Communication network innovations and the implications for regulation

Good morning. It’s a special pleasure to be here this morning given it’s almost exactly 50 years since the Telecommunications Managers Association began in April 1958. It was in the same year that trunk dialling was introduced allowing automated telephone connections to be made. On the screen is the Postmaster General himself - Ernest Marples – demonstrating the new technology from a call box and announcing that a three-minute call would reduce from 3s 6d to “only” 2s 6d – more than £2 in today’s money!

Today I want to talk to you about the relationship between innovations in networks and regulation in our dynamic and rapidly changing communications environment. But before I do, let me start by addressing what I see as a clear misperception of Ofcom among some business users. We’re very concerned to serve the needs of business, big and small. It’s true that the Communications Act, which is our rule book and marching orders, contains a lot of specific provisions to protect domestic consumers and small businesses, simply because Parliament saw these as being more vulnerable than large companies. It’s also the case that issues affecting domestic customers get much more airtime in the media, which may to some suggest that business is missing out. But I would emphasise that, when we at Ofcom speak about ‘consumers’ we mean the full gamut of enterprise customers just as much as domestic customers.

And five of the most important areas we’re continuing to work on are:

Implementing Ofcom’s strategy for fixed telecoms
Next generation core and access networks
Business connectivity
Developing Ofcom’s approach to mobile
And major spectrum awards

All of which matter crucially to the service you get as big business customers, and to your bottom line. I’ll come back these in a moment.

Let’s return to my main theme. Network innovations aren’t just a key piece in the convergence jigsaw. The development of next generation core and access networks will mark a change with the potential to transform our society and our economy. Convergence across teleco m s, IT, the media, and content application sectors is already providing new opportunities for companies and their customers to do things differently. It’s changing everyone’s abilities to do things on the move – both employees and consumers. It’s enabled firms to reduce costs in many ways, including through technologies like VOIP. Perhaps even more fundamentally, it’s changing relationships between suppliers and buyers. And now it’s starting to enable a different kind of innovation, including content- rich multimedia products and integrated services that were previously not possible.

Above all it’s power of competition which can drive these kinds of innovation and value in communications services. Our actions have already opened up competition in broadband based on investment in infrastructure. And companies have already seized the resulting opportunities for innovation and differentiation. That’s been particularly through local loop unbundling which stood at just 100,000 lines when in 2005 we agreed a set of undertakings with BT in lieu of a reference to the Competition Commission. Today – two and a half years on - local loop unbundlers today account for al m ost 4m lines, prices have fallen sharply and a massive range of services is now available.

We as the regulator can enable those kinds of developments, through rules which help markets to operate effectively. But we can’t make them happen. That requires providers to invest and take risks. And the spur of competition is the best way to ensure investments continue to be made and risks continue to be taken in the interests of customers, whether corporate or individual.

At the sametime, we continue to look for ways to deregulate in the interests of customers where there is no enduring market power. We want as far as possible to allow competition to drive market outcomes - not regulation. It’s in your hands, in driving successful customer-supplier relationships, at least as much as in ours, to determine the future of communications markets.

Convergence is happening all around us. And large business users are in the forefront of many of the developments. So we’re already in the thick of a number of hard decisions about how to enable future competition and investment. Let me take you through just a few of the issues affecting business customers which we’re looking at right now.

We’ve recently been carrying out a formal review of the business connectivity market. As part of that work, we co m m issioned extensive research to look at the co m m unications usage of large businesses.

Among those companies surveyed, most had digital leased lines. Many of the larger companies also had virtual private networks with broadband access. Large companies didn’t just have more high capacity links; they also used a wider range of services than the smaller companies.

The factors business users rated most highly were: resilience, availability and a dedicated connection. Indeed companies thought those issues would become even more important in the future. And these issues are precisely the ones we are addressing in relation to the next generation access product of Ethernet Active Line Access.

Download speed was also i m portant to businesses, whereas across our sample high speeds to upload data were deemed the least i m portant of the features assessed.

