The redundant telco?

A couple of months back, I relayed the story of a 'perfect storm' in Birmingham, where BT and Virgin were attempting to block the Council’s attempt to develop, independently,  a new superfast broadband network in and around the jewellery quarter of the city – the development funded by the government’s ‘Super-connected Cities’ project.  I’ve heard no more about that impasse but it occurred to me that, as the penetration of fibre networks grows, and broadband speeds head from famine to feast, our ISPs will increasingly lose what may be their major source of differentiation.  This certainly appears to have been the case in the US where a number of university towns, including Chicago and Seattle, are partnering with a venture capital operation called Gigabit Squared in raising the money to construct new ‘ultrafast’ networks (comprising FTTH and wireless solutions).  Following the deployment of its fibre network in Kansas City, Google is similarly looking to work with municipal partners in other areas.  

This new, non-ISP model appears to have been generally well received by users.  As one commentator put it: “our problem with broadband is not with technology - it is because the networks are too often accountable to entities outside the community - Wall Street most notably”.  And the views of the ISPs themselves?  Well, short of the sort of legal intervention attempted here by BT and Virgin, it is not at all clear how they can - or should – respond…

 

Marital problems

Two recent articles in the FT grabbed my attention.  The first was a rather retro piece by Ian Livingston, Chief Executive of BT, explaining that the justification for BT’s expensive foray into the market for TV content (sports) rights was all to do with something called ‘convergence’.  Now there’s a term I haven’t heard in a while.  To be fair, the real thrust of Mr Livingston’s article was to bemoan the asymmetry in competition between the content business and his traditional telecoms base:

“In a converged world, communications companies should surely be able to offer TV services as easily as TV companies can offer broadband…What we have is a situation where the regulators, Ofcom and the Competition Commission, have declared the UK’s pay TV market to be broken”. 

So, for the umpteenth time, the article was actually a diatribe against the dominant position of Sky in the pay-TV market and its relatively lightweight regulation.  If only it was that simple… 

The other article, in the same FT edition, was a rather more contemporary take on the challenges involved in exploiting convergence.  The article cites the limited success of the telco/content model, explaining that several such alliances are now being unwound, e.g. Vivendi:

Philippe Capron, Vivendi’s chief financial officer, says: “The previous structure was not understood by the market [and so] we needed a change in tack. Vivendi has been a product of history as much as design. We may not be the best owner for each of our assets”. 

The FT piece goes on to look at some of the explanations offered for the apparent demise of these traditional TMT mergers:

“Tony Worthington, head of TMT at Standard Chartered, says the success or otherwise of convergent TMT business models depends on the market, and whether or not managements have a clear model of synergy delivery. History has proven, he says, that the ones that have to carry legacy infrastructure have struggled more as investors have taken a dimmer view on the pipes and cables compared to the “asset-light” approach of Apple… Corporate advisers say the problem has been that the infrastructure-heavy elements of telecoms have struggled to break down the walls into the other sectors partly because they lack the more nimble mindset found in technology and media”.

None of this bodes well for a group like BT that could hardly be described as ‘asset-light’.  And the nimble mindset?  Let’s just say it’s not a traditional strength.

Careful what you wish for

In the whole debate about broadband infrastructure, it’s very seductive to follow the logic of the ‘satisficing’ brigade – those that defend the status quo in bandwidth on the basis that ‘it’s adequate for most peoples’ needs’.  I’m afraid to say that I’ve even heard this kind of argument – several years ago - from senior staff at Ofcom.  You know the sort of thing: “so long as it’s enough to download repeats of ‘Coronation Street’, 2Mbps is fine as a minimum threshold… 

I’m glad to say that even the DCMS has seen the weakness in this argument. Not long before he left the department, Jeremy Hunt made a speech in which he rejected the ‘satisficing’ idea, instead comparing the government’s alleged forward-looking broadband strategy to that of the Victorian planners:

“…When it came to sewers, we got it right. In the 1860’s Sir Joseph Bazalgette ignored all the critics when putting in London’s sewers and insisted on making the pipes six times bigger than anticipated demand.  He could never have predicted the advent of high rise buildings – lifts had not been invented then – but he had the humility to plan for the things he could not predict as well as the ones he could”. 

