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22|11|06

FT World Communications - Conference Networks and Convergence : A regulator’s perspective

See the slides associated with this speech

Introduction

Good afternoon. I want to focus on infrastructure and networks. But I want to begin with a canter through some of the key themes underlying convergence which will shape how those infrastructures and networks develop and are used.

How the world is changing

The first theme is the increasing importance of wireless. Many of the new platforms that have emerged over the last decade and many of the prospective new ones are wireless.

[Slide 1: The increasing importance of wireless.

Forecast of non-government demand for spectrum below 15GHz, 2005-2025]

As you can see, there is a secular rise in demand for wireless. As we have found with recent and prospective spectrum auctions, for any given piece of spectrum there are at least half a dozen different applications vying for access to it. In almost all developed economies wireless mobile revenues have overtaken fixed wireline revenues. There is intense innovation and competition in new wireless services; competing platforms, standards and technologies.

New technologies like HSPA are giving mobile more competitive upload and download speeds. We see innovation in retail and in services; we see operators like 3UK last week announcing their HSPA-enabled bundled service of VOIP, mobile TV, remote access, search and live messaging.

The second theme is competition between platforms. Increasingly adjacent platform markets are competing head on: DSL or fibre versus cable versus 3G wireless for triple and quadruple play services. Sky, a broadcaster, is now in LLU broadband; BT, a telco, is about to launch Vision, its content platform. MNOs are increasingly in broadband and TV services.

[Slide 2: Operators are offering more bundles. Bundles offered, 1995-2006]

Third, convergence of billing or bundling. A recent OECD study of 87 providers in 30 countries showed that triple-play bundles were now available from 48 different providers in 23 different countries; with quadruple play offerings available in 10 OECD countries.

This is part of a story where increasing complexity in service proposition battles with the simplicity offered by a single customer relationship. Our concern is that consumers are able to make well-informed comparisons and that competitive disciplines operate in the market. Migration processes, particularly for bundled services will loom larger as an issue.

[Slide 3: Incumbents’ market share on all platforms is falling

Fixed residential voice calls, commercial radio listening, terrestrial PSBs]

Fourth growing competitive pressure on incumbents. In broadcasting, from audience fragmentation and the growth - 65% this year – of internet advertising. In telecoms from the decline in fixed line revenues forcing the incumbent into new wave markets where they face new competitors, without incumbency advantage and, typically, with thinner margins.

The converged users’ priorities

From the user’s perspective, convergence of platforms and services, and the integration of networks and content with processing power and storage is meeting three critical user demands - for control, mobility and participation.

The critical technologies and services for control are interactivity, PVRs, local storage and downloading. The best current examples include Sky+, Cable VOD , IPTV and, of course the iPod.

[Slide 4: A demand for mobility is driving the demand for wireless

UK adults’ main method of making/receiving calls; average SMS per mobile]

Mobility allows consumers greater flexibility and freedom and consumers will demand more and more of their media and communications in this form. This is as true for business as it is for residential users. Within all corporate telecommunications and IS, mobile saw the biggest rise in share of spend on last year.

Thirdly participation: users are less and less content to be passive recipients of communications services. They expect to be part of the service, to help determine the outcomes or generate the content themselves:

• five million plus upload to Flikr
• there are 57 million bloggers
• and 100 million videos uploaded to YouTube
• But also participation in routine ways - shopping channels, entertainment shows with voting, IM and online gaming.

These trends are most exemplified by the 16-24 year old group covered in our Communications Market research:

• Mobile is their platform of choice and the device they would miss most
• 70% use social networking internet sites
• one third either contribute to or have their own website or blog
• viewing of linear TV – traditionally lower among this group – is declining at an accelerating pace as the young demand more control, more mobility and more participation.

All this- the technology and commercial drive to convergence, and the changing characteristics of consumer demand- add up to economic disruption for operators as they have to revisit business models and strategic positions.

• VOIP with over 2 million UK users and growing rapidly undermines call revenue models.
• Bundling and fixed price tariffs intensify the battle for the customer relationship.
• Advertising-based businesses must respond to the internet, the PVR, and to a generation of viewers who pay only partial rather than fixed attention to the message

This is the greatest challenge for companies; so too it is the greatest challenge for regulators - so let me turn now to some of our key policy priorities in networks and infrastructure.

Ofcom’s overall approach cuts across infrastructure, network, service and content issues.

