|Creating a Dynamic Marketplace|
to The Economist 13th Annual Communications conference, 14 February 2002
Thank you for inviting me to talk at this conference which is happening at a time of great change in the electronic communications market.
My theme is 'Creating
a dynamic market place' - which is a good job description for a sectoral
- it was a time
of great optimism about technological change, unending growth and resulting
wealth for the telecoms industry and telecoms consumers; everybody's
life was going to be changed instantly;
Contrast the above with today's market - at the beginning of 2002. These are more sober times.
Companies are no longer focused on expansion but restructuring and managing debt that has been built up through funding aggressive expansion programmes. Much more is now about maintaining customer base and ensuring overall efficiency.
People no longer talk about mergers and acquisitions. Now it is much more about ARPUs - average revenue per user. Money markets now take a much harder look at telecoms.
So it is useful to reflect on what happened in the intervening two years:
- what was the underlying
basis for the optimism that existed two years ago?
Why the optimism to start with?
Taking out the 'irrational exuberance' of the 'dot.com' age, was there an underlying foundation for optimism? and what has happened to that -in the context of UK market;
The whole UK telecoms market grew in turnover terms by 12% between 1999/2000 and 2000/1, similar to the rate of growth in preceding years;
It is the fastest growing sectors in recent years:
- mobile - the numbers of subscribers grew by around 55% a year in the five years to April 2001, while revenues grew by 25% a year over the same period;
- Internet - volume of traffic grew by 200% in 2000/1, the number of households with Internet access has grown from around 10% at the start of 1999 to around 45% near end of 2001;
Prices paid by consumers have been falling:
- fixed link prices
fell by 30% in five years to April 2001;
Customer satisfaction is high. Recent surveys show proportions of satisfied telecoms customers as:
- fixed link 93%
(residential), 88% (business);
And customers are willing to switch suppliers:
- fixed: 21% residential
and 25% business have switched fixed network;
Oftel actions have
been to enhance the development of competition in the telecoms market
.. and to protect consumers where competition insufficiently developed
to do so - for example:
- while in other markets, Oftel is both protecting consumers - current and proposed price caps in mobile call termination and in fixed residential services - and, in the case of fixed link services, promoting competition through proposing other suppliers can resell BT's local lines which they will be able to purchase at cost based prices.
So far, so positive
- so why has optimism reduced
What happened in
the last year and a half has been accelerating expectations getting
ahead of new service roll out and take up - leading to disappointment
when major changes for consumers in how they communicate didn't happen
as quickly or as widely as anticipated.
What does this mean for the telecoms suppliers, telecoms consumers and the regulator?
For the telecoms industry it means reappraisal of business plans. More caution. More focus on funding and capital
For consumers -
the take up of services is still good, but they may be more cautious
over new services - what do I need this for?
For Oftel, today's market conditions means we have to rely even more on principles of appropriate regulation, rigorous analysis, and transparency.
It also means more
work - as we receive a steady stream of complaints from operators.
Ironically, Oftel's approach to regulation was set out in its strategy document that was published in January 2000, at the height of the telecoms boom. This strategy has held us in good stead, even though market conditions have changed dramatically since it was published.
This approach of 'appropriate regulation' is amply demonstrated in our current work on broadband...covering
- competition at
all levels of the supply chain;
The focus is on "broadband" services as the most immediate step towards a greater electronic age - and a reportedly high volume of frustration from users that it is not happening quickly enough.
Broadband is also seen by many as the next great leap forward for the telecoms industry, that will deliver a raft of new services to consumers, transforming our lives forever.
So, in the interests of grounding any forward look in reality rather than hype, let me summarise where we have got to on broadband - both in terms of rollout and take up and what Oftel is doing about broadband within the framework it has established for regulatory action.
position and prospects
Take-up of broadband
in the UK is still low, but is growing substantially with an increase
of over 500% of users over the last year.
As for local loop
unbundling, there has been steady progress in the provision by BT of
co-location facilities at local sites - facilities now completed at
61 exchanges - to permit local loop unbundling. However, for the most
part, commercial services using these facilities have not yet been fully
Comparing prices to other countries - UK residential customer does well compared to other leading economies based on cable modem prices (though less well for DSL) and around average for business customers
But there are other regulatory developments set out below which should help companies compete effectively in the broadband market.
Current and recent
In October 200,1
Oftel reduced BT's price for shared loops, reducing the rental by 30%
from BT's original proposal - and by 60% from its revised proposal.
A statement resolving outstanding details of co-location pricing, in response to various complaints, was published in January.
This is in response both to formal complaints about BT predation and to grumbling by BT that they would like to reduce prices but are held back by fear of regulatory action.
