Getting the message?

As promised, I’ve been mulling over Ed Richard's address to the Total Telecom World Conference last month.  Entitled ‘Competition & Investment in Superfast Broadband’, this was a curious speech, elegant in some ways but containing more than the usual share of empty rhetoric. In fairness, I thought it set out the challenges of the superfast era pretty well but it was rather less convincing in the solutions it offered. 

In essence, the difficulty is that ‘the ‘early fibre’ phase of broadband development involves considerably greater risk for investors and companies’ than did historic network upgrades, the uncertainties including:

·        the chosen deployment technologies;

·        consumer demand and willingness to pay;

·        capital expenditure and deployment costs;

·        end user equipment;

·        the nature of competition 

In response, says Richards, regulators will have to take the following approach: 

·        Avoid hostages to fortune by adopting policies that are light touch, long term and flexible

·        keep regulation and regulatory actions predictable

• respond to converged and bundled services by providing consumers with better quality information and by giving them more sophisticated switching options.

In other words, “We must accept that this phase of development is different to its predecessor and, most fundamentally, we must recognise that we need to aim to combine essential investment with effective competition…we aim to ensure that regulation is as adaptable, flexible and innovative as the broadband technologies that are being deployed”  Not exactly a policy blueprint, eh…?  And the central issue of how to avoid regulation acting as a disincentive to investment is barely touched on. 

It’s also unclear whether the suspected former tension between regulator and government has been resolved.  Richards is at pains to point out that the creation of ‘the best broadband network in Europe by 2015’ is government policy, not an Ofcom objective, and that “our regulatory approach needs to be seen alongside the context of the public policy objectives” (whatever that means).  More pointedly, Richards explains that: “we have worked with the government to identify some key criteria to ensure that public investment is the friend of competition and not inadvertently its enemy”.  Unfortunately, these criteria are not explained.  With that in mind, it’s curious to note that the latest consultation on duct & pole access – one of the central pillars of Richard’s regulatory strategy for the new era – has been launched by DCMS, rather than Ofcom.  Hmm…

Back from the dead…

Well, hello at last!  I must say it feels very good to be blogging again.  I won’t bore you today with all the ‘editorial’ reasons behind the extended silence: some will no doubt emerge over time.  For now, let’s just say that a planned summer vacation was unexpectedly extended into a seasonal sabbatical.  But the break did at least give me the chance to review the themes I’ve been addressing over the past or so.  

As I said in an earlier blog, one of my main concerns has been ‘the development of competition in the communications sector’, particularly the regulatory approach to fostering broadband access in the UK – both universality and the emergence of next generation, ‘superfast’ services. Underlying both issues is the worry that regulatory policies pay inadequate attention to the business models needed to encourage private sector investment in infrastructure projects with very long pay-back periods.  Over the past year this concern of mine with investment signals has to a large extent been played out through the blog’s close attention to the so-called ‘net neutrality’ debate, specifically its potential constraints on traffic management and the blocking commercial evolutions such as managed internet services or the emergence of new payment models. 

Looking back, I’ve noticed that possibly undue focus on net neutrality news may have crowded out the broader, and more substantive challenges of promoting infrastructure investment.  Happily, however, two fairly recent policy contributions by Ofcom may help to restore the balance. On 24^th November, it published its eagerly awaited statement, Ofcom's approach to net neutrality, setting out the steps it expects ISPs to take to ensure customers are aware of how internet traffic is being managed on their networks.  Without going into detail about the statement, it generally advocates a policy of non-intervention so far as traffic management is concerned, e.g.

“Our current view is that we should be able to rely on the operation of market forces to address the issues of blocking and discrimination, but we will keep this position under review”

For the time being, therefore, most concerns about neutrality are to be left to self-regulation and market forces. On that basis, I hope to avoid extensive coverage of the subject in future.  Instead, I’ll be concentrating on issues such as those raised in Ed Richard’s November 8th speech to the Total Telecom World Conference, ‘Competition & Investment in Superfast Broadband.  In fact I’ll be doing that next time…

The World is just horribly expensive…

I’ve been moaning lately about the need for some fresh thinking on how to improve the business case for investment in next generation broadband networks.  I had almost forgotten the reasons for my evangelism when some figures emanating from Brussels reminded me of the enormity of the task.