• In our regulatory stance, we believe convergence is a good thing – eroding conventional market boundaries, offering added choice, range, keener prices and improved quality of service;
• In this context, our job is to promote competition while protecting the broader public interest;
• It’s to actively encourage innovation, to remove barriers to entry and to facilitate efficient investment;

• to ensure that the market works well, with empowered consumers enjoying appropriate protection that creates a level playing field of regulatory compliance;
• And to reduce regulation and to simplify regulation where possible.

Spectrum

As to policy priorities…

Let me start with wireless which will be a big part of the infrastructure of convergence.

[Slide 5: Command and control vs. liberalised spectrum]

Our immediate task is to bring as much usable spectrum to the market as rapidly as possible and make it as flexible to use as possible. You can see the scale of the challenge from this slide.

Our approach is spectrum release, liberalisation and trading. Authorising spectrum for use with only the broadest of limits on technology and applications use – limits defined by the need to protect other users from harmful interference.

It is for secondary markets to develop in the liberalised area, without intervention from the regulator. Already, some 25% of the significant tradeable licences have been traded since the system was opened up two years ago.

Of course, there are issues of transition. One of the biggest potential prizes for liberalisation – re-use of the 2G spectrum – is complicated by finding a route to liberalisation that is not unfair to parties who entered the market at different times and whose spectrum has different characteristics.

But the direction of travel is clear. Technology innovation is going too fast for regulators to be able to pick winners between different operators or different types of use.

[Slide 6: Auctions so far]

Last month we concluded our second auction.

We also opened up the top end bands (71 and 81 GHz) for first-come, first served, licences for broadband fixed wireless services.

And we have set out our plans to bring some 400 megahertz of the prime real estate part of the spectrum to market over the next 2-3 years. To put that in context that is about three times as much as was auctioned in 2000 for 3G.

[Slide 7: Spectrum releases coming up]

This slide shows the bands and planned timetable for release:

• 1452-1492 MHz (L Band) Auction in second half 2007
• 10 GHz (Broadband wireless/local access) Auction second half 2007
• 2.6 GigaHertz Band (up to 215 MHz of spectrum) Auction by end 2007
• Digital Dividend Review (112 MHz of analogue TV spectrum freed up by digital switchover). Consultation by end 2006.

These releases are likely to be in the form of technology-neutral, liberalised spectrum where possible. In other areas previously that has not been the case and it is important to be clear when there are differences.

In 3G for example the licences came with roll-out obligations. We intend to hold such licensees to the commitments they have given. It would be unfair to the operators who meet their commitments to allow any other licensees to duck theirs. So we are making it very clear to the 3G licensees that we expect them to meet the requirements in their licences to roll out services to the areas where 80% of the UK population live.

One important change not on this slide is the licence for the second national DAB multiplex which we will advertise later this month. ‘Advertise’ not auction because it is a piece of broadcast legislation.

But it is a great example of the convergent world we see as our greatest challenge. DAB is an audio, radio technology. But up to 30% of the Multiplex can be used for any digital data service, including video content.

So what was a purely radio conversation is now of keen interest to TV broadcasters, to content creators and rights holders, to the MNOs, and to mobile handset manufacturers.

So, for anyone in the mobile video business – or who thinks they might want to be in the mobile video business – this ‘radio’ licence is as relevant as development in 3G and DVB-H.

Fixed Wireline Developments

In fixed wireline, Ofcom’s approach has been:

• to encourage competition at the deepest level of the infrastructure
• to require full operational separation of BT’s bottleneck assets from markets that are more inherently competitive
• and to regulate the bottleneck assets to ensure true equivalence of inputs.
• But as that is achieved we withdraw from regulation elsewhere – as we have been able to do in retail price regulation.

After a year in operation, I believe that the principles have proved sound. There are boundary issues and certainly issues of implementation. One of our coming year priorities is to stay on top of this and follow through vigorously where necessary.

In this context, broadband is making progress.

[Slide 8: LLU progress]

• Broadband is available from 99.5% of exchanges.
• The 1 millionth LLU line has been unbundled and LLU is growing at 40,000 lines a week.
• Average speeds have grown from under 512k to around 2Megs; in LLU homes the average offering is up to 8Mb.
• Competition is amongst the keenest in Europe and retail prices have fallen by two thirds for high-speed broadband since 2003.

Three years ago a market structure with one incumbent and a dozen under-capitalised competitors each cannibalising each others’ margins, was not a basis for sustainable competition.

