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Home > Media and Analysts > Speeches and Presentations > 2006 > Sep > Global Telecoms Business


25|09|06

Seizing the opportunities from convergence

Please download the conference slides that accompany this speech (PDF, 50Kb)

Over the course of the last decade, there’s been a large number of conferences with convergence in their titles. So - after ten years of discussions about convergence – why do I want to talk to you this morning about seizing the opportunities it presents?

There are two reasons:

First - there is now substantial evidence that convergence is finally starting to happen, bringing with it real benefits for consumers.

But second - there are a number of key issues which industry and Ofcom will need to address if the UK is to realise those benefits in full.

So what makes me believe convergence is really happening?

Well let’s start with what convergence is. Ten years ago people talked about convergence in its dictionary sense – the act of moving towards the same point. Now I think we understand that convergence is not one magic destination but many things at the heart of which is the delivery of multiple services over a given platform and the delivery of a given service over multiple platforms.

[slide 1] Four trends in technology have now taken us past the hype of the late 1990s:

The last year has shown that these trends are now leading to practical results: Sky is rolling out its own broadband provision; mobile television has trialled in the UK and is rolling out in Italy and Finland, Channel 4 is streaming its output over the internet, VOIP in the UK has now 1.8 million users and WiFi enabled mobile phones are now in the market place – I could go on.

This is bringing real benefits to consumers.

Let’s take the World Cup a few months ago: for some German consumers, their experience of the World Cup was transformed. Instead of being tied to traditional television, they could watch it when or where they wanted: live via DVB-H on their mobile phones or on-demand on the internet. Or they could watch it in much higher quality on high-definition digital TV.

Consumers’ PCs have been turned by high speed broadband from word processors into a major communications platform for convergent services: the 11m UK broadband households have access to streamed and on-demand audio via for example the BBC Radio Player, masses of video on demand via YouTube, any number of massively multi player games, voice via Skype and so on.

And convergent devices are bringing not only voice, video and audio content but a whole range of less obvious benefits: people with i-Mode phones in Japan can use them as the key to their houses, as credit cards and as tickets for major events.

[slide 2] Now comes the ‘but’. We’re still in the foothills of convergence – and there are important challenges which could slow convergence down or stop the UK getting its full benefits.

What are those challenges? I think there are three main types:

Let’s take each in turn, starting with the regulator.

[slide 3] The risk is that regulators may not adapt quickly enough from the old world to the new one and hence slow down the process of change.

There are three particular challenges I’d like to highlight where Ofcom needs to play a key role:

There’s also a fourth, which we can influence, but not determine – the EU Framework Review.

Spectrum is a key input into many converged services, not just mobile voice and broadcasting. Technologies such as Wi-max – and many more - offer the prospect of nomadic or mobile broadband, VOIP and rich media services. Lack of spectrum would seriously constrain the development of converged services in the UK.

Part of the answer to that is making new spectrum available to the market. I don’t expect your applause for Ofcom having just auctioned 8MHz of the DECT guard bands for the princely sum of £4m. But the 400 MHz of prime spectrum under 3Ghz to be awarded over the next three years - nearly three times the amount of spectrum released for 3G – will be a massive enabler for converged services and platforms.

But this isn’t just about new spectrum – it’s about the spectrum rights that are already assigned, and about what happens when the winner of an auction finds their big idea isn’t all it seemed. No-one can predict with certainty what the right uses for spectrum are. But what we can do is make it easier for the market to switch it from one use to another through encouraging trading and liberalising licences. This will make it much simpler, cheaper and quicker for new converged applications and technologies to emerge – maybe hypothetically some spectrum previously used for fixed applications could be redeployed for a WiMax mobile data service across major parts of the country.

But this approach creates challenges too. With a market based approach, new technologies may only be deployed in certain areas or made available to certain customers. This may lead to social policy concerns about equity.

Now for the second challenge for the regulator: ensuring the right incentives for efficient investment in future platforms. One practical example is Next Generation Access – the question of when copper should give way to fibre, either to the cabinet or to the home.