Earlier this year, I commented on the 'CEO Roundtable' convened by Neelie Kroes to consider ways of boosting NGA investment.  The follow-up meeting to that inaugural event was held in mid-July.  Looking at the outputs, one of the key themes addressed by the Working Groups of CEOs was ‘How to Achieve the 2020 European Digital Targets’.  (You may remember from an earlier piece that the EU has set the eye-watering objective that, by 2020, all European citizens should have access to broadband speeds of 30Mbps, and that 50% should have access to 100Mbps).  Based on data from the EIB, Arthur D. Little, BNP Paribas and McKinsey, the CEOs estimate that these targets will require total investment of between 140bn€ and 290bn€.  That’s a big spread – let’s just call it 200bn€ - but, given comparable metrics for the UK, it certainly sounds plausible.  According to some 2008 work done for the BSG by Analysys Mason, rolling out NGA beyond planned coverage to just 90% of the UK population, even employing the cheapest (FTTC) technology, is going to require further investment approaching £2.5bn.  That puts government subsidies of £530m (to include a universal service obligation) into context.  It also explains why the CEO Roundtable delivered a rather gloomy conclusion on European investment prospects:

“Under the current market and regulatory conditions, shareholders of telecom operators are not willing to commit the necessary funds to achieve a massive NGA roll-out. ROI expectations on NGA in Europe are not considered as favourable as in other markets such as wireless or as in other regions”.

One-trick pony...?

I recently bemoaned the lack of original thought in BT’s opening contribution to the current DCMS consultation on the Communications Review – particularly the absence of any new ideas on the broadband investment challenge.  Re-reading BT's response, I’m similarly dismayed at the apparent complacency of the dominant operator’s technology assumptions.  For instance:

“We believe that the [Ofcom] WLA market review reached reasonable and pragmatic outcomes with the Openreach ’active’ VULA product seen as the main basis for scale NGA delivery and wholesale competition… The economics of passives are challenging compared to VULA but they do have a possible, complementary role to play outside BT’s footprint… We see wireless as a useful means to distribute superfast broadband on a localised basis, but because of the very high speeds and the required network capacity…we do not believe that wireless is an effective alternative means to deliver superfast broadband speeds over wide areas”.

Many would challenge this BT-centric view of the UK’s NGA development.  For example, Antony Walker, CEO of the Broadband Stakeholder Group, has said that: “There simply isn’t a one size fits all technology solution to deliver a truly ubiquitous next generation broadband Britain, we’ll need to use all of the technologies available.” 

Walker’s comments marked the publication of a new report for the BSG by Analysys Mason on ‘The costs and capabilities of wireless and satellite technologies’.  The report suggests that, contrary to BT’s assertion, ‘terrestrial wireless technologies are capable of delivering a quality of service sufficient to meet the growing demand for capacity from households and small businesses within the decade ahead and that they could provide more cost effective solutions than fibre for about 15% of UK homes. With more spectrum, terrestrial wireless could provide a cost effective alternative to fibre across much of the so called final third of households’.

A Quantum of solace

I’d been hoping that submissions to Jeremy Hunt on the current Comms Review might have said something new or creative about the broadband investment challenge.  (The DCMS isn’t publishing these, so I’m grateful to Roger Darlington for providing a few links).  Sadly, those I’ve seen so far have been all too familiar and predictable.  For example, BT's response is dominated by well-rehearsed concerns about the proper scope and consistency of communications regulation – BT’s perennial pursuit of a level regulatory playing field.  For instance:

 “An asymmetric approach to regulating mobile, cable and pay TV markets has denied consumers effective choice and lower prices and restricted the ability of new entrants to innovate….

A regime that deals with bottlenecks in only one part of the market – fixed line telecommunications – is systematically biased in favour of the owners of bottleneck assets in other parts of the market – mobile and content….

Regulatory action to ensure premium TV content is available on a fair wholesale basis is required…

We have made clear our commitment to opening up our ducts and poles and believe other providers should be prepared to do the same with their own infrastructure…

It is crucial that all recipients of state aid funding offer wholesale access on the same basis as BT…any other outcome would be both unfair and legally questionable”. 

And, as ever, BT has no qualms about offering words of advice to the regulator: 

“Although Ofcom was established as a ‘converged’ regulator, it has never really regulated in a converged way across fixed telecoms, mobile, TV and cable…

The regulator should be vested with powers to act if markets require this, rather than an obligation to act…

We would like to see the Communications Act amended to give Ofcom the power to introduce ex ante regulation into markets such as pay TV…

Ofcom should have the powers to regulate media rights markets if that is necessary to promote effective competition, but should not be responsible for the regulation of copyright law or its enforcement.” 

I do, however, draw some small solace from a couple of sensible comments BT makes about internet regulation, i.e. 

“Government should assess the experience of limited forays into editorial regulation of the internet, e.g. rules on VOD services. They should not assume that the right response to an internet-related ‘problem’ is to regulate it…

In our view, it would be unhelpful for the Government to consider direct regulation of [ISP retail policies] until self-regulation has been given an opportunity to demonstrate its effectiveness”.

Shock horror! UK government raises the bar!

