say that we have had many complaints. It is a small number. I do not know if the UK picture is different.

David Clarkson: I do not think we have had many what I would call formal complaints. There is the normal sort of friction and issues that go on, especially as new things are being brought out.

Q116 Chair: I have picked up quite a lot of friction, but maybe it has not-

Matthew Conway: That is normal.

Q117 Chair: Another issue that has been put to me is that all of the operators talk about download speeds, 2 Mbps up to 25 Mbps, or whatever it is, but there is very little mention of upload speed. For the allegorical farmer wanting to fill out forms or somebody running a business upload speeds are just as important, if not even more so, as download speeds. Is that something that you have looked into, and particularly whether or not operators are giving people accurate information as to what upload speeds might be?

Matthew Conway: Let me start with the general, which is that there has been an ongoing issue about the advertising of broadband speeds, whether that is upload or download, focusing on download. The Advertising Standards Authority has recently decreed that a communications provider should not advertise "up to" speeds that cannot be accessed by at least 10% of those who receive them. We welcome that as a step beyond what was there before and we will be very interested to see whether that has a positive effect on the market. We had argued for something a little bit more stringent in the form of typical speed ranges of broadband, the equivalent of miles per gallon, something where, as a consumer, you would intuitively understand that most people would get a particular range. However, this is an area where in the first instance the advertising is regulated by the ASA and we wait to see whether their decision has an impact.

On upload versus download, the focus is usually download because most people are pulling down large amounts of information rather than pushing large amounts up. Doubtless there will be some people for whom limited upload speeds will be an issue, but, if all you are doing is conducting your affairs online, then the kind of upload speeds that you typically see will not be a problem.

Q118 Chair: The final question from me, and possibly from everyone here, is whether you can clarify when the spectrum auction is going to take place.

Matthew Conway: We plan to publish a further consultation at the end of the year. We will then give stakeholders at least eight weeks to comment on that. Our aim is to make our decision and publish the statement in the summer, with the aim of the auction following a few months later, perhaps starting in the last quarter of next year.

Q119 Chair: So it will start a year from now?

Matthew Conway: Yes.

Q120 Geraint Davies: I have just a quick question. We have done a recent inquiry into inward investment opportunities in Wales. Can I just ask how important these things are-depth and speed of roll-out-in encouraging small companies to come to Wales so they can set up and access the global marketplace? How important strategically is this for Wales in terms of inward investment?

Rhodri Williams: It is not something that we research ourselves, but from evidence that is available from other sources it is very important. I recently visited Cornwall, where the provision of superfast services under a contract not exactly analogous but similar to the current one being implemented by the Welsh Government is already under way. I visited some small design companies and a pub that put lots of its material on the web in video format to encourage people to come and see what fish had come out of the sea that morning. You could actually see the guy standing there with his turbot or whatever.

Geraint Davies: I was thinking of virtual drinking.

Rhodri Williams: Particularly for those parts of Wales where the SME community is higher than the UK average-the Chair referred earlier to the agricultural community- broadband is now essential in order to undertake the various duties that farmers have for applications for animal passports and for filing returns, which have to be done online. I think it is very important. We certainly hear a lot about that.

Q121 Geraint Davies: In terms of the differentials between England and Wales, perhaps you can comment on those. One of the differentials is the fact that in Wales, if you are thinking of setting up a business, you know the people working for you, and their children at the moment could go to university for £3,000 a year tuition fees instead of £9,000. If you have, say, three children, you are talking about the difference between a £90,000 cost to the family and £30,000. Given that those things are in play, how important is it that this infrastructure is provided? Given that that infrastructure is there for SMEs to set up, do you anticipate a sort of accelerated migration of inward investment into Wales because of these other factors?

Matthew Conway: I think it is fair to say we have not looked at it in enough detail to give an answer.

Chair: I congratulate Members for the ingenious way that they have scored some political points. Thank you all very much indeed for coming along.

Prepared 14th September 2012