Appendix B

The UK Market

B1 The UK economy

B1.1 Introduction

The UK (comprised of England, Scotland, Wales and Northern Ireland) is ranked globally as one of the best locations to do business during the period 1996-2000¹. The rating positions the UK as 4th in the world with the most attractive features of its business environment being; disposition to foreign investment, a relaxed attitude to foreign takeovers of domestic firms, its capital markets and flexibility of the labour force.

In 2000 the UK was also ranked fourth in terms of total Gross Domestic Product (GDP) among the G7 economies, as seen in Table B1.1.

Table B1.2 summarises the main UK economic indicators. During 2000 the economy grew by 3.1% which is 0.8% faster than in 1999.

¹ The Economist Intelligence Unit UK Business Outlook May 2001

² OECD Main Economic Indicators April 2001

³ ONS Social Trends 31 2001

⁴ ONS Monthly Digest of Statistics May 2001

⁵ ONS Quarterly National Accounts, June 2001

⁶ ONS Labour Market Trends June 2001

⁷ Cambridge Econometrics Industry and the British Economy June 2001

Decisions to cut interest rates, made in February 2001 by the Monetary Policy Committee in the UK, were based on the fact that price inflation has remained low and also that the US economy was finally slowing (reflected initially in stock market indices and subsequently in data measuring activity). By the time the March 2001 UK budget was announced, estimates of the Government’s financial position for the financial year 2000-01 had been revised to a larger surplus/lower net borrowing of -1.7%.

B1.2 Gross domestic product and growth by sector

The UK is a modern economy with a large financial and business services sector, representing one quarter of total GDP in 1999, as shown in Figure B1.1. The manufacturing sector and government and other services sector also made a significant contribution to economic output, with each sector accounting for approximately one fifth of UK GDP.

In terms of economic growth, Table B1.3 shows that transport & communications, at 7%, followed by financial & business services, at 5%, have experienced the highest annual growth rates over the period 1995-2000.

⁸ ONS Blue Book 2000

B1.3 Population of UK business sites

The UK has approximately 1.93m business sites¹⁰ (e.g. an office building as part of a larger company or a factory site; also known as local units). Within the remaining unsold licence regions the number of business sites totals approximately 1.27m.

The number of business sites for the UK as a whole are shown by sector and number of employees in Table B1.4. Wholesale, retail, repairs, hotels and restaurants represent the largest sector with almost 0.6m business sites. Financial intermediation, real estate, renting and business activities has just over 0.5m sites.

⁹ Cambridge Econometrics Industry and the British Economy June 2001

¹⁰ ONS Inter Departmental Business Register 2000

Table B1.5 shows the number of business sites by licence region (the shaded rows indicate that all licences within the region have been sold). Of the licence regions remaining, region K including Bristol, Devon and Cornwall has the largest number of business sites, approximately 166,000. The smallest of the remaining regions is Wales with just over 79,400 business sites.

¹¹ ONS Inter Departmental Business Register 1999

¹² The total number of UK business sites differs from the total in table B1.5 by 125 business sites due to rounding.

B1.4 Population distribution

The UK residential and business population is highly urbanised. A large proportion of the residential population, approximately 89%¹³, live in major cities and other urban areas. Approximately one third of the population live in the seven largest urban centres¹⁴, which account for less than 2% of the UK land mass¹⁵.

In terms of the business sites within the remaining licence regions, approximately 35% of businesses are located in 3% of the land mass. Table B1.6 shows similar statistics for each of the unsold licence areas. This information was based on KPMG analysis of post code level business site data obtained from the ONS Inter Departmental Business Register, 2000. The analysis includes all areas where there is a business density of more than 40 businesses per square kilometre.

¹³ World Bank World Development Indicators 2001

¹⁴ Greater London, Greater Manchester, Birmingham, Leeds, Glasgow City and Sheffield

¹⁵ ONS Annual Abstract of Statistics 2000 and Regional Trends 34 1999

B2 The UK telecoms market

B2.1 The total UK telecoms market

The UK telecommunications market is considered to be one of the most open to competition in Europe, with new players entering the market at a rapid pace. BT, the former state owned provider of all telecommunications services, faces a diverse range of competitors utilising a range of different innovative technologies. The new entrants include cable companies, resellers, internet service providers (ISPs) and broadcasters teaming up with traditional operators.

Oftel estimates that UK telecommunications revenue was about £31.5 billion in 1999-2000¹⁶, which accounted for 3.4% of gross domestic product. The market has grown at a compound annual growth rate (CAGR) of approximately 8.4% between the period 1995-2000.

¹⁶ Oftel Market Information 1995/96 to 1999/2000

¹⁷ Oftel Market Information (1992/93 to 1994/95, 1992/93 to 1995/96, 1992/93 to 1996/97, 1992/93 to 1997/98, 1994/95 to 1998/99, 1995/96 to 1999/2000)

After several years of good growth, market conditions in the telecommunications sector as a whole have worsened in recent months. A combination of high debts, built up through acquisitions, 3G licence costs and question marks over demand for bandwidth, has caused a fundamental rethink in the capital markets’ attitude
to the sector and their willingness to continue supplying capital to telecommunications operators.

