Delivering super-fast broadband in the UK

Issued December 5, 2008

Executive Summary

• BT welcomes this Ofcom consultation document as part of a series of publications in September designed to move forward the public policy and regulatory debate on Next Generation Access (NGA). This follows the Caio Review, the ongoing work of the Broadband Stakeholders Group (BSG), (including their recent costing report), Ofcom’s own New Build Statement and the European Commission’s Draft Recommendation. NGA is also, we understand, part of the scope of the Government’s new Digital Britain initiative.
• In understanding the public policy context, it is important to note that things have started to change in the period since Ofcom’s last NGA consultation in September 2007. BT announced in July this year that it was prepared to spend £1.5bn on deploying NGA, reaching up to10 million homes in the UK by the end of 2012. There have also been announcements from other companies at varying levels of scale.
• The response from the regulator to these developments needs to be practical and enabling and reflect the need for pragmatism and flexibility, not prescriptive and theoretical. In particular, the regulatory framework needs to recognise the economic realities of NGA investments and support the way industry wants to take forward NGA deployments. We welcome the fact that this document is a move in this direction, but more clarity is required to give investors certainty about Ofcom’s policy direction. This is why BT’s deployment plans are conditional on there being an acceptable regulatory framework. We look forward to Ofcom’s Statement, in response to this consultation, giving this clarity so that expenditure decisions can be made with confidence.
• This is particularly the case given that, despite the announced plans to begin to deploy NGA, demand remains uncertain. We have not yet seen the new applications that drive people to want very high bandwidth nor do we yet know how much premium people will be prepared to pay for very high speeds. We do not believe this will start to be proven until several years into NGA deployment, emphasising why decisions to invest in NGA are bold and carry risk. This is particularly so in the current economic climate.
• The scale of NGA investments, and the length of pay-back periods, means that it is vital that regulatory certainty is given, such that investment decisions are not undermined. This is an overarching requirement and it is important that individual policy positions are set within an overall policy framework long enough to give confidence to investors. We would suggest a 10 year horizon, with a presumption of no changes in direction unless evidence definitively suggests the need for change, an approach which we believe can still be accommodated within the EU framework of regular market reviews. Although Ofcom make a number of references in the document to the need for regulatory certainty, it is disappointing that there are no proposals to address this and BT urges Ofcom to focus on this area in its Statement.
• BT agrees with much of Ofcom’s overall approach to regulating NGA, as set out in the document. The stress on providing flexibility for trialling and piloting and the support for experimentation is welcome. However it should be noted that, to minimise costs for both Openreach and Communications Providers (CPs), the focus needs to be on providing regulatory certainty for the long term model and clarity on the path to full roll-out.
• We welcome Ofcom’s discussion of equivalence in this document – whilst we share Ofcom’s view that the Undertakings remain relevant to NGA, we believe the concept of equivalence can be developed to accommodate a range of pricing and product offerings. Going forward, it is possible to envisage Openreach offering a number of different NGA products to CPs on an equivalent basis. It is not appropriate nor was it ever intended in the Undertakings that there should be multiple EOI products in a single value chain.
• We also welcome the fact that Ofcom acknowledge that technology choice is best left to the market and that industry discussions are the best way of taking forward the development of the appropriate wholesale products. We believe that the Openreach product consultation process with its industry customers will provide the necessary clarity as to which wholesale products are required; Ofcom should support the outcome of this consultation and not seek to second-guess what the market wants.
• Competition should be at the deepest level that is effective and sustainable and hence it is important that the debate about wholesale products is not a theoretical one, but one which is based on economic realities. It is important that those products that can be economically-delivered are encouraged. We welcome Ofcom’s recognition that the choice between active and passive remedies is not as ‘black and white’ as is sometimes portrayed but more of a continuum. The Active Line Access (ALA) approach (which is being supported in the UK through Openreach’s Generic Ethernet Access (GEA) product) offers significantly better economics of deployment for all parties in the value chain, and, as acknowledged by Ofcom in this document, can still deliver significant capability for innovation and competitive differentiation. It is also more likely, we believe, to support downstream competition. Passive remedies are particularly unsuitable as a basis for delivering services from CPs focussed on the business market.
• This leads to some important conclusions for the regulatory approach required. If it is important for regulation to promote a wide and varied choice of CPs for consumers and businesses; to support consumers being able to switch between these CPs easily and at low cost; to prevent undesirable consumer outcomes such as the creation of ‘technology’ or vertically integrated ‘single CP’ islands; then the key regulatory imperative for passive remedies is not how to make the economics work, but rather how to maintain them as regulatory options without undermining the economics of NGA infrastructure deployment and the inherent consumer benefits of active NGA remedies.
• BT’s investment case for widespread NGA infrastructure deployment is underpinned by the efficiencies and economies of scale of active remedies, which also enable us to support an open wholesale market (and the vibrant downstream market that this generates). This can be put at risk by giving an inappropriate weighting to the as yet unproven arguments for unbundling the passive elements of NGA networks.
• This is emphasised by the fact that we have still not seen any evidence of significant scale demand for passive remedies such as sub-loop unbundling (SLU) and duct-sharing, and hence cannot, at this time accept that they warrant large scale investment. In reality, these remedies should only be considered and mandated if there is clear effective demand, and not on the basis of any theoretical competition models. As stated above the economics of NGA deployment are very fragile and therefore obligations to support both active and passive remedies in parallel will risk making any NGA investment uneconomic, particularly if complex internal consumption models are mandated. It is worth emphasising that all other national scale NGA deployments have been predicated on the basis of either state aid and/or a vertically-integrated incumbent; delivering scale NGA deployment on a competitive wholesale basis remains a significant challenge.
