Connected Research

Union policy research in the 21st century

Posts Tagged ‘BT

The politics of fibre

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Alongside its annual results, BT announced its plans for an expansion of its investment in fibre earlier today. The clear link between the two is that the cost reductions and greater efficiencies identified in the company’s financial reporting have freed sufficient resources for an acceleration of the investment programme so as to allow a further £1bn to be put into fibre projects, extending the reach to two-thirds of UK homes by 2015.

Current investment plans had envisaged 40% of UK homes being fibred up by 2012: thus, an expansion of 67% in the investment budget brings about the same percentage expansion in the number of homes within the reach of a fibre network at the local level. This is interesting in itself, since cost models predict that fibre investment should become more expensive on a per home basis the further investment travels, although this seems to apply largely only once fibre roll-out has been extended into rural areas, i.e. above about 58% of homes (Figure 1.5).

(Incidentally, the Analysys Mason model looks to remain fairly accurate at this point: it seems to predict that, with an investment of £1.5bn in fibre to the cabinet solutions, BT ought to reach about 46% of homes (compared to the 40% in the company’s plans); while a total investment of £2.5bn ought to see it through to about 72% (compared to ‘around two-thirds’). Either the model is slightly out, and the costs associated with roll-out to particular stages are slightly higher than envisaged; or else BT’s mix of fibre to the cabinet and fibre to the home solutions has raised the cost slightly, since the model is based only on the former. The BBC news report of today’s story identifies that around one in four of all homes envisaged as being covered by fibre by 2015 will have fibre to the home – and, therefore, much faster connection speeds. This would seem to suggest that the Analysys Mason model actually slightly under-estimates the cost of fibre roll-out.)

The announcement of BT’s roll-out plans has clearly been well-timed, given the events of the last seven days; and appears to put BT on the front foot.

Firstly, this takes BT to what we might call the ‘Digital Britain’ point – i.e. the two-thirds of homes that ‘the market’ would identify as being suitable for fibre investment. Taking fibre installation beyond this was intended to be the purpose of the ‘Final Third’ fund, raised by the landline duty, which of course has now been scrapped – and without actual plans for its replacement which are more than mere suggestions.

Secondly, the plans will achieve download speeds of (up to) 40 Mbps. The Tories’ manifesto commitment was to getting ‘a majority’ of UK homes wired to (up to) 100 Mbps connections by 2017. BT’s current plans seem to indicate that, by 2015, only around 17% of UK homes will have download speeds at this level. If the manifesto commitment is to be realisable – though today’s reporting seems to indicate that Digital Britain may well not be a priority for the new government – then plans need to be made for how this is going to be achieved. This is not the same as what also needs to be done to roll-out broadband in rural areas (into the ‘final third’) – which mission also needs to be accomplished – since this 17% seems to leave plenty more homes in urban areas with download speeds of much less than 100 Mbps.

Thirdly, Ian Livingston’s announcement contains a strong caveat: that the plans assume ‘an acceptable environment for investment’. This is clearly critical and is an evident acknowledgement not only that the regulatory environment plays an important role in investment decisions, but also that the change in government brings uncertainties in this area which will need to be settled. Inevitably so. But what matters here is that the announcement of the plans now indicates that the existing environment, both known and in the pipeline, is acceptable in terms of the plans – what is unknown is whether that will change and, if so, what impact that will have on the investment. The caveat is a clear indication that the plans are predicated on at least the continuation of the current regulatory environment (if not its further improvement) and that any deterioration may well lead to a reconsideration of them.

How the government responds will be interesting.

In terms of BT – well, it’s clear that more needs to be done to get Britain faster online so as to realise the benefits of Digital Britain, though the importance in this of a healthy, financially strong BT needs not to be forgotten (as well as that the company is still rebuilding its profitability). It should also be remembered that the expansion of the investment in fibre will be ‘managed within current levels of capital expenditure’ – something which implies cut-backs in expenditure on investment in other areas.

A new statutory duty for Ofcom to promote investment in the communications infrastructure in its approach to regulatory decisions would help enormously right now…

Written by Calvin

13/05/2010 at 5:02 pm

everything, everywhere

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So, it’s not going to be T-Orange after all, then. T-Mobile and Orange have resisted the temptation of the obvious and have decided to run in a completely different direction, calling their joint venture everything, everywhere – perhaps a slightly hyperbolic name for a mobile company, even if it is the largest one in the UK, and one which appears something of a mouthful in comparison to the available competition (it has more syllables than the three other network operators put together).

Its ‘vision’ includes a single ‘super-network’ giving ‘unsurpassed coverage and capacity’ for customers (though 3 might take issue with this bit), and at a lesser impact on the environment. Few details are as yet available other than that the company will seek to combine both the Orange and T-Mobile networks and, by cutting out duplication, reduce the number of stations and sites that the company uses (which currently stand at some 27,000). Nevertheless, how this network looks, and operates, is a vitally important consideration not least given the terms on which the JV was approved (i.e. the guarantees given to 3; and the sale of spectrum). The company has, however, confirmed that all four of the companies served by the network (including both 3 and Virgin Mobile) will run on a common infrastructure.

The new company claims a customer base of more than 30 million people – ‘over half of the UK adult population’ (I can’t recall the companies trumpeting this sort of statistic while the regulators were looking at the proposed JV: funny, that!) and its press release helpfully breaks these down into pre-paid and contract mobile customers and Orange’s fixed network (the management of which was outsourced last month to BT) – so would seem to incorporate the potential for some double-counting.

