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15|10|08

The Ofcom Annual Lecture 2008

David Currie, Chairman, Ofcom

Introduction

Good afternoon. The Ofcom Annual Lecture is by tradition a stock-take. So let me invite you to picture this:

Equity markets plummeting from their highs, with the bottom not yet in sight.

Former employees disconsolately clutching cardboard boxes of their office belongings.

A wave of corporate failures, forced consolidations and fire-sales of parts of the business that had had millions lavished on their acquisition only a few years earlier.

A raft of business models that, with hindsight, were not remotely sustainable.

All this in a sector that underpins so much else in the economy.

And that was just the state of the communications sector that greeted me when I was appointed to chair Ofcom in 2002.

It is easy to forget, in the midst of today’s banking and wider economic crisis, just how hard hit much of the communications sector had been by the collapse of the dotcom and TMT boom. BT had just de-merged its mobile arm. The other MNOs were still digesting the £22 billion transfer to the Treasury for the 3G spectrum. All were nervously calculating the investment costs of the network roll-out and marketing that would be necessary, in straitened times, before they would see a penny of that £22 Billion back in revenues. Broadband investment, already mired in clumsy process and inter-industry wrangles, had dried up completely. Cable was in thrall to its American bondholders for whom ‘capital expenditure’ were dirty words. And the UK’s first big venture into terrestrial pay television had just gone broke.

It was not a pretty picture. So, right in Ofcom’s founding DNA was a concern for investment and innovation. I will come back to these shortly. They have a new salience in today’s economic circumstances.

But this is the last annual lecture I shall give as Chairman of Ofcom. So what I would also like to do this afternoon is give an unvarnished assessment of what has worked and what has gone less well than our original hopes and expectations six years’ ago; what is unfinished business and what I believe will be pressing issues for the Board that my successor will preside over.

The market and the consumer

It is also customary on these occasions to give some edited highlights from the current year’s Communications Market Report. In doing so it is instructive to compare this year’s with the first such Report Ofcom issued four and a half years ago.

Then as now, the market was undergoing rapid change. In 2004, for the first time a majority of households had digital television, compared with nearly nine in ten today. But we did not mention personal video recorders, high-definition television or the i-Player and its commercial rivals. We covered industry advertising revenues. But we did not mention internet advertising, which last year overtook the combined ad revenues of ITV, Channel 4, S4C and five.

Mobile accounted then for nearly a quarter of voice minutes. And we were sending, on average, one text a day. And, no, it didn’t do moving pictures or broadband. Today mobile accounts for 40% of an enlarged total of voice minutes. SMS texting has grown at a compound 27 per cent a year; and this year mobile broadband took off, with half a million subscribers in the five months from launch and a current run rate of 130,000 new subscribers a month. At last beginning to justify the huge investment in 3G.

In fixed line, one household in eight had broadband; 512k was a pretty good speed and £30 a month a by-no-means outrageous price. Today nearly 60% of homes have broadband; headline speeds are up to 8 megabits; and for many broadband is ‘free’ when it is bundled in with telephony and TV.

Overall, telecoms prices have fallen by between 4 and 5 per cent since 2004. That may not sound much. But when water, electricity, gas, transport, post, have all gone up by leaps and bounds and when general inflation is running at 5 per cent a year, it shows the benefits of technology change, innovation and competition.

Lastly, in 2004, Ofcom may have been converged as the industry regulator. But for the sector, convergence was still something waiting to happen. Today our Communications Market report starts with a thick section on converging markets, devices, content, platforms, for the simple reason that convergence, which we were set up to oversee, is now fast becoming a reality.

The Communications Act requires us to look after the interests of consumers in terms of ‘choice, price, quality of service and value for money’. The credit for this goes mainly to those in the sector willing to invest, innovate and take risks rather than to the regulator. But on the basis of this evidence could we say: ‘Success. Job done. Ofcom can pack up and go’?

