Session #3
Ben Verwaayen, CEO, BT
The Networked Economy
Who could organise such a symposium a week before we submit our answers to OFCOM? OFCOM! Many challenges in providing the answers to the questions in the debate. Was not originally a fan of strategic review, but coming round.
It’s about being able to make decisions and stick to them. Are we willing to make regulatory choices? Can disagree about the choices. Don’t want a mess. Not because of bad people. It’s bad behaviour. Takes courage, vision and commitment to make choice.
OFCOM was smart and put the choice in BT’s court. Not so sure this was the right thing to do. There are some choices the incumbent cannot take; someone else must take them.
Example. Passionate about NGN. It’s a competitive input into every part of UK economy. Every single company has plan involving activities from abroad incorporated into own activities without physical movement. Used to call this outsourcing. A physical proximity as if in one room. Need real broadband capabilities in every city, in rural areas. Also care because do we have capability to reset the clock and have better transparency between BT and the rest of the industry. Not by going back to the repair the old [stable systems], but negotiated with the rest of the industry.
But not up to BT whether to make this investment decision. The investors make the capital allocation decision. The clarity of the return and risk depends on the regulator.
BT’s task is threefold. Deliver the network the economy needs; deliver transparency that enables predictable returns; deliver new services.
If the only differentiation we have is “one penny less” then commoditisation is inevitable. Need to innovate in services. [Oh my God!]
Only achievable if fix an intermediate step. One way is to adopt OFCOM’s Option 2 [Enterprise Act structural separation.] What is a settlement? An agreement on a purpose, and a commitment to deliver. So far BT has delivered everything it said it would, and delivered it on time. [Stop giggling down the back!] Have only lost one competition appeals tribunal, and few cases brought. And the one lost [on illegal privacy invasion on save calls] was ruled because of OFCOM rules changing.
Firm commitment to deliver. Will deliver LLU. Will feel bad if that’s the only taste in town. ISPs demand from BT a portfolio of opportunities. LLU an opportunity for some, but not say if you’re a small ISP. We were stuck in technical language on product margin squeeze tests.
Perceived BT bad behaviour. But perception is reality with a time lag.
An obsession with equivalence of input. Look at 21CN and opportunity to include regulator in design. Equivalence of input may burden small ISPs with inappropriate processes, and burden BT with pointless temporary investments.
Have not even discussed OFCOM option #1 – refrain from regulation. Have to find new employment for 535 regulators, so not an attractive option. Would say there is option for #1 as #2. In a country built on compromise
This is a market that represents 7% of all UK capital investment. Industry that directly or indirectly employs 2m people. 3 years ago we were a par with Albania. Now by far are #1 in G7 [his PR people are good!]. BB penetration almost as good as mains water [they’re really good!].
Q: Comment of behavioural correction for BT.
A: Need more differentiation than price. Need service differentiation. Thought behaviour issues bypassing changes in last 3 years, based on anecdotal evidence. Believe we are best in class in compliance and training. Some anecdotes are justified. Should just let it go.
Q: 21CN, but many new disruptive technologies like VoIP (e.g. Google VoIP). Is BT happy to see his eat up voice revenue?
A: VoIP today is competing on price. Interesting thing of NGN is based on IP including voice. Trick is keep the service the same while changing the technology. Gives you more flexibility. Today’s network drives the service. Voice service on voice network. New network is service agnostic. Just one network, not a patchwork. High risk, different pattern of investments.
[AKA - we can’t solve Paradox of Best Network, so need huge price leeway now to make up for it.]
Q: BT delivers on its word, just very late, by which time irrelevant.
A: Of course it takes time. Should take less time. I tell my management team that all the time. Rest of the industry takes just as long. Can deliver commitment and resolve to do better.
Q: 21CN will deliver significant savings to BT. Does BT plan to pass on those savings to customers, particularly wholesale customers.
A: Not all of it! Expect a return on investment. Call London-Glasgow has gone from 90p to 5p in years. Predict there will be access platform competition [he would say this…]. WiMAX will be successful. Satellite.
Q: Knowing what you know about 21CN, would you advise customers to invest in LLU?