• Joint investment models, as discussed in this document, do in theory offer opportunities for risk-sharing but these should not be assessed solely on the basis of helping ‘fix’ the economics of passive remedies; much depends on the specifics of the model, and the detailed contractual arrangements which would support such a venture, as some approaches can actually increase rather than reduce financial and operational risk. Critical to the appropriate nature of this type of approach is the understanding of the impact on the market. For example, the potential creation of a single fully-integrated vertical competitor to the rest of the market brings with it its own concerns. Ofcom must ensure that should this model evolve, it does not destroy effective competition.
• While BT believes that Ofcom should leave the details of product specifications to industry discussions, we do believe it has a role in promoting the development of industry standards. We welcome the work Ofcom have done to date on ALA standards, both in the UK and in Europe, but we also believe there is a wider role to be exercised, in conjunction with existing standards bodies, in promoting standards in the home environment (e.g. CPE and home-wiring) to ensure the end-customer experience is prioritised and the take-up of NGA services encouraged. Similarly, BT agrees with the need to focus on migrations processes at an early stage; again we believe this area should be led by industry.
• Ofcom’s promotion of ALA standards underpins an ‘open access’ approach in relation to new build developments, such that all builders of NGA infrastructure are encouraged to offer wholesale access. This is welcomed but BT would like to see the need to offer access placed on a more formal basis, with reciprocal obligations placed on all owners of NGA assets, not just in relation to new build sites. In particular, there is asymmetry with the cable industry. We are disappointed that this issue has not been addressed in this document and we would look to Ofcom to cover this aspect in its Statement. Similarly, in considering the appropriateness of current regulation to NGA, Ofcom fail to consider BT’s Universal Services Obligation (USO). We feel it is time for a fundamental review of the traditional concept of universal service and a need to revisit scope, form and funding.
• BT agrees with Ofcom that the pricing of overlay active products can and should be left to the market, given the constraints imposed by competition, including the continued existence of copper-based broadband services, and on the basis that we intend to provide these on a non-discriminatory and equivalent basis. Clearly, thought has to be given, though, to pricing regimes when and if copper is replaced by fibre. The pricing of passive products should reflect risk and a full apportionment of fixed and common costs, including where costs are shared between passive and active products. It is also important that the cost-plus pricing approach fully reflects the likelihood of high development costs and low volumes. There are substantial risks for infrastructure investors if such products are regulated using inappropriate assumptions or prices are set in way which artificially promotes passive investment or arbitrage opportunities compared to active investments
• There is also clearly a need to consider how the transition from copper to fibre networks should take place. As take-up increases, it will make economic sense to avoid the costs of running parallel networks and, as this may start to happen on a geographic basis in the short to medium term, it is important that there is early certainty as to what such a transition process should look like. BT believes it is important that notice is given in advance of any fibre ‘cut-over’ and that there should be sufficient consultation with all stakeholders, including industry, on replacement products. However, there should be no requirement to replicate existing copper-based products over fibre, nor should there be scope through the consultation process, for any stakeholders to block reasonable change-out plans. We also welcome Ofcom’s general position that it is not the role of regulation to protect existing technologies and business models from innovative market developments. Industry has strong incentives to manage the transition efficiently, both to avoid cost duplication and to ensure a smooth customer experience for wholesale and end-customers
• We support Ofcom’s view that new business models, potentially involving content owners, should be encouraged. Appropriate consumer safeguards, including through improved transparency, may be necessary but it is important that any regulation of the Internet, should be ‘light touch’. In that context, BT agrees with Ofcom’s position in relation to Net Neutrality. Additionally, given that IPTV has been one of the main drivers of NGA investment (and source of revenue) in many other countries, Ofcom and other regulatory authorities should focus on ensuring that there is a level playing field as regards access to key content.
• With regard to the role for the public sector, BT agrees that it is premature to speculate on the limits of commercial roll-out and hence it is too early to think in terms of a next-generation digital divide that needs to be addressed in advance of commercial deployment actually taking place. However, there may be some areas, which would generally meet state-aid criteria, where there could be earlier action taken if funding sources are available. With uncertain demand, there is also a role for the public sector, particularly at regional level, in stimulating local demand and encouraging NGA take-up. In general, we believe that the public sector should focus on demand-side activities rather than replicating infrastructure. We are always keen to work in partnership with Regional Development Agencies, the Devolved Administrations and other local bodies, and both Ofcom and Government should actively facilitate this collaboration.
• Finally, Ofcom’s framework for action is a helpful categorisation of the activities that Ofcom are undertaking in relation to NGA and those that are being undertaken elsewhere. Given that NGA is likely to remain the focus for public policy debate (indeed this may even increase as deployments begin), it will be important to have clarity over the various initiatives. We look forward to understanding more from Government on the NGA aspects of the Digital Britain initiative, which will subsume the Government’s response to the Caio report. In terms of Ofcom’s role going forward, as indicated elsewhere in this response, we believe it is important to be clear where Ofcom should have a direct role and where industry should lead. We also look to Ofcom publishing the NGA Statement as soon as possible in the New Year in order to offer greater regulatory certainty to investors.

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BT would welcome any comments on the contents of this document. Comments should be addressed to Alan Lazarus by e-mail to alan.lazarus@bt.com.