There have been several announcements of investment in next generation access around the world, both by operators and the public sector. Clearly, fibre deployment is an important issue for competitiveness in the business-to-business market. But there is already competitive provision of high bandwidth IP networks for corporate customers. The unresolved issue is around provision to households, and to a certain extent to SMEs.

For the market, the question is about the economics of fibre deployment. The best estimates we have are that typically urban fibre deployment in Europe costs between £140 and £170 per home passed, not including set top box or subscriber acquisition costs. Much is made of the consequent revenue potential for new services - such as gaming, high definition and video telephony. The experience from Japan and Korea shows that there is indeed demand for such new high bandwidth services. But that demand has only taken off when the price for VDSL has come down to levels similar to basic DSL services. Consumers are not yet ready to pay a premium for these new services. So the shift to VDSL doesn’t obviously create value – in which case why is anyone doing it?

In America, the typically greater local loop length has been a significant driver of fibre build rather than relying on DSL or ADSL 2+; and the incumbent telcos are, in the big cities, playing catch-up with a strong cable sector which has offered high bandwidth for several years. In Paris Illiad has become the first LLU operator to invest in fibre to the home – but the business case is built on the specific characteristics of Paris (access to cheap duct, the large proportion of multiple dwelling units and the generally poorer pay-TV offers in France compared to the UK).

In the US, regulators have felt that the strength of competition between cable and traditional telcos means regulation for access via fibre to the cabinet or the home is unnecessary. But the structure of the UK market is simply not like that. So what should our regulatory response be?

You will not be surprised if I say we are sceptical about so called regulatory holidays for incumbents to incentivise them to roll out VDSL or fibre to the home – as Deutsche Telekom have pressed for in Germany. The national champion argument is often seductive for politicians. But as the EU commissioner Mrs Reding noted recently it is those member states where competition has been most vigorously pursued which have the strongest record for investment and take up of new services. If that is true in copper there is no reason why it should not be so in fibre. The other argument put is that the holiday would be only temporary. But competitors have memories. If they have been locked out once and left with stranded assets they will think long and hard about investing again in that market.

That said, the regulatory framework needs to recognise risk and allow commensurate returns. What was appropriate for the old switched copper networks gifted to the incumbent by the State at privatisation may well not be appropriate for market-based investment in the next generation of networks.
Later in the Autumn we’ll be publishing a document seeking to outline the issues in more detail and prompt further discussion.

The third challenge for Ofcom – market definition – sounds technical and dull. In fact it is critical to the way regulation adapts to convergence.

We structure our regulation by defining a market for a particular service. In the past it was clear: telecoms were different from content; mobile voice was different from fixed voice. The boundaries are breaking down – we are moving towards fewer larger playing fields rather than several separate smaller ones. At the same time, we need to start thinking about the issue of geographic markets: single national markets were fine in the old days of the plain old telephone service, but with LLU, VDSL and fibre to the home, the competitive and consumer experience issues will vary widely depending on population density.

In thinking about competition Ofcom needs to consider how quickly we change our view of the world –– different parts of the market are transitioning at different speeds. While we need on the one hand to guard against the leverage of dominance from old markets to new ones, we also need to recognise that if we continue regulating based on the old world model, ‘the usual suspects’ will still be considered dominant in their areas, regulation may well be inappropriate and the progress of convergence hampered.
And our ability to act swiftly and maintain flexibility will remain vital in this rapidly changing, converged world.

Turning to the EU Framework Review we agree with the Commission that the current telecoms framework is still structurally sound – though it still needs to be implemented throughout the EU in full. The approach to the Review should therefore be evolutionary not revolutionary. There is much in the Commission’s proposals that we think should be supported, particularly in spectrum where in line with our policy it suggests usage restrictions be kept to the bare minimum and trading be permitted.

The Commission’s deregulatory proposals for telecoms, to slim down the list of compulsory market reviews by removing retail markets, are sensible. But to seek to extend powers of veto to include national regulators’ remedies when the national regulator has found Significant Market Power is a step too far. Each of our markets has different national characteristics, sometimes very different ones. The further away from the individual national markets decisions are taken the greater the risk of inappropriate one-size-fits all decisions and the greater the risk that it is the biggest players who have the resource and the money to lobby in Brussels whose voice gets a disproportionate amount of airtime. The same concerns would apply to the suggestion of a European telecommunications regulator. Added to which it would be odd to say the least, when the national trend is towards converged regulation covering content, carriage and spectrum to have at European level an unconverged body capable of addressing only one piece of what is an increasingly interlocking jigsaw. And the, wholly proper, subsidiarity for matters of content means a European telecoms regulator could never address the convergent whole.