A: Yes. Gives you tools to differentiate, a nice margin. There will be multiple ways to satisfy need for viable business model.
Q: What are key threats to BT? Look 5 years out and say how you see BT in the future.
A: 2 weeks before Q3 resusts! Industry will be a convergence industry. IT and comms into ICT. Mobile and fixed. Services and network [!!!!]. Service is confined in the network now. FTTH and level of exchange [?]. Telecom will be a competitive regional weapon like oil. Flat-rate services, not metered. Lots of video-based new services. [They’re going to keep bandwidth scarce enough to force you through their video servers and pay the toll…]
Q: Question of LLU pricing.
A: Waffle.
Keith Monserrat, Director of Policy, ntl cable
A wave of deja-vu. Almost 10 years ago I gave a similar speech on future of telecoms. Much technical advance, stock market adjustment, but less change in competitive environment.
Double-whammy of opportunity. Requires choice. Failure will cause us to revert to a monopoly and less innovation.
Opportunity #1: Strategic telecoms review. Allows industry to stand and look back.
Opportunity #2: Migration to all-IP network. Voice networks being replaced. Fundamental shift, crossing of technology rubicon. Technology that isn’t important. It’s the services.
How does telecoms market look to customer? Not bad! Prices low and falling. Even lower in the UK than US. Many price packages to choose from. Direct and indirect suppliers. Multiple BB access methods rolling out.
Cable industry a significant role. Misconception there has been no investment in access network. Cable has hybrid fiber and coax to within 500m of house. BT responded by deploying DSL in cable franchise areas. Price was spending 2001-3 in financial restructuring. Have just deployed VoD.
Potential to deploy digital UK. 45% of homes without a PC, almost 100% TV penetration. Demographic of cable covers many of these homes. Simple and ubiquitous mechanism of cable. [Hah! I see DRM for media content being used to control the edge and thus price discriminate services.]
UK still doesn’t have prices and bandwidth of Far East or Scandinavia. Still as a nation reliant on BT’s copper access. Almost all competitors reliant on BT for base products. Most innovation outside of BT. Forced to respond to these developments. Most competitors supported by a regulatory subsidy, which gives them an interest in keeping BT regulated.
Initial competition in international services. Created arbitrage opportunity to new entrants that depended on BT having high prices. They will always have an interest in intrusive regulation.
Consumers should be able to determine market outcomes. Current market does not open as a market. One supplier with power at wholesale and retail level. Means UK has fallen behind.
In France, 28Mbps to the home; Netherlands, 20Mbps is the norm. Will fall behind in national competitiveness. But not a pessimist. Strategic review enables us to fix market failure, put Britain at the front, if we make the right decisions. Grand unifiying IP network.
Problem is access. Like having a fast motorway network fed only by country lanes. Need to make benefits of reliability and speed available everywhere, and only a functioning market can deliver. Regulation can’t deliver what competition does. Requires three principles: 1. OFCOM needs clear statement on self-sustaining competitive market. 2. Regulatory certainty. 3. Pricing of wholesale products must promote, not mimic, competition.
Equivalence: should apply to enduring bottlenecks. Excellent principle. Devil is in the detail. Definition of an enduring bottleneck? Market with no BT competition? Market with no long-term prospect of self-sustaining competition (i.e. lives without regulation)? Regulation makes a rational investor keep money away from the bottleneck because of risk of change in regulatory strategy.
Classic definition is the place where demand exceeds supply. But alternative is where incumbent has enduring economies of scale that makes it difficult to compete.
Imagine a cable down the street. Odd numbered houses can access the cable. No economic bottleneck. On even side of the road, they can’t. Is there a bottleneck? Some significant incremental cost of serving even numbered houses. Doesn’t preclude a market. Suppose even numbers are declared a bottleneck, access to BT’s copper at regulated price. Suddenly no reason to build competing network.
Move somewhere LLU is unattractive because of low population density. Lowest level of competition is Datastream level. Natural monopoly becomes entrenched and a self-fulfilling monopoly.