I recently looked at the published objectives of BDUK, the government’s broadband deployment agency, showing how the commitment to universal broadband coverage has evolved over time.  Generally speaking, there’s been a scaling back of ambition, absolute commitments and defined targets being replaced with more aspirational jargon.  For some time, the policy aims for ‘next generation’ or ‘superfast’ broadband seemed to be following a similar path, but then things changed…

BDUK’s original mission statement (under the former Labour administration) set the following objective:

To manage the spend of a ‘Next Generation Fund’ to deliver Next Generation Broadband to 90% of the country by 2017.

Under the coalition government, BDUK initially enjoyed joint management - by both BIS (the original parent) and DCMS. These two departments published the following revised aims:

[DCMS] Increase the penetration of high speed connectivity and plan for the use of public money (from whatever source) if necessary;

[BIS] Ensure this country has the best superfast broadband in Europe by the end of this parliament (2015).

BDUK’s recently published 'Delivery Model' document preserves the latter (BIS) objective, thus perpetuating both the undefined ‘best’ and the year 2015 as the relevant date for European benchmarking.  However, the document also takes note of the more explicit goals established under the EU’s ‘Europe 2020’ Strategy, i.e. to have 30Mbps available to all European citizens and for 50% access to 100Mbps by 2020.  Perhaps in recognition of the potential gulf between UK and EU objectives, Jeremy Hunt announced in May the government intention that ‘nine out of 10 homes and businesses in every county in the UK should have access to superfast broadband by 2015’. As a target, this seemed more comforting than the previous ‘best in Europe’ tag but still left some semantic doubts – what did ‘superfast’ mean? Why ‘90 per cent of people in each local authority area’ rather than plain, old ‘90% coverage’…?  Well, I’m happy to say that Ed Vaizey has now dispelled such doubts.  Speaking on the 5^th July at the Intellect Conference on ‘The future of digital entertainment’, his speech included the following:

”We’re pursuing ambitious plans to bring our infrastructure up to speed for a new digital age. We will ensure that 90% of the population have superfast broadband links by 2015 to greater than 24Mbps, and that there is universal coverage. The market will deliver the majority of this, but we have set aside more than £500 million to assist rollout”.

Now that target speed of 24 Mbps has some credibility as the dividing line between old and next generation broadband, so higher speeds will necessarily require some fibre in the access network.  And ‘90% of the population’ is reassuringly straightforward.  So, unlike its universal service pledge, the government’s commitment to the provision of superfast broadband has actually strengthened.  Bravo!

The world is not enough

Forgive the James Bond reference but I’ve been re-reading the DCMS rhetoric on the planned Communications Bill and I’m left a little saddened by the lack of ambition for the UK’s broadband infrastructure.  In his open letter to launch the current Comms review, Jeremy Hunt set out the government’s policy position as follows:

“Our approach is a combination of targeted financial support with £530 million available up to 2015 to support broadband rollout and regulatory and policy interventions aimed at reducing barriers to private investment in superfast broadband networks”.

So what does that mean in practice?  Some understandable local excitement about micro projects for new access hubs?  Yes.  Some tentative steps to open BT’s passive infrastructure (ducts and poles) to third parties?  Yes.  A co-ordinated plan to give the UK ‘the best broadband network in Europe’?  No way…

This is not meant to belittle the Government initiatives: they are worthwhile attempts to address pockets of demand for broadband that the private sector currently sees as unviable.  But the problem with any demand-driven model of infrastructure provision is that it is not forward looking.  It seems incredible that broadband traffic, probably the highest growth sector in the world – and universally acknowledged as the lifeblood of the digital economy – still relies on such a ‘catch-up’ investment strategy.  As with any ‘road-building’ plan, future demand for bandwidth is almost certain to exceed current expectations, so it’s no good dimensioning broadband networks for today’s needs.  Surely the time has come to develop a business model that encourages speculative investment in broadband capacity, thus putting the UK ahead of the digital demand curve…?

Question 9 of the DCMS consultation asks the following: “Is the current mix of regulation, competition and Government intervention right to stimulate investment in communications networks?”  Responses were due in by June 30^th; let’s hope that somebody pointed out that the current regime is not enough.

No panic, please, on neutrality regulation

Following last month’s bizarre machinations in the Dutch parliament, the country’s new net neutrality law is now heading in the wrong direction. Against this background of factional wrangling, it was refreshing to be reminded that the European Commission’s more cautious, ‘wait-and-see’ stance on further regulation is supported not only by network stakeholders but also by leading academics. 

In early 2009, a group of eminent European economists issued a statement on the inappropriateness of imposing increased internet regulation in the EU.  The statement concluded as follows:

“… so far, net neutrality in Europe is a solution looking for a problem which either does not exist or can be solved by mandating clearer customer information and using existing tools to deal with market power. The need for the legislation is unproven, and the unintended consequences on restricting variety, competition and innovation are too big for comfort”.

