Another fine mess

The inquiry by the House of Lords Select Committee on superfast broadband continues to provide excellent entertainment.  Last week saw Culture Minister Ed Vaizey and Robert Sullivan, CEO of BDUK, appearing before the Committee as a double act.  Vaizey even volunteered their dual performance as a Laurel and Hardy routine but, with all the backslapping going on, it was difficult to work out which one was doing the jokes.  Judge for yourself… 

Ed Vaizey on the demise of the idea to locate ‘digital hubs in every village’:

“ No. Perhaps I was a little naive at the beginning, when I first became the Minister, that community broadband would play a major part in procurement projects of this scale. But I have supported community broadband as and when I can. My door has always been open… I think that community broadband is viable in small local communities where people are prepared to put the work in and make the difference, but it is not necessarily the solution for a large-scale, countywide project”.

Well, no… 

Robert Sullivan on achievement of the EU Digital Agenda targets:

“The 50% take-up at 100 Mbps is challenging because achieving 50% take-up is going to be difficult…. As I said at the beginning, we are very confident we have a very robust plan for getting to the 2015 targets, and I think we will be well on the road to the 2020 targets but there is going to be further work necessary to work out the most efficient mechanism and route to deliver that”.

Well, yes...

Faites vos jeux

I have in the past been critical of European Commissioner Neelie Kroes for taking an unduly consumer-oriented view of the pursuit of competition in telecoms markets.  Her more recent comments on the importance of new network investment, and its benefits, were therefore very welcome – if a little intriguing.  Her comments, marking the publication of the second edition of the Commission’s Digital Agenda Scorecard, were reported as follows: 

“Europeans are hungry for digital technologies and more digital choices, but governments and industry are not keeping up with them…This attachment to 20th century policy mindsets and business models is hurting Europe’s economy. It’s a terrible shame. We are shooting ourselves in the foot by under-investing. Europe will be flattened by its global competitors if we continue to be complacent.” 

Well, that’s powerful stuff, and the new emphasis on international competitiveness is particularly refreshing.  (It’s gung-ho, battlefield tone contrasts markedly with the reactive, ‘evidence-based’ stance often adopted by our UK regulator).  But what are we to make of that allusion to ‘20th century policy mindsets and business models’?  In what way should mindsets and business models adapt to the 21^st century? 

It’s not for me to second-guess Neelie’s thinking but the idea that things may be changing does reflect the shift in the Commission’s focus away from the ‘steady-state’ objective of connecting all citizens to basic broadband and more towards facilitating the roll-out of superfast and even ‘ultra-fast’ networks.  Earlier this month, the EC published a consultation on proposed new rules for state aid funding of broadband networks.  This guidance asserts that NGA represents a step-change in technology, rather than just an upgrade, underlining the risk of a new digital divide if some areas are left behind: 

"It is important to bear in mind that in the longer term NGA networks are expected to supersede existing basic broadband networks and not just to upgrade them. To the extent that NGA networks require a different network architecture…it is likely that in the future there will be marked differences emerging between areas that will be covered and areas that will not covered by NGA networks." 

There’s a new game in town…

The penny drops –slowly.

I’m delighted to see that Neelie Kroes, EU Commissioner for the Digital Agenda, has begun to pick up a few home truths about the infrastructure investment process.  She has, for some time, been exhorting Europe’s telecom companies to get their act together on investment in next-generation, ‘superfast’, broadband networks but the industry has been muttering unhappily about the various practical difficulties.  Not least of these is the fact that the financial markets are rather daunted by the investment challenge: shares of industry leading players such as Telefonica and Deutsche Telekom are at 10-year lows. Investors are therefore looking for ways to reduce the risk inherent in the superfast project, mitigate costs or improve their access to capital.  We’ve already seen mergers and asset-sharing deals emerge in the UK mobile sector and similar consolidations seem likely in mainland Europe.  Slightly surprisingly, the EU Commissioner recognises this as a positive market response: 

"Having a few pan-European operators that are strong in the cross-border market would not necessarily be bad for competition," said Kroes, adding that protecting consumers was about more than just ensuring a given number of operators in each country…It can make sense ... and be good for investment and innovation."

At the same time, however, the EU needs to decide quickly on how it will regulate access prices – particularly for legacy networks – in the transition to superfast ubiquity.  Kroes has said that she wants “to give economically sound principles to countries' regulators to help them set regulated copper prices, and we are identifying the most appropriate costing methodologies."   But there is a real fear that the Commission might shift the goalposts in a way that undermines investment decisions.  As one telecoms analyst put it:

"You cannot ask pension funds to put money into something that has an eight-year payback with no guarantee that the rules won't change in a way that destroys any return,"

The broader lesson for Kroes is that her pro-consumer agenda throws up some conflicting objectives.  As I’ve noted before, the imperative for network investment is bound to require some compromises in the perfect competition model.

Push-me/Pull-you?

Interesting footnote to this week’s announcement of a network-sharing agreement between Telefonica (O2) and Vodafone.  According to the New York Times , the companies will continue to charge each other termination fees for calls between the two of them.  That is, they will continue to charge so-called ‘off-net’ fees for calls that actually remain within the jointly owned network.  Does this strike anyone else as slightly odd?  The NYT also reports that an investment fund manager - Sanford C. Bernstein & Company – has estimated that the network-sharing arrangement could generate savings of up to $1.9bn for each operator.  If the companies continue to raise off-net termination charges, will any of these savings be passed on to mobile customers?  Or is this a zero-sum-game?  Smarter thinkers please advise…

Castles in the air

The news that the government has decided it now won’t bother with a Green Paper for the forthcoming Communications Bill came as little real surprise. The Green Paper was originally scheduled for “toward the end of 2011” but accumulated delays were fatally compounded by Jeremy Hunt’s required appearance before the Leveson inquiry – and the possible need to incorporate lessons from the inquiry in new legislation.  Slightly more surprising, however, was the DCMS explanation for its preferred approach.