This has to be the right approach – getting well ahead of the demand curve. It was therefore worrying to see a major ISP, Zen Internet, sending out some mixed messages this week: 

“Over half of premises in the UK can already access FTTC broadband, a solution which avoids disruption and guarantees high performance and reliability. Most organisations don’t need the 330Mbps promised by FTTP, and will find 80Mbps more than enough…” 

On closer reading, Zen’s concern appears to be that, possibly unnecessary FTTP aspirations are suppressing FTTC uptake – quoted at just 18%.  Might this evidence of apparently limited demand have the effect of discouraging subsequent FTTP deployment?  Well that’s a tricky one…

The byte balance

Way back in February, I bemoaned the final death throes of Cable & Wireless – the network’s final incarnation being to provide backhaul capacity for Vodafone.  One of the lessons of this story was that, notwithstanding all the excitement surrounding the emergence of 4G, these new broadband services increasingly come to rely on the availability of high capacity fixed networks for their transmission.  I was reminded of this point by a throw-away fact in Ofcom’s recent update of its Infrastructure Report.  The associated headline for this document is that ‘Ofcom unveils plans to avoid mobile ‘capacity crunch’, and it is mostly concerned with the release of new mobile spectrum.  However, tucked away in Section 7 of the Report is the noteworthy fact that: “460PB of data went through the fixed networks in June 2012 compared to 19PB of data on mobile networks”.  (I didn’t know either but a petabyte (PB) is apparently around one million gigabytes).  So there you have it: on the basis of Ofcom’s June sample, the volume of data flowing on fixed lines is roughly 24-times that of the mobile network.  You heard it here first…

Wacky Racers

As this year ticks by, and 2015 looms ever closer, the race to equip the UK with ‘the best broadband network in Europe’ becomes ever more intense.  BT, as usual, appears to have played it’s cards rather well in the country’s adopted form of public-private partnership;  the company announced last week that its overlay, FTTC network will now reach two-thirds of the country - 19 million homes and businesses - by spring 2014, rather than the former objective of end-2015. In reality, and notwithstanding the efficiency claims of Openreach, the repeated announcements of acceleration in FTTC deployment increasingly suggest that the original commitment was something of a soft target.  Nonetheless, BT can clearly claim to have done its bit to honour the government’s broadband ambition. 

Spare a thought, then for Maria Miller.  She got off to a flying start with her announced sweeping away of the ‘swathe of red tape’ that frustrates broadband planning but her feet were barely under the DCMS table when she was landed with the BBC nightmares resulting from the Jimmy Savile scandal.  So it was perhaps understandable that the Culture Secretary would focus outside Westminster for the causes of any slippage in the public sector’s contribution to broadband goals… Yes, you guessed it: the answer is yet more infuriating red tape, but this time in Brussels.  According to The Telegraph last week, the Culture Secretary “has demanded an urgent meeting with Europe’s Competition Commissioner over EU delays that have seen schemes worth more than £530million held up since January”.  (This diatribe against Brussels mandarins draws a convenient veil over the earlier  ‘evidence of failure’ and ‘sclerotic progress’ within Miller’s own team at BDUK). 

​ Anyone inclined to place bets on the broadband contest should probably wait until the end of the year when, according to the Government response to the House of Lords ‘alternative vision’ Report, Ofcom will publish the first European scorecard.  Exciting times!…

And it came to pass….

More evidence has emerged recently to vindicate critics of the government’s broadband investment strategy. First and as widely predicted, BT looks set to achieve a clean sweep of the funds made available through the BDUK procurement process.  As the House of Lords anticipated in its 'alternative vision' Report:

“There are clear competitive advantages in the market for infrastructure provision which accrue to those able to draw on economies of scale and scope. If unchallenged, these may result in the dominance of a single provider”. 

However, it appears that BT’s dominance in this process has now been both accepted and enshrined. According to a report in ISP Review, the Director of a major media research firm has warned that any UK cities which win government backing to boost their superfast broadband availability must pick “safe bet” BT to do the job or risk being left with “networks based on technologies that failed to keep pace with the wider market or devoid of popular service providers “. 

The related fear expressed by the House of Lords was that government dependence on BT’s own investment strategy, in particular its choice of FTTC as the principal superfast technology, could restrict service competition.  Again, ISP Review has picked up on this issue and reports that the same fears are now being voiced more widely:

‘At present the dominant form of superfast broadband delivery on BT’s national UK telecoms network is FTTC, which at best only offers a somewhat restrictive form of virtual unbundling known as VULA. Sadly this doesn’t provide the same level of price, direct control or flexibility as copper LLU services, which is technically difficult to achieve on fibre’. 