In December, we
issued a draft determination proposing that BT should introduce an ATM
We also issued a draft determination requiring BT to offer partial private circuits (that is the connection between the end user and core network) at cost-based prices. This measure will improve competition in high capacity broadband circuits, as BT is dominant in provision of "local ends". This will probably be of most applicability to medium to large businesses.
At the same time, we issued a draft direction relating to the connection between the local BT site and core network node. Cost-based provision of this connection will help to stimulate take-up of unbundled loops, by reducing the cost of extending the competitor's network to the local exchange.
Although final prices
for these products are not expected for some months, there is already
sufficient visibility of the prices to allow competitors to plan ahead
Our general approach is set out in our Broadband Strategy, published last December. It is also fully consistent with the approach we will be required to take under the new EC Directives, just negotiated. Indeed, the Directives will give us relatively little scope to depart from that general approach.
Oftel is also holding a series of one-to-one meetings with key players in the broadband market. We want to get a better idea of what their thinking is in rolling out broadband services to determine the likely trends over the next few years.
This will help us to anticipate the regulatory issues that may develop over the next few years' and work out Oftel's approach in some detail before they become problems.
We are also working
with the Government on a number of initiatives to stimulate the take
up of broadband services by businesses and consumers. For example the
work of the Broadband Stakeholders' Group, the work of the Office of
the e-envoy on the Broadband Action.
What are the
Prospects from convergence - no single killer application - just an ever growing mass of applications with the potential to come into the market eg, beyond text messaging to video or multi media messaging, text to voice messages and vice versa, video telephony, interactive games/betting over TV or mobile terminals, multimedia home entertainment systems, location sensitive terminals - enable real time weather forecasting to a more local level - in car monitoring of mechanical systems, home monitoring and control, continuous monitoring of health conditions of 'at risk' individuals .
While broadband roll out is underway and the policy framework in place, there is more to come eg, 3G, broadband fixed wireless access, satellite.
I am not trying to predict these services will happen on a mass market basis in a particular timescale or form - more to say that overall there is a dynamic market place in prospect from which the consumer can benefit.
How OFCOM can
help convergence to happen
Underpinned by this new EU regulatory regime for electronic communications services, the establishment of OFCOM will allow difficult issues to be tackled effectively. This will be both in terms of continuation of existing regulatory rules (eg, terms for access to networks) and changes in those rules such as developments in extent of competition in market leading to changes in regulation.
To be effective, OFCOM should recognise the need to have a separate focus on economic regulation and content regulation - if we don't identify which are primarily economic/competition issues and which are primarily content issues we will risk confusing ourselves and, more importantly, our stakeholders
Ofcom will need to face the challenge of implementing key policies in areas that have an impact on a wide range of consumers and industry players. For example in areas that are currently being debated :
- on media ownership - in particular the challenges faced in making such rules pro-competitive and protecting citizens. Tough questions such as:
I don't pretend to have the answers to these questions - but OFCOM will need to address such issues;
- on making spectrum trading work - critical to convergence, we need as much spectrum trading as possible to bring new players and more capacity into the market.
To make spectrum trading work means getting to grips with the practicalities of what does a tradable property right look like for spectrum, how do we deal with anti competitive practice in such a market.
What opportunities are there for public sector bodies to realise some of the value in the spectrum that they hold ?
- on defining PSB for a digital world - the value that public service broadcasting has brought to viewers and listeners needs to be maintained but in a new climate where competition plays a much larger role and the consumer is increasingly in the driving seat of deciding what they watch, and interact with and when they do so.
- on building on best practice in current regulation:
Role of stakeholders
in helping a focused OFCOM come about
Industry and all
stakeholders need to target their messages if they want to influence
OFCOM bill and the resulting regulatory regime.
Markets are constantly
changing and there is uncertainty amongst both businesses and consumers
as to what tomorrow's mass market services will be.
But let's look beyond current actions. There are tremendous prospects for consumers from the benefits that convergence can bring.
OFCOM can be instrumental in enabling this to happen, based on the springboard that the new European Directives provide for proportionate regulation that adds value to the communications sector.
Although the telecoms and communications industry may not be facing the future as optimistically as it has done recently, I believe that there is a cause for optimism.
New technology will bring huge opportunities to businesses and consumers, but it may take longer than originally anticipated to deliver. Oftel, and in possibly less than two years time, OFCOM will have an important role to play in ensuring that companies can compete fairly in these new markets.
There is still much work to be done to define and establish the new regulatory framework for the communications industry, and I look forward to the input of this audience to this debate.
For everyone here today has a part to play to create the dynamic communications marketplace.