Before you all get too excited, the answer, I’m afraid, is ‘not quite’. We still have what are euphemistically called the ‘problems of success’. If there wasn’t such intensive competition we would not have the incentives for consumer mis-selling or slamming which still plague our industry. If broadband still rested on a single BT wholesale product, and stodgy pricing failed to tempt customers to move, we would not have had the issues of consumer migrations and switching that have - and still require - intensive inter-company cooperation to resolve.

There was some interesting cross-sectoral research on consumer satisfaction published this summer. At first blush you would expect the Communications Sector to score well. But the results were worse than one would hope certainly by comparison with simple consumer purchases like DVDs or trainers. We rank alongside financial services and even energy (though mercifully ahead of estate agents and used car dealers). This is not, on reflection, that surprising. The more complex the product or service and the more players involved in the value chain the greater the risk that the minority of consumers who have a bad experience have a very bad experience; and that the companies involved point the finger at each other rather than swiftly resolving the consumer’s problem.

It is no coincidence that several of these more complex industries have sectoral regulators – the FSA, Ofgem and Ofcom - to help even up the imbalance of information between producer and consumer that prevents competition doing the necessary for the consumer interest.

If there is to be a continuing consumer role beyond just the promotion of competition, vital as that is, how is it best discharged?

I personally dislike the term “light touch regulation”. Either it arrogantly assumes that the regulator knows everything that is going on in the market and can apply just the right, discerning, touch on the tiller to maximise wellbeing. No regulator is that omniscient. Or “light touch” means a palsied unwillingness to act, captive to the producer interest, when real detriment to the consumer is occurring.

Ofcom’s approach has three elements. First, a bias against intervention: a well-functioning market is the best safeguard of the consumer interest. Second, where intervention is necessary, a preference for the least intrusive form of intervention: for example, price publication rather than price controls, wholesale pricing rather than retail controls. But, thirdly, where intervention proves necessary being swift and decisive.

On this last, I would accept that we have been on a voyage of discovery. We have learned that it takes longer than we would like to identify a new consumer detriment, to understand why it is occurring and how it operates, and to gather the evidence for a proportionate response – all in a climate where all our decisions can be, and often are, appealed.

That is at its starkest with consumer scams. There can never be complete protection for the consumer: rapidly changing technology and business models will always create new opportunities for unscrupulous operators to fleece unwary consumers.

I believe however we have picked up the pace in response to these and tightened the chain of command within Ofcom and with our sister regulators.

Let me give a couple of examples to illustrate these points.

In terms of scams, the first and financially most distressing were the international rogue internet diallers. One of the many new internet software scams that have sprung up. It came onto our patch – or to be precise that of our then sister regulator, ICSTIS - because the payment mechanism was the telephone bill. It took many months before the necessary regulatory controls were in place right through the value chain. And only with the transition from dial-up to broadband has it been eradicated.

Broadcast premium rate services probably affected more consumers, though the individual amounts involved were much lower. The pace from discovery to ‘cease and desist’ was swifter. Several broadcasters, who ought to have known better, came close to forfeiting wider public trust. Hefty fines were in order. They have learned that they too have a duty of care to individuals in the audience as consumer as well as to the mass audience as viewer.

For our part the two lessons learned were, first, that reliance on complaints-driven investigation and enforcement is not foolproof. If consumers do not know that they have been diddled they do not know to complain. We now have proactive audit controls in place. Secondly, that relationships with sister regulators must be on a very clear footing. Where the relationship is one where there are clear boundaries and handovers of regulatory power and responsibility, then a self-regulatory or co-regulatory relationship is possible, as we have with the ASA over broadcast advertising. Where the boundaries are ambiguous and the need for speed vital, a tauter ‘agency’ relationship, such as we now have with Phone Pay Plus, is appropriate.