“To help inform policy options for a White Paper, Government will be holding a number of half-day seminars. The seminars will cover a range of topics, focussing on key questions in each policy area”. Communications Minister Ed Vaizey added:

“Through these seminars, we will look in detail at how best to drive investment and competition. We want to shape the Communications Bill so that we have the right framework to secure our place as Europe’s tech hub.”

Wow, this is heady stuff.  Only last month, the DCMS guidance notes for its Super-Connected Cities program appeared to endorse the (highly ambitious) ‘EU 2020’ access targets (see para. 2.4); now we have the UK seeming to aspire to broadband dominance.  So what are these key policy questions that the seminars will need to consider?  Structural separation of BT, perhaps?  The application of wholesale obligations to all infrastructure?  National mobile roaming?  Well, no...

The topics nominated for the five seminars are actually as follows:

   

      ·        Driving investment in TV content

·        Competition in the content market

·        The consumer perspective

·        Maximising the value of spectrum

·       Supporting growth in the radio sector

All important subjects, no doubt, but offering little guidance on how to secure, in Hunt’s own words, ‘a communications infrastructure that provides the foundations for growth’.

Regulated competition (and the fallacy of picking winners).

Just back from yet another extended break and my first conundrum is the regulatory view of the competitive process.  Let me explain…. 

The first thing that comes to my attention is the latest broadband pronouncement from Neelie Kroes on how she sees the promotion of competition – in her words, “to reward those who relentlessly focus on consumer needs”.  Isn’t there a danger that this consumer-centric idea might actually distort the competitive process?  Take, for example, the decision by European regulators to favour service competition, rather than infrastructure competition, in the latter part of the 20^th century.  This certainly promoted market entry, and was presumably aimed at meeting consumer needs, but how sustainable was the competition it spawned?  According to ECTA's recent pronouncement, such competition can be remarkably fragile: “It is time for a wake-up call. The liberalisation experiment which Europe began in the late 1990s is close to failing because regulatory rules are not supporting the business case for even leading telecoms competitors.” 

So continued regulation is necessary to support the competitive process… Is that really a step forward for ‘consumer needs’?  By contrast, let’s look at Ofcom’s proposal to vary one of the mobile operator’s spectrum licences in order for it to deploy LTE and WiMAX technologies.  Surely a ‘slam-dunk’ for consumers…?  In reality, however, the licence variation might tilt the competitive playing field in a number of important ways – so much so that a competitor has argued:

“This is an extraordinary step for a National Regulatory Authority to take, given its duty to promote competition…Any such proposal must raise prima facie competition concerns...” 

Without reaching judgement on that particular issue, it demonstrates that the pursuit of competition in telecoms markets is a far more complex challenge than the simple maximisation of consumer needs.

Advertisements for myself

Ever the telco policy hound, I’ve been sniffing through the written evidence to the House of Lords Select Committee’s Inquiry into Superfast Broadband – all 381 pages of it.  Predictably (but disappointingly), the leading actors, BT and Virgin Media, chose to concentrate on what a good job they are doing in their respective ways – the panacea of an open access network (BT/Openreach) and a sustained duopoly for Virgin, viz:

“The key objective for Government should be the creation of an environment in which two or more network providers invest and compete aggressively to deliver innovative, high bandwidth broadband products.“

Apart from their support for the status quo, neither of these broadband giants volunteered any particularly new ideas or constructive reforms.  Nonetheless, the evidence does contain some memorable remarks – here are just a few: 

·        There is no direct relationship between availability and take-up of superfast services (Ofcom);

·        The government target of having the best broadband in Europe in 2015 is very challenging, and in our view will be difficult to meet (BSG);

·        BT believes that the Government’s target is capable of being achieved if public funds being made available from BDUK and local authorities are used effectively;

·        In the end the big issue for all the alternative operators is to decide whether the BDUK game is worth the candle (INCA);

·        The Government’s ambition is for Britain to have the best superfast broadband network in Europe by 2015….At the Internet Service Providers’ Association conference on 9^th November delegates were asked if they thought it would actually be achieved. Only one hand went up, and that was the rep from BT (INCA);

·        It is becoming clear…. the scale of the challenge for any provider of scale other than BT to enter the rural broadband market is significant, and that in all likelihood, BT is likely to win the vast majority of public money to upgrade its network in these areas (Virgin);

·        Arqiva is concerned…that there remains a risk that not everyone will get something by 2015; 

·        Research shows that achieving universal coverage of standard broadband provides the greatest return on investment. This is higher than the return for investment in building fibre networks (Talk Talk);

·        The speed of broadband is almost less relevant than the universality of broadband access…. Connect everybody (100% not 90%) and then demand will drive industry investment and innovation to increase the speeds (Wispa);

·        It is regrettable that responsibility for telecoms infrastructure was moved from BIS to DCMS, which is perhaps less tuned in to the needs of the wider UK economy (Geo);

·        We remain unconvinced of the need for obligations to provide “passive” wholesale products such as duct access (KCOM);

·        At the heart of the problem lies the fact that telecoms consumers’ interests have for decades been sacrificed on the ideological altar of infrastructure-based competition (Broadway Partners).