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13|02|07

Speech to Communications Management Association Conference

1pm Wed 7 Feb

David Currie

Good afternoon, thank you for inviting me to speak today. The CMA and its members are an important group of stakeholders for Ofcom and I am pleased to be able to engage with you at your annual conference. Communications has always been important to business success and to the world economy, and that importance is growing. You represent a core part of the UK economy and you are critical to its competitiveness.

I am well aware that I stand between you and lunch. So I plan to be brief, speaking for about twenty minutes, leaving you to decide the balance between questions and food. I am conscious that I had the pleasure to address you three years ago when Ofcom was just getting going. That was the time when I was adept at saying not much at length – I judged that Ofcom would be judged by results, not by what we said, and results 50 days in were thin on the ground. But I was very aware of the Reithian triplet: entertain, educate and inform. Rereading that speech, I think I can claim to have informed: I flagged the telecoms strategic review, the results of which I think we can claim to have transformed the telecommunications scene in the UK; we may also have educated through our processes of engagement with stakeholders, though we have also been educated and informed in turn. And we have certainly been entertained by the changing of hats that we have observed, especially in old-fashioned telly. I hope we have also entertained in our modest way: my speech three years ago was heavy on gags and ended with a quote from the Pet Shop Boys, but sadly without the vocals (or perhaps not, given my voice).

I have been asked to talk about how we see the future of the communications sector and the changing role of regulation. Last year, my colleague Sean Williams addressed you on the developments in the communications industry and Ofcom’s response to those changes – particularly our telecoms strategic review. Today I will speak about infrastructure and networks and the key themes of convergence which underlie the changes in the market you operate in – all serious stuff and without the gags.

Clearly communications services are important for businesses in two ways: firstly as an essential tool in communicating and managing your people; and second as the means of access for and to your customers, suppliers and business partners. And increasingly both sets of communications are distributed geographically and internationally: globalisation requires, and is made possible by, high speed electronic communications.

Since Sean spoke to you, much has changed in the communications world in the past twelve months. I am going to create a context for my later observations by giving you an overview of the current state of the market. I will then cover the regulatory response to some of the key themes facing you as enterprise users of telecoms. These include local loop unbundling, availability of broadband, next generation networks and the increasing importance of spectrum. Lastly I will take a fleeting look at an issue which we can respond to and influence but not determine – the challenges facing us in Europe.

But first let me address what I see as a clear misperception of Ofcom among some business users. Ofcom is very concerned to serve the needs of business, big and small. It is true that the Communications Act, which is our rule book and marching orders, contains a lot of specific provisions to protect domestic consumers and SMEs, simply because Parliament saw these as being more vulnerable, whereas the big boys can, to a much greater degree, look after their interests. It is also the case that issues affecting domestic customers get much more airtime in the media, which may suggest that business is missing out. But, having noted those points, I would emphasise that, when we at Ofcom speak about ‘consumers’ we mean enterprise customers just as much as domestic customers. And by enterprise customers, we mean the full gamut, from SMEs all the way up to large corporate and public sector organisations.

You, the CMA, raised this issue in your written response to our draft Annual Plan for 2007/8 where you stated that you saw no evidence of Ofcom’s commitment to business consumers. In reply, I would like to draw your attention to those important policy priorities for the coming year which are focused on business needs, albeit not exclusively. The list includes:

• Ensuring BT implement the undertakings effectively so as to deliver real equivalence of input and effective competition in wholesale broadband access and local loop unbundling;
• Ensuring competition and investment in next generation networks;
• Developing our approach to next generation access;
• Reviewing the mobile network termination markets;
• The review of telephony markets, including VoIP;
• The review of leased lines markets and converging backhaul markets;
• Ensuring the delivery of wholesale line rental products and carrier pre-selection.

Together with our plans for spectrum release for new applications, which I will discuss later, all of these issues matter to the service you get as big business customers, and if we get it right you should get real benefit that reaches to your bottom line. So, by all means let us have a debate about how Ofcom can better engage with the large business users of communications services – though recognising we have made major efforts in this, not least in supplying heavyweight Board level speakers at each of your annual conferences. But can we please kill the notion that Ofcom does not care about the business enterprise users of communications services.