The third scam last year was bogus mobile cashback offers. That was cracked in weeks not months. First through a voluntary code with the Mobile Network Operators, then the move towards mandatory codes. But the response also had to be proportionate. Many called for a total ban on cashback deals or an end to mobile reselling; but that would be to neglect the consumer popularity of genuine cashback schemes and the good role many resellers play in promoting competition.

In terms of the bias against intervention I would cite our regulatory forbearance for three years on VOIP, to allow a new technology to develop. And on ‘least intrusive’, broadband speeds where we have persuaded the industry to adopt a voluntary code so that consumers are better informed. This is coupled with ongoing research into actual speeds to help develop true comparisons that will help consumers pick the best deal for them.

Ed Richards’ trinity in his lecture last year of empowered, informed and protected consumers remain very much the watchwords for how Ofcom should safeguard the consumer interest in the years ahead.

Finding the right, proportionate response within our legal powers means that some consumer issues – 08 number charging and additional charges for example – remain unfinished business. But on which the book remains firmly open.

The citizen interest and the internet

My former colleague, the economist Philip Booth, said that regulators should see competition as a dynamic process not as a fixed final goal to be attained. If that is true of competition, it is doubly so of securing the citizen interest against a backdrop of rapidly changing technology and market pressures.

We see that starkly in public service broadcasting where the old, plural system is clearly not going to survive the transition to the fully digital age. It needs a new and sustainable design. It also needs a debate that is not skewed to hyperbole about ITV regional news or the switchover surplus. Certainly we want to keep ITV regional news for so long as its licence has value. And we would like one of our proposals for the future use of non-core licence fee to be considered dispassionately. But enough words have been spoken and ink spilled over PSB – important as it is – for me to say no more on it today.

Save this: there are of course a number of issues on which only Government can make a decision. So we would be delighted if there is a new enthusiasm among Ministers to accelerate the role Government must play in these key areas.

By early New Year we will have done all the analysis that can be done on PSB. The options will be clear. But only Government can take certain key decisions on them.

In digital radio we are working closely with Government and industry but long-term development needs to be backed by legislative change. And as Ed Richards said two years ago in his first major speech as Chief Executive, the time has come to think again about the universal service obligation in a converged broadband world and to think radically. But it must be governments at a European that decide.

Let me focus on a number of other aspects of the citizen interest in broadband and the internet.

It is an entertaining parlour game to guess how many mentions of the internet there are in the Communications Act. Answer: zero. But Parliament thought seriously about the issue in the debates leading up to the Act. Its view – I believe the correct one – was that the internet was still so new and its implications so uncertain that a period of legislative forbearance was called for.

Ask most legislators today and, where they think about it, they will say that period is coming to an end. To say this is not Ofcom going looking for trouble – trouble usually finds us without undue exertion on our part! – but a marker for my successor that Ofcom is likely to find its remit being stretched. And a word of caution to legislators: if you do decide to stretch Ofcom’s remit please match any duties with the necessary powers and levers to deliver on them – don’t give us orphan duties.

There are one or two such orphan duties already in the Communications Act. They do – in the cliché – send a signal alright. But the signal is that Parliament finds an issue important and worrisome, but doesn’t quite know what to do about it.

Media literacy and the encouragement of usable communications equipment are two such orphan duties. We are firmly committed to both: protecting the vulnerable, older and disabled people is central to our citizen duty. But, as means, all we have is soft power and a (very modest if welcome) subvention from DCMS. Contrast with the clear match of duty and power to help disabled people through subtitling, signing and audio description. Here the situation has changed markedly for the better since 2003.

Public policy development on potentially harmful internet content has got off to a good start. The danger of importing old broadcasting style regulation to the internet has been avoided. The Byron review was a model of good sense. Its main recommendation – a new UK Child Council on Internet Safety – was established last month. These recognise the distributed but shared responsibility for ensuring that children and the vulnerable are protected whilst enjoying the huge benefits of the internet.

Ofcom with other bodies and the industry need to develop, and spread awareness of the practical actions, and the tools and technologies – from the use of filtering and kite-marks, to parent’s enforcement of simple rules about internet use - that allow people to navigate the online world and for parents to ensure their children’s safety.