Despite the more recent clamour in the Netherlands - and elsewhere – for regulatory intervention, the economists’ sceptical view remains largely unchanged.  A paper by Martin Cave on ‘Competition and Consumer Protection Issues in the Net Neutrality Debate’ was submitted to the OECD Working Party on Competition & Regulation for its meeting on 27^th June (Paper ref. DAF/COMP/WP2 (2011) 4).  As before, Professor Cave considers that Europe’s relatively high level of retail competition in internet access has acted as a defence against the exertion of market power, and that any rules on access blocking would be premature:

“…given that currently there do not seem to be significant risks and evidence that exclusionary behaviour is an endemic feature of competition in Europe, ex post rules seem a better option”.

Indeed, Professor Cave goes on to point out the difficulties of even establishing ex ante regulations in a complex, multi-sided market such as the internet.  And he contends that some new optional powers, such as the imposition of a minimum QoS obligation on ISPs (under the revised Universal Service Directive), have been ‘introduced ahead of any evidence of need’:

“As a result, regulators such as BEREC are currently engaged in the task of defining the conditions in which such instrument might be applied…an ‘anti-precautionary’ principle can be applied to regulators, stating that they should not be granted powers ahead of demonstrated need”.

Ofcom please note….

Beware the psephologist!

It’s not often that I get the chance to use the word psephology in this blog but it sprang vividly to mind as I read the results of ISPreview’s latest opinion poll regarding net neutrality. This struck me as a prime example of the ways in which both the framing and interpretation of consumer surveys can reveal quite a lot about the views of the polling organisation itself.  In this case, could it be that ISPreview (like most neutrality fans) abhors the idea of any changes to the current internet business model?  Take the following survey question (and results), for example:

Who should foot the bill for your use of internet content?
The Customer (You) - 42.1%
Your ISP - 31.5%
Content Provider (e.g. Skype) - 26.2% 

A leading question perhaps?  Might the results have been different had the phrase ‘your use of internet content’ been replaced with, say, ‘the conveyance costs of the content you access’? 

As it is, ISPreview appears a little disappointed with the poll result:

“Less than half (42%) of the consumers questioned by ISPreview.co.uk agreed that customers should foot the bill for their own consumption of internet content, which is the normal way of doing things (i.e. the same way you pay for your gas or water supply)…” 

At a stroke, ISPreview thereby dismisses swathes of economic thought on the internet as a multi-sided market (and very different to the linear market for utilities).  Not content with this, the pollster then goes on to paint the dire consequences if the misguided 26.2% had their way: 

“It's not hard to imagine the chaos that could ensue if hundreds or even thousands of ISPs from around the world suddenly began demanding payments from content providers. Some would simply go out of business, thus harming the very content that makes the internet worth visiting…” 

Democracy in action…?

USC: going down?

BDUK, the government agency tasked with allocating funds to rural broadband projects recently (27^th May) announced the successful bidders for the latest round of DCMS subsidies.  Congratulations go to local authorities in Wiltshire, Norfolk and Devon & Somerset who, together with their delivery partners, will share £50m of funding towards new broadband pilots.  All well and good but, in order to get a better understanding of this process, I’ve been looking closely at BDUK’s recently published 'Delivery Model', a document which sets out its philosophy and preferred approaches to issues such as network design, procurement and funding. 

There are, predictably, some quite controversial points in this document but one I spotted early on was that BDUK’S objectives appear to have changed - again.  For instance, in relation to broadband availability, the outgoing Labour government crafted BDUK’s original mission statement as follows:

“To drive forward the government’s proposed Universal Service Commitment (USC) of ensuring broadband availability (at 2Mbps) to every UK household by 2012 “

Following the election, the new coalition government initially proposed joint ownership of BDUK – under both BIS (the original parent) and DCMS. The former realised that the initial USC timetable was not feasible, and modified the objective thus:

“To ensure delivery of the 2Mbps Universal Service Commitment within the lifetime of this parliament (2015)”

By contrast, the DCMS version at the same time (June 2010) was notably less prescriptive, i.e.

“Effectively use the funds provided to meet the Universal Service Commitment”.

Now, in BDUK’s latest publication, and with DCMS fully in control, we see a further tweak to the broadband commitment, i.e.

“To ensure delivery of Standard Broadband to virtually all communities in the UK within the lifetime of this parliament (2015)”.