But, it was clear fro m the sa m e study that business users aren’t prepared to have this i m proved resilience, availability and speed at any cost. In fact, two thirds of the 450 co m panies sampled said that they would change supplier to avoid a hypothetical 10% price rise for voice traffic. More than half said they would switch to avoid a si m ilar price rise for data traffic. So being the demanding executives you are, most of you expect better services at keener prices. We’re keeping confidential the names of those of you who said they wouldn’t mind a 10% price increase..

We published the initial findings of our review of the business connectivity market six weeks ago. A major focus within that has been leased lines which are a critical element in the networks underpinning many UK businesses. Since our last review in 2004, we found there’d been progress towards more effective competition in a number of areas. That was particularly in the m arkets for so m e higher bandwidth wholesale services.

For example, outside the Hull area, a separate and competitive market now exists for wholesale Ethernet services at bandwidths over 1Gbit/s. We consider that very high bandwidth SDH services are also effectively co m petitive outside the Hull area. And we believe that a separate and effective wholesale market now exists for high bandwidth SDH terminating segments in central London and Docklands.

So we’ve proposed that BT’s provision of those relevant services should no longer be subject to SMP regulation.

But in some business markets, the evidence showed that regulation is still necessary. BT continues to have a very strong position in the retail m arket for low bandwidth leased lines, where its m arket share increased slightly from 78% in 2002/03 to 80% in 2006. I don’t need to tell anyone owning and running a medium-sized business that this is still a market of vital importance. So in our view any steps towards deregulation in the low bandwidth retail m arket would be premature. BT also remains do m inant in the leased lines trunk market, and we have proposed to extend the existing PPC charge control to cover these services.

In the wholesale m arket for low bandwidth ter m inating seg m ents the situation appears to have got worse. BT’s m arket share increased to an esti m ated 89% in 2006. So in that area we’ll continue to apply the existing remedies, including a charge control, unless and until greater co m petition becomes visible.

We’ve also heard concerns from businesses that BT’s wholesale Ethernet services have had a nu m ber of shortco m ings which have i m peded effective competition including delays in rolling out new technology, poor service quality and an inflexible approach to product migrations.

We believe these concerns are serious. So we’ve pressed BT to give fir m co m m it m ents for the roll-out of ethernet backhaul products based on a new national backhaul network using WDM technology. We expect to consult on these commitments following the completion of the market review. We have also consulted on a new regime of Service Level Agreements and Guarantees for BT’s wholesale Ethernet services.

Let me turn now to next generation core networks. We have received feedback from some customers concerned about the possibility that as BT rolls out its new 21st Century Network, it may seek rapidly to withdraw legacy services – notably analogue and low bandwidth circuits. There were also concerns expressed that BT may increase the retail price of analogue services, of which it is now effectively the sole supplier.

We are firmly of the view that these concerns need to be addressed now. So we propose to require BT to support existing analogue and low bandwidth circuits for the next four years. In addition, BT has indicated that it is prepared to give a set of voluntary undertakings to supply new analogue and sub-2Mbit/s retail circuits until 2011. BT has also undertaken not to increase its prices for analogue services more quickly than the rate of inflation for the next two years. We believe that an appropriate set of undertakings including these should provide a reasonable level of assurance for business consumers of legacy services.

Next generation access is another subject which we can’t afford to be complacent about or put off tackling for another day. There’s been a lot of coverage and discussion about our recent consultation on Next Generation Access. I thank the CMA for your contribution to that debate.

But you know there’s an old saying that the best of all monopoly profits is a quiet life. So our instincts remain in favour of the technology neutrality and infrastructure competition which we believe stands the best chance of generating the very end result that CMA members are looking for.