It still requires a big and ongoing job of education. Younger children in particular need to learn what information can safely be shared on social networking sites without provoking unwonted and undesirable attentions.

Equally, proper concerns about internet privacy should not be over-egged to prevent legitimate, if novel, business opportunities or ways of funding creative media. Behavioural advertising may well have a useful and, in time, significant place in the array of advertising techniques. The manner in which it was first introduced to the UK market has certainly tainted the well. But sensibly done we should allow it to have a place. Transparency is the key. And individual users can benefit from advertising that directly addresses their wants and needs.

The one area where the Communications Act did give Ofcom an explicit role was in encouraging the wide availability – and take-up – of broadband. Then there were doubts about how far the market would roll out broadband. In the event almost everyone today is connected to a broadband-enabled exchange. The widest availability of any major world-economy. So we should not be too pessimistic about where the market will end up with next generation broadband.

True there are some ‘not-spots’ and rather more ‘not very good spots’ with current generation broadband. They are now a semi-permanent feature. If there is a case for any public investment in next generation broadband – in an era where public money will be incredibly tight – then it is in dealing with these holes in coverage.

Take-up of broadband is approaching 60 per cent of households. So, as I have said, a reappraisal of the Universal Service Obligation is timely. Today, BT funds the USO and it applies only to narrowband.

The European Commission has just kicked off the debate on this issue which ultimately is a European level decision. Ofcom will need to work closely with Government on the right policies for the UK and to influence the debate across Europe.

The analysis – if not necessarily the policy prescriptions – should be wide-ranging and from first principles. To what should a new USO extend? To what standard? Is mobile an acceptable substitute for fixed? Who pays? How?

The answers to these may not only relate to the network. With 99.5% current availability but 60% take-up, the barrier may lie in the fact that less than three quarters of homes have a PC. And PC take-up is growing much more slowly than broadband. In an era where an ever increasing range of private, government and other public services are delivered online, the nature of a Universal Service Obligation needs to be understood in the context of wider considerations of access and inclusion. We will certainly want to play our part in this debate.

Investment and Innovation

The fourth internet issue which has come Ofcom’s way – not envisaged where we started – is peer to peer file sharing and piracy. Ofcom has been asked to hold the ring. On one hand are the content creators and producers, understandably concerned about the fruits of their investment being expropriated by users and professional pirates: “internet shoplifting”. On the other hand, the ISPs are understandably not keen to act as policemen over their own paying customers, to prop up unsustainable business models that technology has overtaken, or compensate for content companies’ inability to innovate.

I caricature the respective sides’ positions (though only slightly – it is an interesting brief!). But they lead neatly to my last theme today – investment and innovation.

As Ofcom started, so again today, I cannot overstate the importance of an investment-friendly framework.

The Communications sector is important in its own right. But it also underpins the health of our wider economy and society. So the health of the sector is central to our concerns. Particularly so in a time of credit crunch and national, possibly global, recession. This does not mean putting producer interests ahead of the consumer interest. New investment and new ideas are usually most effectively generated by a strongly competitive environment where producers strive to get the pound in the customers pocket by best meeting their needs.

As a regulator we cannot make investment happen. But we can help – or hinder – that decision. I believe that the regulatory framework we created for broadband and the wider Strategic Review framework encouraged the much needed consolidation and re-capitalisation of the fixed network operators and brought new and energetic competitors like Carphone and Sky into that space.

The sector faces big investment challenges to move on to the next phase.

• Next generation broadband. £2 billion or more to start the roll-out process. The Broadband Stakeholders’ Group calculate £10 billion for universal fibre to the kerb, £25 billion for universal fibre to the home.
• 3G mobile broadband, Wimax and LTE - the individual companies will have done their sums.
• In content, sustaining – and if possible enhancing – the level of UK origination to populate the ever-expanding digital and online platforms and meet viewers’ desire for higher technical standards – such as HDTV – as well as high creative standards.