Becomes crucial to whole country, as market structure becomes entrenched. Will have a patchwork quilt of remedies. No need for equivalence in some places, and at different levels of network in other places. Herculean task for BT to account for it. Impossible to regulate behaviour.
If OFCOM applies LLU then it hands a regulatory subsidy to service-based competition. UK relying on a single company to innovate in the absence of competitive pressure.
Investors must be able to earn a reasonable need, operators respond to customer need. Consumers should have a choice of substitutable access networks: fiber, copper, coax, wireless. Implementation must match strategy. OFCOM needs vigilance so what is defined in strategic review. Price of regulated wholesale product sends vital signal to investors. Regulatory price should encourage entry at deepest level.
Cost should be at that of an efficient entrant, not inflated cost of incumbent. Indifference between entry and wholesale. Many will enter. Ex-ante regulation will become less necessary.
Hybrid coax is more future-proof than copper; and fiber-copper is closer than BT exchange. 10Gbps in fiber, plenty to share with fast DSL.
Use a lot of the capacity for broadcast TV. Will be less future demand for broadcast TV, switch to VoD. Can offer 100Mbps without further network build.
Bottlenecks and equivalence entrench monopoly.
If prices are held down by short-term need or political intervention it hurts investment. Policies must stimulate and not mimic competition.
Mike O’Brien, Minister for Energy and E-commerce
Telecoms is vital to competitive economy. UK telecoms one of the most competitive in the world, 100s of service providers, as many mobiles as people. Approaching 99% BB coverage, more penetration of Germany. A good result for government and industry. Falling prices stimulate take-up. LLU working.
BT moving to an IP network. Once-in-a-generation opportunity. Chance to have equality of access from day 1. [Oh dear, more entrenched regulation. Are we going to be at the mercy of BT forever]
But Internet has darker side – computer security, spam and viruses. UK Internet Security campaign to be launched this spring. Straightforward security measures. Need confidence in BB. If we allow development of darker side people become afraid to do business, allow children online. Have already acted on Internet dialler scams. Will respond. People will find new scams, make money. Ongoing effort to keep productive use of Internet ahead of fraud and corruption.
Also looking to enforcement powers of information commissioner. OFCOM right to stabilise regulatory environment. Key government interest to keep regulation fair and proportionate. Consumer protection important where regulation is drawn back. Less regulation cannot mean more corruption, spam and fraud. [So are BT are going to promise to create a “safe” world in return for political favours?]
Telecom accounts cannot be slammed. Happened to an 83 year-old constituent. Fixed telecom suppliers need a sales and marketing code of practise. Avoid problems of gas and electricity markets. Cannot have people left behind, need to address universal service order.
Government will engage with EU on regulation policy. UK businesses will get access to European markets. Commission will have universal service directive next year. Would like to see OFCOM regulatory reforms implemented across the EU. A priority for UK presidency of EU. All EU states will have telecom markets as open as UK’s.
A balance of regulation: public safety and benefit vs. growth and competition. Huge new consumer demand. [Gee, this feels very pre-Cluetrain. Consumer, consumer, consumer. Not participants, citizens, producers.] British companies will be at the forefront.
Q: There’s no consumer representative as we have for water and electricity regulation. Will we see OFCOM have a greater role?
A: OFCOM won’t tell consumers which tariff is right. Need clear Ts&Cs, pricing. Don’t need a consumer group yet.
Q: Music industry suffering from fraud [P2P sharing]. What to do?
A: Need new international agreements to protect content providers. Need to build up a secure market in these areas. Have discussed with Japanese and Koreans. But what about the Chinese? Complex problems for government to grapple with. Want to see British economy expand in these areas. Cross-border enforcement of intellectual property rights.
Q: Do we want to enforce foreign copyright? Also, UK is streets ahead in IWF and Hotlines. Have fantastic infrastructure. [WTF!?!!]
Q: We’re a small-medium ISP. A lot of traffic is P2P. Mould make it into a legitimate process. New pricing and marketing. A reason for a lot of illegal activity is due to inflexibility of pricing and access to new media.
Session #4 Will equivalence work?
A rather dry discussion on the mechanics of “equivalence”. I’ll spare you the pain and me the typing.
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