We are, of course, aware that, having encouraged a new, competitive market in communication services, notably though not exclusively through local loop unbundling, the current operation of that market is less than perfect: we have a number of technical problems that we did no anticipate that get in the way of switching; and we have a number of improper selling practices. We need to deal with that, and we are doing so: you will have seen recent fines and a vigorous emphasis on compliance. But we should hold onto the fact that, although the market is as yet working imperfectly, the proposition for customers, big or small, is hugely transformed from two years ago. Despite the teething troubles, which we are tackling, the service offering is being hugely enhanced.

Now let me turn to developments in the market over the last twelve months. Change has continued at a great pace and convergence has started to become a reality. In our Annual Plan which is currently out for consultation we set out six areas of change in the communications sector. I will highlight three of them here.

We are seeing an ever increasing demand for wireless. We have found with recent spectrum auctions that for any piece of spectrum there are at least half a dozen different applications vying for access to it. And there is intense innovation and competition in new wireless services, standards and technologies.

We are also seeing much more competition between platforms. Increasingly adjacent platform markets are competing head on: DSL or fibre versus cable versus 3G wireless. Sky, a broadcaster, is now in LLU broadband; BT, a telecoms company has launched BT Vision, its content platform.

And then we see the growing competitive pressure on incumbents right across the industries we regulate. In telecoms it comes from the decline in fixed line revenue. This is forcing the incumbent into new markets where it is facing new competitors, without incumbency advantage and, typically with thinner margins. Voice over IP has over two million UK users and is growing rapidly, undermining traditional call revenue models.

All this – technological advances, the commercial drive to convergence and changes in consumer demand - add up to economic disruption for operators, especially the incumbents. They have to revisit business models and strategic positions. And there is the possibility of disruption for all types of consumers too.

We see the combined effects of all of this in broadband provision: progress is continuing. We have around 1.5 million unbundled lines. Average speeds have grown from under 512k to around 2 Megs and competition and prices are amongst the keenest in Europe. According to BT, 99.6% of UK premises are now connected to a DSL-enabled telephone exchange capable of supporting broadband at 512 kbit/s speeds or higher. These statistics suggest that we have the second highest penetration level in the G7.

Now, of course, we don’t automatically take all the numbers that BT gives us at face value. We work closely with BT and with third-party consultants who model BT’s network to cross-check the data. In addition, we are conducting ongoing analysis into broadband availability in the UK. Some results will appear in the next UK Nations & Regions Communications Market Report published in May, I have no doubt that you will scrutinise those carefully.

But of course, while almost all exchanges are broadband enabled, if you live too far away from the exchange, you may still not get connected because the local loop is too long. Technically this problem might be solved by extending fibre into the ‘last mile’ to the cabinet or the home. However the services here are not yet defined and the technologies are not yet stable. It is too early to define a regulatory approach but we will work to create the right environment for investment. We are also watching with interest to see how next generation access technologies are developing abroad, albeit in markets which have developed differently from the UK.

Let me now re-visit some of the principles behind our regulatory decisions at Ofcom. Three years ago a market structure existed with one incumbent and a dozen or more under-capitalised and weak competitors. This was in part because BT’s monopoly in copper and last mile fibre limited competition.

Our strategy for telecoms regulation is to promote infrastructure-based competition as deep in the network as reasonable and unshackle BT from regulation where competition means it is unnecessary. To promote infrastructure based competition we introduced equivalence – where BT buys the same wholesale products as its competitors – and a new business unit in BT – Openreach – to ensure that competitors competed on a level playing field.

LLU has taken off and there is now dynamic competition. But this has thrown up new problems and the market is not as we would like it to be. We know that among your community there is some concern about the effectiveness of the Undertakings. In particular over the summer service quality provided from Openreach – be that provisioning times for leased lines or fault repair on voice lines - deteriorated. Openreach has faced challenges tougher than they anticipated – partly because of the problems of success – LLU has taken off much more rapidly than perhaps any of us could have hoped just two years ago, and that has made the role of Openreach that more challenging. But I am assured that they will rise to this challenge, and Ofcom will hold them to it.

Ultimately most consumers – and that includes enterprise users - will end up benefiting from more and better choice between providers, and more innovation resulting in new services being brought to the market. In addition to pervasive fixed line broadband, the demand for wireless broadband is also set to take off. This illustrates why our spectrum liberalisation programme is so important. It will free spectrum to provide innovative new services. Over the next three years, around 400MHz of prime spectrum under 3 GHz will be auctioned. This is in addition to the spectrum that will be freed up by digital switchover.