Today we have a BT that is running harder and doing better, but also fewer but stronger and better-capitalised competitors: a structure more likely to deliver sustainable competition, innovation and benefits for consumers.

We were always clear that, as LLU competition developed, BT would at some point need to re-balance the tariffs for its own wholesale products for those that do not use LLU.

Last week, BT announced its forward Bitstream tariffs – a product known as IPStream. They provide some forward certainty in the market, not just for IPStream customers but also LLU operators.

As a regulator concerned with all consumers, we welcome BT’s voluntary commitment to a price ceiling for IPStream in rural areas, where there is unlikely to be wholesale competition.

Those new price ceiling proposals will be an important input to the consultation on the Wholesale Broadband Access Market Review which we published yesterday.

It is the first time the UK market has had proposed regulation on a geographic rather than nation-wide basis. We identify three geographic markets. I will summarise them as:

• Market 1, typically rural: unlikely to be competitive;
• Market 2, typically county-town: potentially competitive;
• And Market 3, typically metropolitan: probably competitive.

This will allow us to tailor remedies to the significantly different competitive conditions rather than adopt a one-size-fits-all approach

For next generation networks, work is proceeding to design equivalence of input into BT’s 21CN; and, through the industry-led body NGN UK , to ensure the interconnection and inter-operability of 21CN with competitors’ next-generation core networks.

NGA

The last topic I wish to touch on this afternoon is next-generation access.

Very high capacity, high speed networks are crucial to competitiveness at the large corporate level. In the main, the UK large corporate market is well served with fibre access in what is a competitive market.

The emerging issue is around fibre to the curb, fibre to the building or its wireless equivalent for the residential and SME market.

The question of when deployment should happen here is something for the market to judge. Except for some green-field building developments, the market is not today showing a marked inclination to deploy.

But, as this question is increasingly asked – as it will be - we need to be sure that the regulatory framework helps rather than hinders efficient investment.

We want to start a conversation with the industry around those issues. To that end we will tomorrow be publishing a discussion document exploring the regulatory challenges posed by next generation access.

Why is deployment happening in some countries but not others? In Korea and, to a lesser extent, Japan , state intervention has been significant. But alongside state intervention Far Eastern markets have a different approach to planning law: daisy-chaining fibre on poles is a lot cheaper than digging up the roads.

And there is building density, seen at its most extreme in Hong Kong where deployment has been market-led but where 80% the population lives in only 8,000 buildings.

In some markets, notably the USA and The Netherlands, where cable has historically been strong we are seeing fibre deployment by the telcos playing competitive catch-up; a pressure reinforced in America by the regulatory incentive of removing access obligations on the incumbent telcos where fibre is deployed.

One feature in common to these markets is that while users say they like the higher speed services such as IPTV and high definition, they are not prepared to pay a large premium for them. To drive take-up of these services, many operators are charging similar prices for fibre based services as they are for DSL. That may also bear on the UK market, given our relatively mature Pay TV market which is itself already offering high definition and home storage.

We have two broad objectives when looking at NGA. Firstly not to become an obstacle to efficient commercial investment. And secondly, to ensure that competition is maintained in an NGA environment.

There are a number of key questions.

First, should there be regulatory forbearance?

Forbearance can be right for new entrants, with new technology in a competitive market-place. VOIP is a good example. But we believe forbearance does not have a place when used as industrial policy, the quid pro quo for which is allowing incumbent operators to leverage market power from the old world to the new. In many ways, the net neutrality debate in America is an emerging response to the impact of regulatory forbearance – in other words, the emergence of a duopoly of vertically integrated fibre access operators.

Secondly, how does regulation reflect the higher level of risk of new infrastructure investment? The current local access network is a sunk cost with predictable demand and relatively low risk and requiring a low rate of return on investment. None of this is likely to hold for next generation access investment.

Thirdly, where will be the correct focus to ensure access to promote downstream competition? This could include access to ducts, unbundling options, including sub-loop or fibre unbundling or access to a wholesale bitstream product - but is likely to vary depending on the technology choices made by the market.

Finally, building on our intention to sustain competition, what is the best medium to long term migration path for existing infrastructure investments such as LLU in the event of deployment of the new technologies.

You can tell from the way that I frame those issues that they are genuinely open questions with which we need to engage with the industry. But it will be critical to get them right if we are to move successfully to the next phase of convergence in a way that delivers investment, innovation and competition for the benefit of all consumers.

Thank you.

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