ISP Review goes on to record that ‘the CEO of budget ISP TalkTalk, Dido Harding, has warned a Westminster panel session that the UK government should “start to worry” about the lack of competition in the new market for fibre optic based superfast broadband services…Harding added that she had no idea whether TalkTalk was paying a good price for superfast broadband from BT.

"I simply don't know, but there's also no alternative," she said. "Over time, as we consume more of it, I should know and so should Ofcom."

 
So far, full marks to BT!

Perfect storm in the midlands

You couldn’t make it up!  I had to smile – laugh, even – at the confluence of topical commercial and regulatory issues that recently played out in Birmingham.  It’s a complicated story of broadband development, and some facts are difficult to establish, but here’s how it appeared to me… 

1.    Birmingham City Council wanted to provide ‘ultrafast’ broadband connectivity to businesses in some previously un-served areas of the city - Digbeth, Eastside and The Jewellery Quarter.   

2.    Both BT and Virgin have trunk network (duct infrastructure) in some parts of these areas but have hitherto chosen not to exploit it.  BT has said it has some limited plans to develop access network in the area but its preferred FTTC solution was seen by the Council as failing to provide adequate broadband performance.

3.    The Council discussed with both BT and Virgin the possibility of gaining access to their existing infrastructure but neither approach was ultimately successful.  Virgin is of course under no regulatory obligation to provide wholesale access to its infrastructure, and declined to do so.  The BT regulated access product (PIA).was found unsuitable because: 

·        Some BT duct was unfit for co-location

·        The pricing of BT’s PIA product proved to be unattractive

·        PIA is essentially not available to business customers.

4.    The Council therefore applied for c£10million (or was it £6million?) of public funding via the government’s ‘super-connected cities’ scheme (which has set aside £114m for similar projects in 10 of the largest cities).  The proposed network is intended to be genuinely open access and will offer a full array of wholesale services. 

5.    The application was successful and received state aid approval from the European Commission in June of this year, the first such clearance to be given.  However, while the council claims to have kept BT and Virgin fully informed throughout, both have now made formal requests to the ‘Commission to have that decision revoked.  (Virgin has also appealed to the European Court of Justice to have the Commission¹s decision struck out). They argue that the money will be used to build a state-funded rival in areas already well covered by their own broadband networks. This, they allege, would contravene state aid rules, would be a waste of taxpayers’ money and would undermine broadband investment from the commercial sector. 

What to make of it all?  Chi Onwurah, shadow BIS minister, sees it as ’another example of the chaos and incompetence at the heart of the government's broadband strategy’.  Yet it could equally be seen as a vindication of that very strategy – letting the private sector lead broadband investment in urban and marginal areas.  BT and Virgin may have been wrong-footed on this occasion but they are likely to be much more alert in future to pockets of demand, either to extend their existing network or to offer access to potential public sector investors.  

On the other hand, the story seems to endorse critics who see government reliance on BT’s current network technology, based on FTTC, as a short-sighted strategy.  On the face of it, the Birmingham experience also supports regulatory criticisms that BT’s PIA remedy is not fit for purpose (for all the reasons suggested to Ofcom) and that third party access obligations should probably also be imposed on Virgin’s network.

Quite a storm.

It’s the vision thing…

I have to say that I was disappointed, though not greatly surprised by the government’s official response to the recent House of Lords report on broadband strategy.  Predictably enough, the government shot down some of the report’s wackier ideas – like the suggestion of a state-sponsored FTTH network, costing “in excess of £25bn”.  But to this reader, the value of the HoL report was less in specifics than its high level messages, for instance:

1)   Setting humane objectives for the value of broadband diffusion, rather than relying on service metrics.

It’s all very well the government explaining that speed alone will not be the critical measure, rather contradicting the words of the former Culture Secretary, but the HoL has to be right in focusing on the demand side aspect of broadband development.  As the Select Committee put it: “what is important is the long term assurance that as new internet applications emerge, everyone will be able to benefit, from inhabitants of inner cities to the remotest areas of the UK.”  The government response does not address this issue.

