My theme is 'Creating a dynamic market place' - which is a good job description for a sectoral regulator.

To start, I would like to reflect back on this time two years ago, to the beginning of 2000:

- 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;
- telcos were rapidly expanding; and
- the 3G auction was about to happen.

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?
- what has Oftel done to facilitate the development of new services in particular, broadband?
- a clear look at the facts - what are the prospects now,
- what do these reflections mean for telecoms regulation in 'creating a dynamic market place' as the process for establishing OFCOM gathers momentum?

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;
- and mobile prices fell even faster, by 60%, in the same five year period.

Customer satisfaction is high. Recent surveys show proportions of satisfied telecoms customers as:

- fixed link 93% (residential), 88% (business);
- mobile 93% for both (residential and business); and
- Internet 89% for both residential and business.

And customers are willing to switch suppliers:

- fixed: 21% residential and 25% business have switched fixed network;
- mobile: 24% residential and 26% business have switched mobile network; and
- Internet: 46% residential have switched ISP.

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:

-unmetered access for Internet users,

- responding to demands from a variety of stakeholders, Oftel required BT, given its market position, to provide unmetered wholesale products to other players so they, in turn, could offer unmetered products to end consumers
- ….. and it has worked, 40% of residential Internet users now use unmetered services

- 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

The telecoms market in recent years has been characterised by its ability to develop new services and markets.
Rapid growth in mobile and Internet markets in the past few years - as the figures above illustrate - have led to an expectation of increasingly fast developments everywhere, every time.

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.

And the slowdown in several of the major economies has depressed prospects for growth in some areas of the telecoms market.

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.

And we have to be forward looking - trying to anticipate problems before or as they arise and making clear decisions on whether to intervene or not.

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;
- ruling on disputes;
- setting appropriate regulatory framework; and
- working with other stakeholders;

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.

Broadband market position and prospects

BT's own DSL roll-out now covers about 60% of UK households and with the DSL services provided by Kingston communications, in Hull, over 140,000 customers are now receiving broadband service via this route.

The take up of cable modems is even greater - currently around 200,000 customers. In terms of availability, around 55% of UK households have access to cable with some 7 in 10 of these able to get cable modem services.

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.

Prices for residential DSL service have started to fall below £40 a month following BT's launch of a self -install wholesale product. Some DSL service providers - such as Pipex - are now offering services for as little as £30 per month, DSL prices having previously been sharply undercut by prices for cable modem service (typically £25-30 per month). In addition, ntl: offer a £15 entry-level internet access service at 128 kilobits per second. And BT is apparently now intending to drop wholesale prices significantly.

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 launched.

The number of unbundled loops remains low but should start to climb more steeply as commercial services are rolled out. For the moment, unbundling activity is focused on the small business market.

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 regulatory activity

Oftel's approach has been to intervene where justified by the presence of market power and to do so in a way that limits the intervention so that it is proportionate and appropriate in a market that is developing.

Broadband pricing

Oftel has maintained significant downward pressure on BT's prices for unbundling and wholesale DSL products through a series of rulings.

These will benefit current and prospective providers of services to small businesses and of Internet access to residential consumers.

They also make it more attractive for those interested in providing entertainment services to the mass market to raise the considerable capital needed to enter this market.

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.

Shared access allows telephony and high speed services to be provided on a single line and is of most relevance to the residential market.

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.

New Products

We have found it necessary to take action, some following complaints, some on own initiative, to require BT to offer additional wholesale products on reasonable terms. New wholesale products will widen the choice available to BT's competitors, thereby lowering the barriers to new entry and potentially increasing the range of retail products.

In December, we issued a draft determination proposing that BT should introduce an ATM interconnection product.
This will benefit network operators who wish to maximise the use of their network but which cannot justify the considerable capital investment to extend their network as far as BT's local exchanges (the latter being necessary to take advantage of unbundling). We are considering the responses to the consultation and are aiming to publish our final decision in March.

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 with confidence.

Other enhancements to the regulatory framework

In November, we determined service level agreements and guarantees for local loop unbundling services that BT must provide to operators, having previously given BT a chance to sort the matter out itself.

Although a reasonable price for wholesale services is obviously important to BT's competitors, the reasonableness of the non-price terms and conditions is equally important. Providing the appropriate regulatory incentives to ensure that BT offers terms which are reasonable from the outset - and not only after an Oftel investigation and direction - is one of our priorities.

Understanding industry requirements

We believe that all the significant pieces of the regulatory framework are in place to facilitate development of effective competition to BT in delivery of broadband services. Companies can compete with BT either by using their own network or unbundled local loops, BT wholesale services or a combination of their own and BT's broadband network infrastructure.

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.

But broadband is not the end of the story.

What are the prospects now

Broadband services - in the terms described above - are enablers of moves towards convergence and what it can offer - the digital revolution holds out the chance for much greater competition between networks delivering services. Digitalisation enables different types of network to be much more flexible and have much greater capacity so they can compete to carry the same service or equivalent service..... although a 'big impact' on people's lives may still be some way off.

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

Establishing OFCOM can help deliver these benefits to consumers - by enabling faster moves towards convergence. As will the new European Directives which require proportionate regulation for promoting competition in networks and services, promoting the interests of European citizens and contributing to the development of the European market.

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:

- what can competition and competition law achieve in relation to plurality of supply ?
- where will content regulation be more effective than ownership rules in achieving the desired diversity of programming ?

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:

- focus on getting benefits to the end user, the consumer - not on the suppliers;
- independent regulation - if you want investors to have the confidence to invest in new and competing technologies they need to be certain that the regulatory process is predictable, not subject to unseen deals in smoke filled rooms;
- open, transparent processes are therefore needed to establish credibility and independence including consultation, assessment of options, rigorous measurements of the achievements of regulations against the planned objectives.

Role of stakeholders in helping a focused OFCOM come about

What are operators and others doing to influence the OFCOM debate?

Industry and all stakeholders need to target their messages if they want to influence OFCOM bill and the resulting regulatory regime.

Oftel is already involved in the debate at various levels - seeing the DTI Select Committee and attending the hearing with other communication regulators in front of DCMS committee.

In summary

Creating a dynamic marketplace in telecoms is clearly a challenging task.

Markets are constantly changing and there is uncertainty amongst both businesses and consumers as to what tomorrow's mass market services will be.

However, I firmly believe that significant progress has been made in the UK and Oftel has played a major role in creating the framework for a competitive market in broadband services to develop.

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.

Thank you.