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11|10|06

FTTx regulatory developments - a UK and European view

Speech at World Broadband Forum Europe - Dougal Scott, Director of Policy Development

Thank you for that kind introduction

I’ve been asked to talk about regulation of fibre-to-the-home, both in the UK and in Europe . But actually I want to do something a bit broader than that, and talk about broadband more generally. As a range of different technologies are in prospect, all of which can deliver much faster broadband speeds, I want to talk about the challenges it poses for us as regulators, and the broader challenges it poses for other policy-makers.

So I’m going to talk about three things:

• broadband deployment in the UK
• the regulatory challenge, which is all about promoting competition and securing efficient investment; and
• the public policy challenge, which is all about the prospects of a future digital divide.

Let’s start off by looking at broadband deployment in the UK . The first thing to say, is that by most measures, broadband is turning out to be a huge success:

• over 99% of people are connected to broadband-enabled exchanges, which means the UK has among the highest broadband availability in the world higher than Japan , Korea and the States;
• penetration is still growing fast, over four in ten households now have broadband;
• I won’t say we have a price war going on in broadband, but that’s only because regulators are cautious people and have to choose their words carefully. But if you’re a Sky subscriber in the UK , you can get broadband for free; if you buy your voice calls from Carphone Warehouse, you can also get your broadband for free. So the UK consumer is doing pretty well on price.
• and finally, speeds are going up too. Two years ago, if you got broadband, you were probably on 512 kilobits. Now, you’ll pretty well definitely get 2 Meg as standard, you might get up to 6 or 8 Meg as standard, and you might have even faster speeds available.

How has that happened? We think it’s partly because, following the Telecoms Review that we finished this time last year, we’ve been working hard to make sure that LLU is a real success in the UK. The thing about LLU is: it allows operators to compete on innovation, investing in different kinds of DSLAM and offering different speeds of service. On LLU we’re a bit behind the market here in France , but we’re getting there. You can see that we already have LLU coverage of over 50% of households; that’s about 800 exchanges.

So far so good. But what you haven’t seen in the UK is any real investment in fibre access networks. And that’s now a different story to many other parts of the world. So I was in Japan a couple of months ago and they now have about 5 million broadband subscribers on fibre access. In the US , Verizon and AT&T are rolling out their fibre access networks as we speak. And though much of Europe was behind, the announcements are now coming thick and fast: Deutsche Telekom plans to roll-out VDSL with 50% coverage in Germany ; Belgacom is rolling out in Belgium , KPN in the Netherlands , the list goes on. And just last month, we heard that Iliad was planning a fibre roll-out here in Paris.

So the question is: where there isn’t fibre, how much should the worry? That’s a debate that we hear quite a bit of in the UK . And the answer very much depends who you talk to. So if you talk to some business groups, or to the development agencies or devolved governments who worry about regional competitiveness, the answer is a clear, “yes we should worry”. They point out that if we want to be a knowledge economy, and if we want to be able to compete effectively in the world economy, we’d better have the best communications infrastructure that we can. 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 SMEs.

But then you talk to the operators – the guys who might actually have to put up the money to build this infrastructure – and they’ll tell you that they can’t see the business case. The best estimates we have are that typically fibre deployment in Europe costs between 1000 and 1500 Euros per subscriber, not including set top box or subscriber acquisition costs. Much gets made of the 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 really taken off when the price for VDSL has come down to levels similar to basic DSL services. Consumers aren’t yet ready to pay a premium for these kinds of services. So the shift to fibre doesn’t obviously create value. And hence, their reluctance to make the investment.

You can have that debate at quite an emotive level – and in fact that’s the level that it usually takes place at. But how can it be that something is so valuable to the economy, yet doesn’t have a clear business case? We think it’s important to understand why it is that some countries are pressing ahead with fibre, and others haven’t got there yet. There are a number of reasons for this:

• One is loop lengths. We all know that you can generally get more out of DSL , the shorter the loop. The outlier here is the US – they just designed their networks with longer loops. So there’s no upgrade path in copper in the way that there is in much of Europe – in the US, if you want faster than a Meg or so, you’re going to need to roll out fibre down towards the customer.
• Another reason is the state of the television market. It’s an interesting aside that where fibre is being rolled out, the business case is usually from IPTV – from entertainment services to households. But most of the benefit that people expect to the economy comes from services to home workers and SMEs. But in the UK , for example, we already have three large competing digital TV platforms, and we have the highest digital TV penetration in the world. So the business case for IPTV looks pretty poor, and brings down the case for fibre with it.
• Another reason is planning controls. We value pretty towns in much of Europe , so we bury our fibre. But that comes at a cost – if you staple fibre to the trees, it’s an awful lot cheaper to roll it out, than if you put it underground.
• Another reason is government intervention. Some regional and national governments have explicitly intervened to help ensure roll-out. You can see that in parts of the far East, and also in Europe – for example in Stockholm .Yet many European governments don’t see the case to do that.
• Competition is also an important reason. Where there’s a cable industry which is widespread and well-financed, you often see faster roll-out of fibre than where there’s a weak cable market. The US is a good case in point: there it helped that cable hadn’t previously been able to offer voice, so it could go aggressively into voice over IP without cannibalising an existing revenue stream.
• …and the final reason is differences in regulation. I’ll come back to that in just a minute.