2)   Warning against the dangers that both the BDUK framework and the delegation of decisions over broadband architecture tend to favour the dominant incumbent.

More pointedly, the Committee’s fear was that current broadband investments, including those enabled by government subsidies, could allow BT to recreate in fibre the monopoly it gradually lost in its copper network.  To the extent that the government addresses this issue, which is not much, it seems to see it as wholly a matter for Ofcom.  (Don’t hold your breath!). 

It’s hardly news when the government chooses to ignore a Select Committee critique, even one that’s been well researched, but when the wheels are already falling off current policy – here, for example – it seems a pity not to have been more receptive to alternative ideas.

 

Huawei away

Don’t you just love a good conspiracy theory?  When, some six years ago, BT issued an invitation to tender for its so-called ‘21CN’ network upgrades, the major supplier chosen was Huawei, then a little known (but fast-growing) Chinese manufacturer.  In addition to the predictable disappointment expressed by Marconi and other, more familiar suppliers, the decision subsequently led to some concern that the new hardware might be ‘hijacked by China to cripple the UK's communications infrastructure’.  It was reported in early 2009 that UK intelligence officials feared ‘a risk that China may have used its influence on Huawei to ensure 21CN is vulnerable to a remote attack’.

Fears of a Chinese conspiracy later died down in the UK but similar concerns have more recently erupted elsewhere.  Earlier this year, the Australian government blocked Huawei’s participation in the NBN project to build national superfast broadband infrastructure.  The company also faced opposition to its commercial expansion in India and, just this month, a congressional committee report urged U.S. companies to steer clear of Huawei (and ZTE Corp, another Chinese supplier), citing concerns that the Chinese government could install malicious hardware or software in U.S. telecommunications networks.  The report was covered in detail by ‘The Economist’, no less, the magazine having run a major survey last August on Huawei and other Chinese multinationals.  The Economist sought to draw a distinction between UK and US approaches to Chinese procurement:

“America has no effective system of supply-chain checks. In Britain, by contrast, where BT is a big customer, Huawei has established a unit (run in close co-operation with GCHQ, Britain’s signals-intelligence agency) with security-cleared personnel, including former employees of GCHQ, who vet gear from China before it is installed.”

I was still radiating in the warm glow from this reliable assurance when I saw the headline in last Wednesday’s Guardian: 

“Huawei's relationship with BT under investigation by MPs”

A fire is born?

Oh dear, oh dear, it was bound to happen: the mess at BDUK just got worse.  Sparks generated by Ian Grant have been fanned into life by the national press and politicians. One to follow…

Back to the drawing board…

Earlier this week, Robert Leigh of The Guardian put forward the idea of imposing a monthly £2 levy on broadband subscriptions in order to subsidise the costs of (print) investigative journalism.  Daft as it may seem, the idea was welcomed by Leigh’s (normally sensible) colleague on The Guardian, Roy Greenslade. 

I have to admit that I’m mildly sympathetic to the idea: like Leigh, I worry about a world in which, absent the investigative writing of commercial journalism, “wwe’ll just get the timid BBC on the one hand, and superficial junk on the other”.  But the £2 broadband levy simply won’t do as a remedy: aside from its obvious distribution concerns (who wants to subsidize Murdoch?), the levy is patently in the wrong place: any economic transfer should be attached to usage, not general subscriptions.  In other words, I agree with Mr. Leigh’s critics who respond with an ‘adapt or die’ message: the challenge is for the quality press to come up with some kind of ‘pay wall’ that meets their needs and is fit for purpose. 

But the broader point is that newspaper proprietors are not alone in struggling to find an economic model that continues to reward their investment: the providers of broadband infrastructure, particularly those investing in the expensive access network, are desperate to find ways of sharing their costs with others in the broadband value chain.  So far, all such attempts have been rebuffed – typically on grounds of net neutrality – but the pursuit of new business models is a healthy sign of market development and should not be discouraged.

 

Peer support

From time to time, it’s reassuring to learn that you’re not entirely a voice in the wilderness.  I’m therefore very grateful to Jon Hunt for pointing me towards the recent Nesta report on ‘The case for innovation-led growth’.  The thrust of this document is that the UK’s economic growth depends on our ability to foster innovation.  Fearing that the country is losing ground in this ability, and so losing international competitiveness, the Nesta paper sets out a number of proposals for enhancing the prospects for innovation.  One of these proposals is for significantly increased investment in broadband infrastructure and the policy document speaks a great deal of sense on this score, e.g. 