 
Government targets for ‘superfast’ broadband have likewise seen multiple iterations but that’s another story…

Beware face value

Wednesday’s news release from the UK regulator was published under the unpromising heading of ‘Strengthening Ofcom’s consumer protection powers’.  Further examination revealed that UK legislation is being amended “as a result of revisions to the EU Electronic Communications Framework”.  So far, so bland.  But tucked away in the regulatory small print are some much more significant changes.  OK, so imposing a retail price cap on premium rate numbers is unlikely to set the pulse racing, but dig a little further… 

First we learn that the government proposes to widen Ofcom’s discretionary powers to recover costs in resolving disputes between warring parties. Apparently, the aim of this is ‘to encourage alternative dispute resolution where appropriate’ but I wonder whether many of those involved in disputes with BT would be persuaded by this rationale.

Secondly, in the context of net neutrality, Ofcom is expecting the revised EU Framework to grant it new traffic management powers, including the ability to require additional consumer information and to set a minimum broadband quality of service. ”This quality of service could be a minimum broadband speed to ensure a basic level of access for consumers”.  Watch this space.

Finally, Ofcom seems determined to extend infrastructure-sharing obligations beyond the BT network:

“As a result of revisions to the Framework Directive, the government intends to revise the Communications Act to empower Ofcom to require infrastructure sharing, including in cases where there is an absence of significant market power”.

This might be seen as a response to the complaints by Sky and others that it is ‘increasingly anomalous’ that Virgin Media’s cable network is closed to competition while BT's infrastructure is not. 

Appearances can be deceptive…

Back in business.

Hello again!  Apologies for the extended silence but April proved to be a very chaotic month here – too many children and bank holidays involved.  Anyway, I’ve used the extended break to catch up on my reading and there are a couple of interesting items I’d like to share…

As someone with absolutely no technical background, I wanted to devote at least part of my Easter reading to acquiring a better understanding of internet technology.  I still have a long way to go but, as a thought-provoking introduction, I thoroughly enjoyed Richard Bennett’s ITIF paper, Facts of Life: The Citizen's Guide to Network Engineering.  As well as describing the underlying technologies, Bennett’s paper also manages to comment on some of the controversy surrounding the development of traffic management techniques, e.g.

“The Internet’s dynamic process of self-modification is the key to its longevity and utility. It would be a supreme error for any regulatory body to insist that the Internet should be declared a finished system forbidden from further improvement”.

Oh, what a tangled web…

One of the practical problems with so-called ‘service based competition’ is that it requires setting regulated prices for access to the dominant operator’s physical infrastructure – the prices that Talk Talk, Sky and the rest pay for using the BT network.  Because such charges are supposed to be ‘forward looking’, they have to be based on the current (replacement) value of these assets, not their actual (historic) cost.  This is by no means an easy calculation but BT’s competitors are understandably concerned that it might involve some creative accounting techniques.  A report recently commissioned by their trade association (UKCTA) from Towerhouse Consulting drew attention to a number of weaknesses in the regime.

“In particular:

·         current cost accounting inevitably involves a high degree of judgement, and in some circumstances requires entirely arbitrary assumptions;

·         as a result, BT has the opportunity and incentive to choose these assumptions in a self-interested manner; and

·         the extent to which charge controls allow BT to recover more than their actual costs is not clear…”

Well, it is now.  In Ofcom’s ‘Charge control review for LLU and WLR services’, published today, the regulator goes to considerable lengths to demonstrate how some of BT’s assets appear to have been overvalued, specifically its holes in the ground.  Over the past two years, for example, BT spent a total of £360m on these ‘duct assets’.  Making some necessary adjustments for prices and BT’s buying power, Ofcom calculates a net replacement cost today of around £290million.  By comparison, BT’s own estimate of the replacement cost for these same assets is £480million, around 30% more than was actually spent when the assets were acquired.  Oops.

Titter ye not…

I was doing some research on FCC Chairman Julius Genachowski when I came across this video of him trumpeting the US National Broadband Plan.  Cynic that I am, I was fully prepared to hurl a few rotten tomatoes at the grandiose, self-serving publicity I expected.  There’s certainly some of that in the speech but there’s a lot of good stuff too.  And it occurred to me, now that Digital Britain appears to have sunk without trace, I have absolutely no idea where the UK’s own ‘broadband plan’ is heading (apart from a few hobby projects in rural outposts).  Maybe Jeremy, Ed & Co. could learn something from the FCC… 

Consensus shock horror!

Good heavens, I’m amazed to report an outbreak of cautious endorsement for the government’s handling of the net neutrality debate.  I don’t suppose it will last but yesterday’s all-party parliamentary committee debate certainly seems to have backed Ed Vaizey’s preference for self-regulation over state intervention.  But I suspect the networks and ISPs will have to do more to demonstrate that this is the right approach…

BSkyB takeover - tears before bedtime?