Unlike for households, next generation access already exists to many UK businesses. There are already so m e 120,000 fibre connections to business in the UK today. That’s significant by any measure. But wider consumer access to next generation access is clearly relevant to businesses too: for small businesses who can’t afford dedicated lines, for employees working from home, and for those businesses providing bandwidth hungry services to consumers. We want the conditions to be in place for efficient investment in next generation access as soon as the business case is attractive enough. Virgin Media have already decided that it is for them. So we want to continue with the three central principles of the Telecoms Strategic Review:

allowing investments to be contestable
maxi ising scope for innovation by intervening at the deepest sustainable level
ensuring equivalence of input for key monopoly products;

but add two others to reflect the riskiness of new network investments

reflecting appropriate risk in any regulated prices
providing regulatory certainty so that investors understand the long term rules of the game.

The government announced on Friday that it was launching a review headed by Francesco Caio designed to complement our regulatory work in this area. The review will look at whether there were any barriers holding back the rapid deployment of next generation access in the UK. That will include whether Ofcom’s current regulatory powers need to be increased. We welcome the review and we’re looking forward to working closely with Francesco and with Government in the review.

All too often next generation access is equated purely to fibre. But innovation in high bandwidth services isn’t just about fibre. Mobility is increasingly crucial for business and consumer communications. Wireless technologies are changing fast, and governments and regulators are less well placed than markets in selecting which technologies to back. So we remain committed to a market-based approach to spectrum as the best way to encourage innovative wireless services.

Last week we awarded licences for radio spectrum at 10 - 40GHz to 10 organisations. This auction is significant and exciting for three reasons.

First, it will provide access to a very large a m ount of spectrum – almost 6 GHz in total.
Second, this – Ofcom’s fourth spectrum auction - represents many of the key facets of our market-led approach. The licences will be largely technology and service neutral. That will allow a number of possible uses, including backhaul for mobile and fixed network operators, high capacity infrastructure links and broadband access networks.
Third, we introduced a novel auction design which encouraged all the lots on offer to be sold and each of the ten bidders won some spectrum. This success has encouraged us to apply a similar approach to the important L Band and 2.6 GHz auctions later this year.

All of which is to the good of business connectivity and network innovation.

Before I close, let me touch on an issue which Carolyn raised in her opening session – how to achieve a seamless communications market in the EU.

I believe that the current EU regulatory framework has, on the whole, served the interests of consumers and business well in promoting competition and investment in communications services, and in improving consistency among different regulatory regimes. That doesn't mean the job is done or that there is no room for improvement.

However, we're now in the throes of legislative process to reform the EU Directives. The Commission has proposed a new Authority and a veto on national regulatory remedies in order to ensure further improvements in consistency of approach and greater opening of markets across Europe.

Most Parliamentarians – both national and European - as well as most national member governments have expressed strong reservations that those proposals will achieve those aims. As one example, in its report published on 8 th February, The House of Lords EU Committee rejected the case for a European “Super Regulator” in telecoms, finding:

“such a measure is likely to increase regulatory complexity and uncertainty for market participants and bring insufficient benefit for the costs involved”

I’m also rather sceptical about this aspect of the Commission’s proposals. I think a better way forward is to ensure that the Commission and national regulators work together using their complementary expertise to identify where more consistency is needed and how this can be achieved.

A lot of progress has been made through the work of the European Regulators Group in the last 18 months and a good and practical way forward would be through implementing measures such as: giving legal standing to the ERG within the Framework; and the work the ERG is doing to improve the quality of its guidance and its reviewing of national regulatory decisions.

So to sum up. Convergence is with us now, bringing huge opportunities for British companies, both for service innovations and for cost reduction. So too are m any of the challenges often categorised as belonging to the next generation of communications networks.

I’ve set out some of what we’ve been doing to ensure that the conditions are right for businesses to take advantage of that opportunity. We want to avoid regulating new services wherever possible so we don’t stifle innovation. But we won’t hesitate to regulate when it’s necessary to ensure business markets remain competitive as products evolve.

Because effective competition remains the means by which network innovation and value will best be delivered to businesses and individuals. And we remain determined to create the conditions for that competition.

Thank you

Communication network innovations and the implications for regulation

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