·        “Broadband, and in particular super-fast broadband …is the twenty-first century equivalent of the motorway system… Public investment in broadband should be seen as strategic investment…

·        We do not fully know what applications superfast broadband will give rise to… but if the history of the last 30 years has taught us anything, it is that people and businesses find ingenious uses for more memory, more processing power and more bandwidth.  It was not so long ago that Bill Gates opined that 640k of memory would suffice for most computer users.  Looking further back, the American Interstate system and the German autobahns were built long before there were enough cars to fill them.  Like these projects, superfast broadband is an investment in the future”. 

The report goes on to recommend that the government funds the construction of a national FTTH network, initially to some limited areas and costing ‘perhaps £5 billion’.  (Access to the national network would then be leased to service providers on a competitive basis).  So, in line with the recent House of Lords recommendation, the aim is for a fully fibre solution with uncertain cost.  And, similarly perhaps, it may not receive serious consideration from a cash-strapped Treasury.  We can only hope, however, that someone in government does at least read Nesta’s excellent report.

‘Something Somewhere'.…?

Not sure what to make of the Everything Everywhere (‘EE’) 4G launch yesterday.   Apart from the hoop-la over 4G itself,  the company more quietly announced it will also launch a fibre broadband service to homes and businesses with fixed-line internet speeds ‘typically ten times faster’ than today’s average broadband speeds: “Our Fibre Broadband will be available to over 11 million homes, representing around half of the population. We will be adding more homes all the time… EE is the only place where you will be able to get superfast internet - home and away”.

 So is this a new fixed network for the UK?  Well, not quite.  Dig a bit deeper and the T-Mobile website offers some additional clues:

 “Fibre speed may vary depending on distance from street cabinet and how many people are using the network at the same time as you…10 times faster based on 58.5 Mbps average speed on EE Fibre compared to the average speed of 5.9Mbits/s on ADSL broadband…”  All of this seems to confirm the story in ISP Review that EE “will make use of BT’s latest Fibre-to-the-Cabinet (FTTC) technology and should offer speeds of up to almost 80Mbps…  It will also offer standard broadband via ADSL in non-fibre areas”.

Ten times faster?  80 Mbps? Not according to our good friends at Br0ken Teleph0n3:

“Br0ken Teleph0n3 has received reports that even 24Mbps is the top end of what BT’s Infinity fibre to the cabinet service will deliver. It appears that some councils are being told to plan for the average speed delivered from an Infinity cabinet to be just 15Mbps….Users who live close to the cabinet and have good quality copper will enjoy the top speed, but most will not”.

 
One to watch…

Nice move but no game-changer

Don’t get me wrong: I’ve no wish to rain on anybody’s parade, least of all that of the new Culture Secretary, Maria Miller.  The ‘swathe of red tape’ she plans to sweep away from the bureaucracy of broadband deployment is truly welcome, has been widely applauded and will no doubt lessen the pain for many of those intending to lay fibre.  I’m not even going to quibble over the fact that the DCMS press release which details the government’s intentions is riddled with phrases like ‘facilitate discussions’, ‘broker a new deal’ and ‘review existing schemes’ – none of which could be accused of excessive  precision.  No, the dissenting voice in my ear simply makes the pedantic  point that the overwhelming challenge in constructing a broadband access network is the business investment case, particularly since the asset deployed is both sunk (literally and metaphorically)  and earns unusually slow pay-back.  Other than at the margin, none of this is changed by the DCMS announcement.  So, while a VM spokesperson is right to confirm that “steps like this will help support Virgin Media's on-going private investment”, it unfortunately remains the case that the requirement for wholly new infrastructure is essentially unaltered.

All change at DCMS

Maria Miller?  Former under-secretary at Department for Work and Pensions?  Nuff said.

 

No easy answers

On reflection, I think my piece on Jeremy Hunt’s ‘Faster, Higher, Stronger’ speech  was a little unjust to focus so narrowly on the issue of speed.  To be sure, this was very much the focus of Hunt’s remarks, and my criticism was that this emphasis risked obscuring other legitimate objectives (such as the scope for competitive provision) but, elsewhere, the speech also contained some important remarks about the necessary mix of broadband technologies.