I suspect I’m not the only observer who feels somehow dissatisfied with the recent clearance of News Corporation’s takeover of BSkyB, ‘the fight that never was’.  A few months back, before Vince Cable lost control of the matter, many of us would have placed serious bets on the move being blocked. As Ivan Lewis, shadow culture secretary, said at that time: "The Murdoch empire has sometimes crossed reasonable boundaries with overzealous business practices and the assertion of political power. There is a case to answer, and the public interest can only be determined through proper scrutiny by the competent authorities."

And I think that sums it up: the concern was about both media plurality and the potential effects on competition.  However, the latter were subsequently taken out of play by the European Commission's clearance of the deal under EU merger regulation, leaving the more recent assessment by Ofcom to be confined to plurality issues.  That in itself has proved to be tricky balancing act for the UK regulator, the challenge being to ensure that editorial separation of Sky News does not undermine its long term financial support. 

And yet, there remains a nagging feeling that plurality ought not to have been the only game in town.  While Joaquín Almunia, the EU competition commissioner, might be ‘confident that this merger will not weaken competition in the United Kingdom’, I think some of us would have liked the UK authorities to make their own judgement on that. Listening to Ed Richards on yesterday’s Media Show on Radio 4, I rather think he agrees…

Infrastructure comparisons – revisited

OK, hand on heart, I really did plan to do a piece on the recently announced investment plans for the 'High Speed Two' rail network between London and Birmingham.  Given the paucity of government funding for ‘Digital Britain’, the idea of spending more than £30bn on a rail enhancement is difficult to comprehend.  Sadly, however, Chris Marsden spotted the same incongruity and he got there first.

Chris offered a straightforward comparison between the level of government investment in the rail and broadband projects, calculating a 10,000% difference.  Perhaps a more telling statistic is that, according to the 2008 Analysys Mason report for the Broadband Stakeholder Group, providing point-to-point fibre for every household in the UK (the most expensive broadband option) would cost less than £29bn.  Better value, surely…? 

Physician, know thy limitations

Glad to see that Neelie Kroes has been taking time out to talk to the private sector movers & shakers about “the broadband investment challenge”.  Her CEO Roundtable last week certainly boasted an impressive line-up of industry representation, and I’ve no doubt that the planned follow-on meeting (in mid-July) will help to develop the “holistic approach” the EU Commissioner says she’s looking for.

Thinking about the meaning of that word ‘holistic’, I was planning to launch a sermon on the need for the EU – and other regulators – to consider their own role in overcoming our current investment hurdles.  But then I saw TV coverage of David Cameron speaking at his ‘Enterprise Summit’ in the Midlands, calling for a ‘rebalancing’ of the UK economy towards long-term, export-led industry investment, and I was struck by the parallels between these two consultation exercises.

In the past, a few, relatively simple adjustments to government or regulatory policy instruments have been able to summon up some limited forms of investment – whether it’s been the development of retail and service-led competition in the communications sector or the creation of public sector jobs in former industrial zones.  Sadly, those at the helm seem to think that the creation of a different, more sustainable investment model is simply a matter of plotting a new course.

In reality, there are very few levers available to the EU – or the coalition government – in their quest to promote competitive investment in infrastructure (or productive capacity).  Indeed, if the authorities only acknowledged their limitations in this context, we might have avoided some of the unhelpful initiatives and interventions of the past.  Because a key attribute of this kind of investment is its reliance on long-term payback – over 20 years in many cases.  So, even if they can help create the right ‘climate for investment’, one of the essential skills required of regulators is patience. 

A blogger’s prerogative

One of the joys of blogging is that there’s nothing to stop you occasionally changing your mind.  Or perhaps more accurately, there’s the chance now and then to reassess some throwaway remarks of the past.  During an enforced lull in new writing, I’ve had the opportunity to review some older posts, and I’d like to offer a couple of retractions.

First, I recently teased my good friends at Virgin Media for inadvertently adopting a ‘little Britain’ policy position – specifically, in their attitude towards the vexed topic of net neutrality.  Secondly, I extended some real sympathy towards Ed Richards for the rigour of his grilling by the Public Accounts Committee.  On reflection, I would now like to recant both these positions.

My change of heart stems from a growing concern that there is something fundamentally flawed in our current approach to the development of competition in the communications sector.  Now, this is a BIG topic, and one that I’ll have to revisit, but let me begin by explaining why I slightly regret those two earlier posts.