Just this year we are expecting to hold seven auctions for pieces of spectrum which individually can be used for services as diverse as private mobile radio, wireless broadband, broadcasting, 3G and WiMax. Some of these pieces of spectrum are so flexible that they can be utilised for almost any service. These releases will be in the form of technology-neutral, liberalised spectrum where possible. The auctions will ensure that the spectrum is used efficiently and that we give maximum flexibility to the market. You may not be interested in directly acquiring any spectrum yourself, but you will benefit from the services that are provided as a result of liberalisation .

In addition to the planned auctions we are currently advertising the licence for the second national DAB multiplex. DAB is an audio radio format. But up to 30% of the Multiplex can be used for any digital data service, including video content. This opens the door for TV broadcasters, content creators, mobile handset manufacturer, mobile operators and anyone interested in creating mobile video type services to apply and give you, the user more innovative services.

The introduction of IP-based next generation networks is the most significant change to telecoms networks since competition was introduced two decades ago. These new networks have the potential to deliver very significant benefits to all consumers. NGNs facilitate exciting new services that offer downloads and streaming of broadcast quality images on a single, converged, core network. And all at a lower cost than that associated with legacy networks.There will however be important effects on competition with many of the existing wholesale products needing to change as the new networks develop.

A policy priority for us in 2007/8 is creating the conditions for all providers, including BT, to invest in NGNs. Our planned work in this area includes changing the regulatory regime for fixed telecoms to take account of NGNs. This will ensure that regulation reflects technological reality and is not living in the past. There will be new market definitions such as wholesale voice access, new wholesale product specifications and appropriate pricing.

BT is expected to begin migrating its customers to its 21CN in earnest in early 2008. We are committed to ensuring that the migration goes smoothly for everyone. I am aware that there are concerns among CMA members that there might be disruption, that wholesale legacy services might be lost and that some existing retail products might not be supported. I know that some of you also feel that the process is not transparent.

We take these concerns very seriously. For example, we have held two workshops to inform users about the migration to NGNs and we will continue to work to enable information sharing. Work is in progress to ensure that operators engage fully with their customers and provide clarity on the changes. This is a shared voyage of discovery for all of us – the precise nature of the future is being defined as we move forward, so we don’t yet know the answers – that is the fascination of a sector subject to huge technological change. We will seek to ensure that, as soon as BT knows the answers, you will have them. That is what NGN UK is about – sorting out the interconnection issues between operators and making sure that it is communicated to you, the customers.

It is important that we remember that NGNs will undoubtedly be good for enterprise users. Some of the barriers to service innovations which existed in the past will be swept away. The new services created as a result will be more innovative and better for your business. I am sure you are aware of this, but it is why you need to exert your important muscle and influence.

Lastly, let me turn to developments in regulation in Europe, what they mean for those of you who need networks in Europe and what they mean for us, the regulator.

I believe without doubt that competition within the European single market is good for the communications industry and good for communications users. We know that different regulatory processes in other countries create obstacles for growth for both operators and consumers. The challenge for us is to utilise the advantages of the single market without the disadvantages of centralisation. We are committed to working with the other members of the European Regulators Group to get the ERG to raise its game and make European regulation work better. But I don’t believe that a monolithic Euro regulator is the way ahead because markets and sectoral structure vary considerably across Europe. In addition, I suspect that it would make it easier for the large, pan- European incumbents to lobby successful while smaller operators and consumers were ignored.

So in summary, there are challenges ahead for us as regulator and for you as business consumers in this rapidly changing market. But I believe the overall picture in this dynamic market is a very positive one. When I last spoke to you in 2004, we had one huge player facing many, rather weak and unsustainable businesses, largely kept in business on the regulatory drip-feed. We are not there yet, but I see the prospect of a genuinely competitive market with a number of scale operators offering a genuine alternative to the incumbent – genuine effective competition rather than shadow competition. Investment in infrastructure is a key test of the sustainability of this. I am optimistic that we will see a continued expansion of products and services at ever keener prices to the benefit of all consumers, domestic and enterprise. And the wider benefits of this will be on the broader competitiveness of UK companies, to the prosperity of our economy and society.

I believe we have a great story to tell here in the UK about progress in our communications sector, taken broadly to include all represented here today. Thanks for listening. I look forward to your questions and to lunch.

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