So these are the regulatory challenges.

[slide 4] Let’s now talk about the second potential challenge for convergence – consumer issues.

Convergence ought to be a great news story for consumers – but with it comes increasing complexity and choice: some consumers enthusiastically embrace new technologies, others use it where it is useful to them, still others feel alienated by it. Even the most technically literate can feel that way. Bjarne Stroustrup – the computer scientist who invented the C++ programming language said "I have always wished that my computer would be as easy to use as my telephone. My wish has come true. I no longer know how to use my telephone". The research bears him out. Nearly a quarter of mobile phones returned for being faulty are working properly – the problem is people just cannot figure out how to use them

So a key question for both the regulator and industry is how do we help consumers to engage with the new world. How do we harness the opportunities created by technology and convergence to empower consumers – rather than alienate them? This is important both from a social perspective– to ensure people are not left behind – and from a competition perspective – to ensure markets are competitive.

Ensuring consumers are empowered is necessary but not enough to ensure markets are effective. Having decided which provider they would like to use, it is crucial that they can switch suppliers efficiently. A few weeks ago we published our approach on broadband migration, setting out proposals to ensure that consumers are able to move freely between broadband providers. We aim to deregulate where we can – we want to work through co and self-regulatory bodies if possible – but in this instance that approach wasn’t delivering. Migration will be even more of a challenge as service bundles become larger and more diverse.

For some platforms – particularly the internet – consumers can easily come across material they are offended by or don’t want their children to see.
Audiences’ access to media is increasingly mediated through EPGs, search engines and recommendation tools – tools provided by the market which are easy to use and allow audiences to take more responsibility for their own protection. But consumers also need to be media literate – and know how to avoid content they don’t want to watch and use these filtering tools to protect their children from content that is inappropriate.

New and more open platforms also offer increasing opportunities for scams and other kinds of criminal activity. If consumers are worried about being duped by the latest scam or uncertain about being infected by malware they may hesitate to take up new services. So protection is crucial.

So in summary there are four key areas where we see our role and the role of industry to address these consumer challenges

[slide 5] Finally the third potential issue for the pace of convergence – the communications sector itself.

Despite the massive technology improvements and huge opportunities presented by convergence, the FTSE Media and Telecoms indices are down 15% and 7% respectively relative to the market over the last couple of years.

Price pressures are huge – as one example the basket of consumer telecoms prices we track is down more than 30% over the last five years. That’s great news for the consumer which we welcome. But it puts significant pressure on existing business models. And after a long period of underlying growth in many areas – notably mobile – penetration levels are high and further growth will need to come through new products and services

The biggest success stories of the last five years have not involved platform ownership. I won’t reel off the list which you all know - but they’re all content or application-based and capex light. Indeed content appears increasingly important for growth opportunities. And within content, new distribution platforms are having a profound impact on traditional platforms and business models. This trend was evident first in audio content. In less than a decade, personal computers, mobile phones and televisions have emerged as mass-market alternatives for listening to radio. As a consequence, profoundly disruptive change has affected both producers and distributors of audio. This year Gnarls Barkley reached number one in the music charts without selling a single CD. And higher bandwidth access networks and dramatic reductions in the cost of local storage will create the same dynamics in video content.

So it’s a challenging as well as an exciting business environment. But our regulatory response can never be protection or the creation of temporary arbitrage opportunities. It needs to continue to be the promotion of a transparent, competitive and pro-innovation marketplace. And these are challenges which I’m sure you will rise to – helped in part I’m sure by the debate at this conference over the next couple of days.

[slide 6] So in summary there are three important set of challenges - regulatory, consumer and business – for us to overcome. But if we can overcome all three – and I believe we can - the benefits will be huge. For businesses there will be new markets – and new returns. And for consumers there will be new products and services, and lower costs.

Thank you


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