There was a time when the UK telecoms regulator was an offshoot of the old Department of Trade & Industry.  In his ‘end of term report’, the DG was required to set out not only what he’d done and why, but also how his actions had enhanced the national cause – in terms of making the UK a better place to do business, encouraging inward investment and so on.  To be sure, there were a lot of shortcomings in that regime but it was at least oriented towards outcomes, towards delivering tangible results for UK plc.  The situation today is rather different.  Ofcom is undoubtedly a more sophisticated (and better resourced) regulator than any of its predecessors.  Its outputs and decision-making are altogether more professional, and it regularly tops the EU league tables for regulatory performance.  And yet, it seems remarkably difficult to find evidence of real – sustainable - industry development.  Ofcom has dined out on its success in the implementation of local loop unbundling but, in the transition to next generation broadband, the fruits of that success may be short-lived.  And, as I've pointed out before, there are increasing signs that the UK’s communications infrastructure is falling well behind international standards. 

Reading again the PAC's report on Ofcom's effectiveness, I’m inclined to feel less sympathetic towards Ed Richards for his interrogation by the Committee.  In fact, I think their report gets it absolutely right: “Ofcom publishes a lot of information about consumer outcomes, but acknowledges that it needs to do more to define the specific results its work is attempting to achieve. Ofcom should set out in its Annual Plan what outcomes it intends to deliver, expressed in a clearly defined and measurable way, and indicating in advance what success will look like”.

Mea culpa!

Called to account

I’m grateful to Roger Darlington for drawing my attention to the PAC's Report on Ofcom’s effectiveness as a converged regulator.  I’ve previously been a mite critical of the organisation, both for its value-for-money claims and – a related issue - for its tendency to be rather selective in its success stories.  The PAC effectively echoed both criticisms during its oral evidence session on 10^th December, with Stephen Barclay being particularly brutal on Ofcom’s efficiency claims.  For example:

“So, we have an organisation that spent £80 million on the merger, on being set up; the actual reduction in total spend is £70 million; and a fair chunk of that £70 million is being made up of the benefits of the merger, such as getting rid of properties, rather than what I would call traditional efficiency savings… You're dressing up merger benefits as efficiency savings and then you're double-counting them over the years compared to the methodology set out by the NAO”.

 

Ed Richards proved to be a pugnacious defender of Ofcom’s record (and arithmetic) but even he must have wilted a bit under the Committee’s relentless and forensic scrutiny.  After a particularly heated exchange, Barclay dealt a shuddering blow:

“Mr Richards, it's the role of the Committee to ask questions. I'm sorry if that upsets you”.

Ouch!

Welcome to my world

Don’t get me wrong: I have lots of sympathy for the folks at Nokia.  When your CEO publicly announces that the company has lost the plot strategically, it must be pretty disheartening.  And yet, there was something quite exciting about Stephen Elop’s admission of failure…

As someone immersed in the ‘science’ of economic regulation, I have increasingly felt that regulators and other competition authorities expend far too much energy on the ‘static’ aspects of market definition and assessment, and too little time on understanding the underlying market dynamics – where are the new sources of competitive advantage emerging?  Where and how is market power being exerted?

In fairness to Ofcom, the UK regulator seems to acknowledge the need for a new ‘toolkit’ in its assessment of the internet domain.  For example, its September consultation on Traffic Management and Net Neutrality devoted quite a bit of attention to the (relatively) new analytical concept of two-sided markets, and how this might challenge traditional notions such as ‘market power’.   But the Nokia story demonstrates that we’re only just beginning to understand how radically the economics of the communications sector have changed.

Net Chauvinism?

In an idle moment, I decide to re-examine the responses to the EC net neutrality consultation.   On the lookout for quirky ideas, I’m gratified  to see that my old friends at Virgin Media take a refreshingly parochial view of internet regulation

 “…we would caution against the potential influence of international perspectives on the matter..A situation in which the European policy debate is unduly influenced or prejudiced by developments in other territories must be avoided”.

God save The Queen.

It’s the economics, stupid!

Worrying signs from the UK’s broadband laboratory. It was always a concern that the coalition government’s policy response to a potential digital divide was to sponsor ‘superfast’ broadband trials in some rural communities dominated by sheep.  How would this help?

Well, a pivotal objective would be to see whether these islands of public sector investment could create a sustainable business model, i.e. one that is not dependent on ongoing subsidy.  And it appears that BDUK, the agency responsible for deploying broadband subsidies is indeed in search of a framework ‘for monitoring the progress and benefits of these pilots and subsequent broadband projects in order to inform the approach to wider roll-out of super-fast broadband’.  Sadly, however, the framework appears to have taken on additional baggage.  For instance, it now seems that a core objective of the pilots is ’to understand more specifically the associated economic, practical and regulatory challenges and constraints and help refine and inform future approaches to deploying super-fast broadband’.  Baa!

Cablegate – behind the scenes

Amid all the political controversy surrounding Ofcom’s assessment of the takeover of BSkyB, the regulator’s disclosure of internal communications (following a freedom of information request) throws up some delicious insights. 