The recent difficulties are likely to lead to a modest slowdown in overall growth in the communications sector as a whole, although prospects in the medium to long term remain good¹⁸.

¹⁸ Cambridge Econometrics Industry and the British Economy June 2001

B2.2 The UK business telecoms market

The total business telecoms services market in the UK in 1999-2000 amounts to £10.9bn¹⁹. Of this, more than £5.9bn is generated from circuit-switched telephony, approximately £1.8bn comes from leased lines and about £3.2bn from other services, including corporate data networks.

¹⁹ Oftel Market Information 1994/95 to 1998/99, KPMG analysis

Both the business and residential markets are experiencing favourable growth, although the business sector has experienced greater revenue growth (from calls and exchange line connections and rentals) than the residential sector as shown in Figure B2.2. The business market has grown at a CAGR of approximately 6.6% over the period 1996 to 2000 compared to 2.8% for the residential sector over the same period.

²⁰ Oftel Market Information 1995/96 to 1999/2000

The average monthly spend on fixed telecoms amongst SMEs (which includes call costs, rental, maintenance and VAT for voice, fax, Internet and data services) which contributes to the overall business telecoms spend, is shown in Figure B2.3. Average spend amongst small businesses is £337, compared with £3,961 for medium sized businesses. Average spend varies considerably across different industry sectors as well, with businesses in the financial sector spending £714 compared to £214 in Agriculture, for example.

²¹ Oftel Business Use of Fixed Telephony Oftel Small and Medium Business Survey Q4 Feb 2001

Figure B2.4 illustrates how an increasing proportion of both traffic and revenues for the business market has been generated from data rather than voice. The increasing proportion of data traffic is likely to require an increasing need for high bandwidth.

²² Dreisdener Kleinwort Benson, Broadband, August 1999; KPMG analysis

B2.3 The broadband market

The broadband market is still at an early stage of its development. Figure B2.5 shows that the highest residential broadband penetration level amongst OECD countries is in South Korea at a level of 9%. (An important factor in this relatively high level is the high proportion of residents living in high density housing). Further, the disparity between South Korea and other countries is quite high. In the UK less than 1% of the population subscribe to broadband services. The low penetration level in the UK, does however, indicate significant growth opportunities for broadband services.

²³ OECD Broadband Penetration Survey 2001

B2.4 The UK broadband access market

If present trends continue, it is considered that most companies will have internet access, and that most of them will require high speed internet access over the next few years. This is likely to drive the need for broadband access amongst businesses of all sizes, including SMEs and SoHos.

Figure B2.6 shows that by February 2001, 59% of UK small and medium businesses said they were connected to the Internet, a significant growth from 49% in November 2000. Nevertheless, the majority of these businesses still use ‘narrowband’ communications. Figure B2.7 shows that 64% of small businesses and 38% of medium sized businesses in the UK use PSTN / dial up. Even ISDN, adopted by 53%, and leased lines taken up by 18% of medium sized businesses can only achieve data rates of less than 2Mbps.

²⁴ Oftel Business Use of Internet Oftel Small and Medium Survey Q4 Feb 2001

²⁵ Oftel Business Use of Internet Oftel Small and Medium Survey Q4 Feb 2001

B2.5 Current availability of access technologies in the UK

The emerging demand for fast access and high bandwidth across the business and residential markets is driving the availability of broadband access technologies in the UK. For larger companies in urban areas, fibre/co-axial cable will be the technology of choice. Fibre is only available in large population centres and then typically only in central business districts and trading areas.

Unbundling the local loop, although underway, will take time. Some of the ADSL-interested operators have withdrawn from the market and those still intending to offer ADSL services have scaled back their network roll-out plans to focus predominantly on urban areas. Due to technical constraints, ADSL is unlikely to reach customers located more than 5.5km from a local exchange - approximately 15% of BT customers will remain out of the reach of ADSL²⁶ for the foreseeable future.

The UK cable network coverage in terms of homes passed is only 51%²⁷. Of the homes upgraded for broadband, 50,000 have taken up cable modem services²⁸, providing high speed internet access. Cable technology is largely focused on the residential markets and predominantly within urban areas.

High speed internet is also offered through fixed wireless, utilising 3.8GHz spectrum. The service is currently limited to five cities in the UK²⁹. Broadband satellite access services have also recently become available but are not expected to impact on the market for several years.

²⁶ Dreisdener Kleinwort Benson, Broadband, August 1999

²⁷ ITC, Cable Statistics for the First Quarter of 2001, 29th June 2001; ONS, Social Trends; No. 31 2001 edition

²⁸ ITC, Cable Statistics for the First Quarter of 2001, 29th June 2001;

²⁹ Tele2 website www.tele2.co.uk July 2001

³⁰ KPMG's analysis of Oftel, Competition in e-commerce: a joint Oftel and OFT study, April 2000

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