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!