One that amply demonstrates the sang froid of our regulatory regime is the point at which Ofcom was forced to change horses in its reporting line.  Following an exhausting exchange of e-mails about precisely how and when the report would be delivered to the Business Secretary, a low-key internal memo of 22^nd December signalled the reshuffle thus:  “As widely reported, we will now be submitting our report to DCMS. It is therefore unclear whether DCMS will take the same view on issues such as publication as BIS”.  (In fact, the report was delivered to DCMS on time, 31^st December, and is available here).

Another revelation was that Ofcom was able to recharge the cost of the exercise.  In the formal words of another e-mail: “This work constitutes a Public Interest Test under the Enterprise Act, and therefore the costs fall under the definition of orphan expenditure which must be funded by Government through Grant-in-Aid, rather than by Ofcom stakeholders.

And the cost?  A very reasonable £177k.

First signs of ‘neutrality creep’ at Westminster

What is it about internet commerce that leads some to believe the normal rules of economic regulation should be stood on their head?  First we had Senator Al Franken claiming that the Comcast/NBC merger violated Net Neutrality principles. Now, on this side of the Atlantic, we have Graham Jones MP, arguing that Google’s success as a search engine is squeezing out UK competitors: “British companies are being stifled. Moreover, the Treasury is losing out," according to Jones.  And what does the MP for Hyndburn see as the solution to this grave situation?  A complaint to the OFT, perhaps, or a competition reference to the EU?  No, what we need is a whole new layer of regulation!

“It is time to look beyond network neutrality and consider search neutrality: the principle that search engines should have no editorial policies other than that their results be comprehensive, impartial and based solely on relevance… Without search neutrality rules to constrain Google's competitive advantage, we may be heading toward a bleakly uniform world of Google everything…”

I’m no lobbyist for Google, and they certainly don’t need me to defend their business practices, but I don’t see how the company can be criticised for being good at what it does.  As for global domination, brand pervasiveness is nothing new in the UK: just think Tesco…

Ofcom finally blinks

In an earlier piece, I described how responsibillity for UK broadband policy has bounced between government departments in the 18 months since Digital Britain was published. Throughout this period, the industry regulator has remained essentially silent on the Report’s proposals – even the idea of using public funds to promote broadband deployment.  As Peter Phillips of Ofcom said at the time: ‘Spending public money to build out the broadband network is primarily a question for Government rather than regulators’.

OK, but it’s that word ‘primarily’ that matters here.  While Ofcom might go on pretending that issues such as defining or developing a universal broadband commitment were outside its brief, it was only a matter of time before the hoopla emanating from DCMS and BIS was going to rub up against the core policies of even the most myopic communications regulator – not least Jeremy Hunt’s £830 million strategy to secure ‘Britain’s Superfast Broadband future’.

And so it came to pass that Ed Richards spake at the closing session of the Oxford Media Convention.  And he did issue dire warnings against the creations of government, speaking thus:

“…we must also not forget the Government’s £830 million investment, through the licence fee, where we will be keeping a very close eye to ensure that proposals emanating from that expenditure and the procurement associated with it do not distort competition and do not inadvertently create islands of monopoly, offering short term benefits but with long term costs”.

And it was good.

UK broadband orphaned again?

Is it just me that finds the recent transfer of telecoms policy to DCMS a little depressing?  Perhaps I fret too much about semantics but there’s a bit of a clue in Jeremy Hunt’s job title –‘Secretary of State for Culture, Olympics, Media and Sport’.  That’s a pretty eclectic brief already, and perhaps not a natural home for issues such as the development of the UK’s next generation broadband infrastructure.

There’s some history here. The Digital Britain Report, essentially the Labour government’s roadmap for the UK’s  broadband future, was published in July 2009 by Stephen Carter, then the Under-Secretary of State for Communications, Technology and Broadcasting.  In spite of its strong steer for UK broadband policy, the White Paper was effectively orphaned when Carter subsequently resigned his ministerial position to pursue a career outside government.  Responsibility for delivering the report’s recommendations then fell to Stephen Timms as a minister within BIS - in addition to his existing position as Financial Secretary to the Treasury (a dual role that attracted considerable criticism).

Under the coalition, the broadband mantle was passed to Jeremy Hunt, the incoming Culture Secretary, but BIS (under Vince Cable) has, until recently, been expanding its own role.  Indeed, this joint departmental parentage was formalised when it was announced that BDUK, the government agency tasked with overseeing broadband deployment, would be “reporting to Ed Vaizey (as a joint DCMS & BIS minister)”.  However, as part of the fallout from Vince Cable’s ‘war on Murdoch’ gaffe, Vaizey reverts to being a straightforward DCMS minister.

Oh well, perhaps once the Olympics are out of the way, telecoms policy will stand more chance of getting the attention it deserves…