But the sector faces these challenges against a very difficult economic backdrop: capital market constraints, a recession affecting personal and business consumer spending; and an advertising market in free-fall.

Against that difficult backdrop, for Ofcom encouraging investment means, among other things:

• Setting the right financial framework for Openreach; and leaving the market not the regulator to determine the price of the next generation wholesale broadband bitstream product.
• Predictability of regulatory framework so investors can at least remove that uncertainty from their calculations. An example is cable, currently rolling out high speed broadband. Others have lobbied for open access to their network. We have given cable the predictability that, absent a Market Review and a finding of Significant Market Power- highly unlikely in the foreseeable future- network access is a commercial decision for Virgin not a regulatory one for us.
• In mobile, it means adopting a sympathetic approach to access network sharing to free up resources for new investment. In Europe we have called for action to prevent consumer bill shock in data roaming. But we will argue vigorously against any attempt to impose simplistic retail price controls that would risk stifling investment and service or tariff innovation in this emerging market.
• In content, it means being open to the adoption of new techniques or sources of revenue to support media assets, from behavioural advertising to ad-funded programme. In public service broadcasting, investment in UK origination is central to our vision for a sustainable, plural system. Not as an end in itself but because it is a necessary enabler of public purposes.
• And in wireless services, releasing as much spectrum to market as rapidly as we can. The Digital Dividend Review showed the pent up demand from new users for good quality spectrum. The economic downturn may scale back some would-be bidders’ ambitions. But Ofcom’s recent technology report shows that in everything from healthcare to transport over the medium term the scope for innovation and the need for spectrum will rise and rise.

Conclusion

If I have a regret, it is that we have not been able to move more quickly in getting the big 2.6 GHz block of spectrum to market sooner and in liberalising the 2G spectrum. Both important economic assets. The legal process will no doubt continue to act as a brake on progress and has been used as a roadblock to consumer benefit.

Let me finish therefore with an observation for future legislators and a plea for enlightened self-interest from stakeholders.

I observe over 5 years of Ofcom’s existence the increasingly litigious nature of engagement with the industry. Wherever there is a position of incumbency, or where necessary change may cost money, an increasing first resort is to the City law firms and the inevitable delay the appeal process imposes.

This is not a plea for all our decisions to go unscrutinised or unchallenged. We will from time to time get it wrong on substance or even significantly on process. I hope that real and extensive consultation should iron these out in most cases well before Ofcom’s decision. But some stakeholders have been candid: if a decision will cost us £10 million and we can defer it for a year or two by hiring £100,000 worth of lawyer and going to the CAT why shouldn’t we?

Indeed, it may be a rational short-term tactic. But a system that evolves to be like America, where swiftness and decisiveness is impossible, and decisions get mired in court cases that make Jarndyce v Jarndyce look brisk, is not a recipe for a healthy system or for the consumer interest. And it could ultimately lead Government and Parliament to rethink the appeal process.

Equally, in an increasingly converged industry, you may be in an incumbent position in one part but a challenger in another, resentful of the gaming of legal process to deny you the opportunity to compete.

And thirdly, most important, an increasing range of decisions in our sector are affected by what Brussels does. Roaming may indeed have been a decision that can only be taken sensibly at European level. But sights are overtly set on several other areas. A system that is paralysed by legal recourse at national level plays wholly into that agenda. I simply invite those who have experience of some of the more political decisions flowing from Brussels to consider whether they are always as proportionate, evidence based or indeed user-friendly as the ones made here.

But apart from the propensity to reach for the lawyer you have been and are a wonderful bunch of stakeholders. It has been a privilege to be the Chairman of Ofcom in a period of such exciting change and to have had the opportunity to engage with you so positively. I will miss Ofcom and you; but just to be clear, I am still around and very much on the case for another six months or so.

Thank you.

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