As wireless capabilities evolve, it becomes increasingly likely that broadband access will be delivered via mobile devices – even in urban areas.  But, as Hunt pointed out: “in order to cope with capacity, we will need to get that mobile signal onto a fibre backbone as soon as possible”  

 
As Victor Keegan has pointed out in The Guardian, the recent upbeat announcements about 4G, however welcome, should not blind us to this reality.  The development of the UK’s fixed network, whatever its investment and ownership model, has to remain the key focus of attention for government and other stakeholders.

Never mind the quality, feel the speed.

In his recent rather self-congratulatory speech, Jeremy Hunt borrowed some of Team GB’s Olympic success to freshen up the performance of his department’s broadband development plans.  As others have pointed out, he didn’t actually have a lot to say that was new: he basically defended the pursuit of broadband speeds as a prerequisite for the country having the ‘best network in Europe’ and cited some helpful statistics on the UK’s relative performance – ignoring some less flattering metrics.  He also hit back at the other recent criticisms of government strategy by the House of Lords Communications Committee, in particular their alleged misconception that ‘fibre to the cabinet is the sum of the government’s ambitions’ for the broadband network. 

On the question of speed, Hunt is right to point out the folly of setting an arbitrary target that is deemed to be ‘enough’ to meet broadband demands: the latter are always likely to exceed current expectations.  However, he still fails to address the HoL’s legitimate concern over universality.  As the Select Committee put it: “what is important is the long term assurance that as new internet applications emerge, everyone will be able to benefit, from inhabitants of inner cities to the remotest areas of the UK.” 

The ‘misunderstanding’ over FTTC is perhaps more worrying.  Hunt seems to justify the choice of this technology as if it were a matter of government planning, whereas the choice is entirely a matter for BT. Similarly, the idea that FTTC “is most likely to be a temporary stepping stone to fibre to the home” and that “by 2016 fibre to the home will be available on demand to over two thirds of the population” are again matters that are both entirely dependent on BT’s commercial judgement.  (On current expectations, BT’s pricing of ‘FTTP on demand’ is likely to make it too expensive for the residential market).  

Hunt also fails to acknowledge the HoL’s deeper concern with FTTC – and the PON network that BT is also rolling out – that this architecture is unsuitable for physical unbundling, thus stifling the prospects for service competition.  The Committee’s fear is therefore that current broadband investments, including government subsidies, will allow BT to recreate in fibre the monopoly it gradually lost in its copper network.  But hey, monopoly or not, it’ll be fast..!!

 

 

Behold the meaning of everything

Recently returned from holiday, I was eager to take a look at the findings from the inquiry by the House of Lords Select Committee on superfast broadband.  The report's 67 pages contain a lot of material for discussion but here’s a first, rather sweeping impression…

Douglas Adams wrote that the answer to the meaning of life, the universe, and everything was 42.  In similar gnomic fashion, the members of the ‘Lords Communications Committee appear to have concluded that, in the realm of broadband, the answer is either ‘dark fibre’ or ‘middle mile’ or possibly both.  If you listen to much of the oral evidence from the ‘Lords Inquiry (and I have), it’s striking how often the peers shoe-horned these two concepts into the discussion – even where they weren’t entirely relevant.  Indeed, members of the Committee admitted that they weren’t altogether sure about the meaning of the two terms or why they might be of such significance issues but it was as if an ancient sage had whispered to them mysteriously that the concepts would somehow unlock the solution to delivering the best broadband network in Europe.  As a result, the Committee’s ‘alternative vision’ for a broadband strategy has been fashioned around the twin pillars of wholesale access to dark fibre and the provision of backhaul.  While there’s undoubtedly merit in exploring both issues, their dominance in the construction has perhaps been at the expense of other, more mundane considerations – for example, the role of wireless in rural areas and the affordability of a fibre-only solution.  That’s soothsayers for you!

Steady as she goes…

‘Poked with a twig’ was just one of several, relatively benign metaphors that the Lex column in last week’s FT used to describe the reaction of Europe’s telecom incumbents to Neelie Kroes’ decision not to impose price reductions on access to their legacy, copper networks.  Predictably, that view was not shared by the competitor fraternity: a swift response from ECTA argued that “the direction…will harm the competitive conditions of the broadband markets and will eventually harm consumer interests without fostering investments”.  But the incumbents’ feeling of this coming as a ‘welcome respite’ was based not just on the favourable pricing decision but also from its durability: Kroes said she wanted the regulatory guidance ‘to apply at least until 2020’. 