But the point I want to make first is this: there are lots of reasons why countries might move to deploy fibre at different rates. And some of them are legitimate reasons that mean that the economically efficient speed of deployment may be different in different countries.

Let me come back to the second thing I want to talk about, which is the challenge for the regulator.

Well, our starting point for thinking about that is our legal duties. Our primary duty is towards citizens and consumers, and we’re required to further their interests by ensuring competition, where appropriate. Our other duties go on to explain how we should do that. So, for example,

• we have to promote competition in relevant markets;
• we have to encourage investment and innovation;
• and we have to encourage the availability and use of high speed data services throughout the UK

What do we take out of all that? First of all, we certainly need to provide as much certainty as we can about our regulatory approach. Investors don’t like anything less than uncertainty. We’re shortly going to be publishing a discussion paper exploring the various approaches to regulating next generation access, and we need to ensure that we set out our approach well in time for anyone who wants to make an investment.

Secondly, we think that what we need to do to make sure that regulation provides the right incentives for efficient investment. And I choose my words carefully here. Incentivising efficient investment – i.e. the right amount at the right time – is different to incentivising investment – i.e. as much as possible, as soon as possible.

So what should a regulator do? The first thing is: we could cause some very costly distortions in the market if we took one approach to one technology, and one to another. It must be up to operators to decide whether they’d like to upgrade using wireless, fibre to the cabinet, fibre to the home or anything else. So we need to make sure that whatever we do, it’s as neutral between different technologies as possible.

The second thing is, we need to recognise that it all depends where you start from. 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. Some European markets look a bit like the States, with strong and widespread cable operators. But the structure of the UK market is simply not like that. So we need to recognise that quite different approaches are going to be appropriate in different markets.

So how do we balance what should our regulatory response be? It certainly needs to recognise the risk of the investment 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. That’s particularly the case because these investments are risky: as we discussed earlier, the investment case is a bit uncertain. It’s no good if operators are responsible for the loss if it all goes wrong, but aren’t allowed to keep any of the profit if it all goes well.

As an aside, that’s easy to say now, when we can’t look into the future. But in five years time, when the investment has proved to be a real hit, it’ll be easy to forget that there was any doubt about it at all. So one thing that we might want to do is to think about how we can commit, credibly and over a significant period of time, to continue to reflect the risk, at the time that the investment decision was made, when we regulate access.

The final point I want to make on this is that this is a very complicated question for a regulator. I said that we wanted to make sure that we provided the right incentives for efficient investment. But if you’re an incumbent – or anyone else – and you’re thinking of making an investment in upgrading your access network, what are the things you think about? What are the ways that you might monetise that investment? The answer is that there are lots of ways:

• you might want to offer premium delivery services to application and content providers. But there you come right up against the net neutrality debate
• you might want to save money by closing down the copper network in time, or by selling exchange buildings. But those assets are being used by LLU and other operators.

So, this is a critical call for regulators and yet it’s a very complicated question. We’ll be publishing a discussion document on this in a couple of month’s time, so that we can get a debate going in our markets about these issues.

The last thing I want to talk about today is the public policy challenge in faster broadband. National and regional governments rightly recognise the boost that widespread, first-generation broadband has given to the economy, for all sorts of reasons. For example:

• broadband allows people to work at home more effectively. So parents can stay at home and run a business while looking after their children;
• broadband allows small businesses to benefit from electronic supply chains, cutting down back-office costs

…and so on. It doesn’t seem unreasonable to think that as we move to next generation access networks, there’ll be similar benefits from widespread availability.

In the UK , the market has provided very widespread availability of basic broadband. There are a few, well-targeted schemes to fill in the gaps, but actually the gaps ended up being quite few and far between. So there are two reasons to be cautious when we think about public schemes for next generation broadband:

• one is, that although many state people argue as if it’s self-evident that faster broadband will deliver lots of benefit to small businesses and home workers, it’s not yet quite clear what the applications are that deliver that. On broadband it was clear – always on, access to email, file transfer that wasn’t at a snail’s pace. But what will you need 50 Mbps for? Something, no doubt, but because we don’t yet know what, it’s very hard to measure the benefits.
• the other is that we don’t know what the commercial roll-out will look like. We know that there’s likely to be a whole range of technologies used, side-by-side, to offer faster broadband. Some wireless, some wired; some point-to-point, some mesh. So how can we know where the gaps will be? It’s sobering to think that only five years ago, no-one expected the commercial roll-out of DSL to be much more than about 70% of the UK .

So for those reasons, it might be wise to be a bit cautious about public sector schemes in next generation broadband until the picture has become a little clearer.

So that’s a short stroll through some thoughts on regulation and faster broadband services. Thank-you very much for your time today; I really look forward to taking any questions on the panel later on.

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