The idea of regulatory stability is routinely trotted out as a precursor of private sector investment but Kroes was right to give this factor renewed prominence in her policy statement:  From another perspective, Sean Williams, Group Strategy Director of BT, provided a very tangible illustration of the investor’s fear of instability in the evidence he gave to the House of Lords Select Committee on superfast broadband: 

“One of the most supportive things that Ofcom could do is make a long-term commitment to its regulatory policy towards fibre networks. At the time when we made our fibre investments, we had a conversation with Ofcom about how it was seeking to regulate this risk investment that we were making. It made some very supportive remarks but it did not feel the need to regulate this investment. In fact, it was so uncertain that it would be very difficult to regulate, and we completely agree with that. But every three years it has to make that choice again. That is a very difficult environment for us to make a 20-year-view investment with a 12-year payback if the regulatory regime can change every three years…” 

He has a point!

The eye of the beholder

Ofcom’s Annual Report was published yesterday and, guess what?, the regulator gives itself a largely glowing end-of-term assessment.  To be fair, the Report does at least dissect Ofcom’s individual goals, and attempts to monitor progress on each, but some of the progress statements take a rather blinkered view of regulatory achievement.  For example, as regards broadband, Ofcom identifies one of its aims as “to create an environment that gives confidence to potential investors, enabling them to make a case to roll out new superfast networks”. Here’s the first action review:

“After we required BT to offer access to its network of underground ducts and telegraph poles to allow companies to offer superfast broadband services, BT published prices for these in October 2011. These prices are among the lowest, if not the lowest, for comparable products elsewhere in Europe….In areas where BT has no commercial plans to invest, access to these ducts and poles will allow other providers to bid for the funding which will be made available by Broadband Delivery UK (BDUK)…” 

Sounds plausible enough but, in the real world, things look a little less rosy.  We heard just this week that Fujitsu, BT’s only qualified rival under the BDUK tendering framework, has withdrawn from two further broadband contests. Indeed, there’s a growing consensus that BDUK’s whole approach to subsidy allocation unreasonably favours the incumbent.  As to competitive access to BT’s passive infrastructure, there is countless anecdotal evidence from competitive providers that the PIA product is simply not fit for purpose.  No wonder, then, that BT itself acknowledges a lack of interest: in evidence to the House of Lords Select Committee on superfast broadband, Sean Williams, BT’s Group Strategy Director, admitted that “there is no demand for PIA”.

The success of other facets of Ofcom’s broadband policy can (and will) be questioned on another day but, for current purposes, a more realistic judgement in Ofcom’s report card might be: ‘could do better’.

Plumbing matters

For anyone who believes that the open Internet and cloud computing are simply dependent on the exchange of ideas and content services, June 30^th provided a timely reminder.  On that day, as blogger TechnoLlama reports, a significant part of the ‘cloud’ failed when a key Amazon data centre (EC2) in Virginia was hit by a violent storm, knocking out its power.  This particular cloud centre hosted important content for various Internet services, including Netflix and Instagram, putting them offline for up to six hours.  Nor was this a wholly isolated incident: the same data centre had crashed earlier in the month, and it seems that cloud outages are now becoming so frequent that websites and Twitter accounts have sprung up to document them.

A central assumption behind the growth of cloud services is that storage and processing are distributed amongst different data centres, in theory making outages less likely. Their whole principle of distribution rests on the assumption of network resilience: if one server is knocked down, others can take up the load. Indeed, this is the one of the founding pillars of the Internet as we know it.  However, the reality is that, from a distributed model, we have been migrating content to more and more centralized services – in terms of both geography and industry concentration.  It’s reported that the top 10 cloud providers are now all based in the US, and that Amazon alone holds an estimated 15% of the cloud market

 
For TechnoLlama, the danger is that this growing reliance on fewer providers has made legal or regulatory control of the Internet an easier task.  For our purposes, the simpler, but no less vital lesson is that the ‘information superhighway’ relies crucially on the resilience of its road (network) infrastructure. Put another way, plumbing matters!

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.