The merged company will have 16,500 employees – 2,500 fewer than they had when the JV was announced seven months ago – and is, according to the same report, seeking savings of some £3.5bn by 2014 in shared infrastructure, technology and in the savings resulting from job cuts.

Not everything, everywhere for everyone, then.

Written by Calvin

12/05/2010 at 11:21 pm

Britain’s Digital Future II

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I’ve now had a chance to listen to The Guardian‘s Tech Weekly podcast I blogged about last week. Unlike some of the comments on the podcast page, which mostly seem to reflect continuing disappointment over the copyright and file sharing aspects of the Digital Economy Act, I thought this was an interesting and reasonably open discussion on the policies of the three main parties towards Digital Britain, underpinned by some thoughtful and articulate comments on the issues and the policies.

The bits on broadband, specifically on how to fund broadband access in rural areas, occur from the 39.17-minute mark and wrap up around 48.50. I learned the following:

– an acknowledgment from Jeremy Hunt, shadow secretary for culture, media and sport, that the market won’t provide for all and that an element of subsidy would be necessary to extend broadband to rural areas. This is not new by itself, but the Tories’ vehicle for this, i.e. using the £200m surplus in the digital switchover portion of the BBC licence fee, was, according to Hunt, supported by the BBC on the grounds that the hungriest consumers of bandwidth were iPlayer users and that the BBC wanted to extend access to iPlayer further. This BBC support for the use in this way of the digital switchover surplus was news to me.

– Stephen Timms, minister for Digital Britain, argued that the switchover money would not be available until 2013 and that doing nothing until then was simply not good enough, while making progress in rural areas demanded investment of £150m per year (i.e. the sums being spoken as being raised by the landline duty). At the same time, conceding the switchover surplus for rural broadband would leave little left for the universal service commitment. Hunt’s reply was that he would rather use the sums which Labour had spoken of to subsidise regional news programmes from ITV for rural broadband instead. So, here we have a Tory spokesman unsympathetic to the notion of the need to subsidise independent sources of regional news – while I also remain unconvinced that the Tories in office would do much towards a universal broadband service at all: having a policy for rural broadband is not the same thing as ensuring that all households in the UK can get access to a minimum broadband service.

– Hunt commented that next generation investment could cost £29bn [apparently, for fibre to the premises solutions right across the UK] and that this was not something that one company [BT] could afford on its own.  He lamented the failure of the Digital Economy Act to do more about encouraging other private sector operators to step forward and said that he wanted ‘Virgin Media to do more; Sky to do more; Carphone Warehouse to use our pilons, telegraph poles, ducts and sewers’ as a way of stimulating a lot more investment in fibre. Of course, there’s nothing to stop any other operator from building out a fibre network and then connecting that with the networks of others to extend coverage. (Except, of course, the need for investment finance and then the obligation to offer that network on a wholesale basis, just like BT has to do. That ‘our’ is an interesting and revealing word, too!)

– Hunt’s reference to Virgin Media having a fibre network which reaches the major towns and cities, and half UK households, whereas BT was the only operator which had the infrastructure to reach rural areas, and that it was ‘madness’ to wait for BT to make that investment as it simply could not afford to do it, seems to me symptomatic of a Tory desire to see BT only as a provider of last resort – that competition will provide in the major areas and that, where it doesn’t, BT will have to provide. So, other operators would be allowed to cherry pick the best areas for their investment, i.e. those which offer the best returns, while leaving to BT alone the prospect of investing in low return areas (and then having to do so on a wholesale basis). I’m extremely unconvinced that this is a sensible, rational approach to getting fibre rolled out across the UK: it leaves far too little in terms of returns for the operator relied upon to undertake the most costly investments (and the only one with sufficient scale to generate the necessary finance). In a situation in which the costs of fibre investment have already been identified as too high for one operator to deal with, it seems completely contrary then to ask that same operator to fund all the unattractive, low return investments. The UK deserves much better joined-up thinking than that.

– ‘Anyone who laid fibre would have an obligation to wholesale the fibre they laid to anyone who wants it’. I’m quoting here because I was quite astounded by what I heard and replayed several times to make sure I got it right. This goes well beyond BT, for which wholesaling obligations as regards fibre investment will inevitably be mandated by Ofcom, while that ‘anyone’ seems on the face of it to encompass, for example, Virgin Media, as well as any other operator which currently does not have SMP (significant market power – only BT and Kingston Communications currently have SMP). On the other hand, it might be argued that there is a strong whiff of ‘in future’ to the quote and, bearing in mind that Virgin Media is expecting to have completed its delivery of superfast broadband right across its network by next year, it may well on this basis be held not to have been caught by the need to respond to such wholesale obligations.

By the way, the programme ended with a comment on the impact on fibre investment of valuation office decisions. This has been well summarised by Computer Weekly and is based on a court case brought by Vtesse, and lost, earlier this year. It had been Tory policy to ‘realign’ business rates charged on fibre networks, although this seemed to lead to a bit of a spat with the Valuation Office Agency and this policy seemed eventually not to make it into the Tories’ Technology Manifesto. Making the cost of fibre essentially cheaper is likely to have some impact on investment decisions since it will increase returns: but, where that investment wouldn’t otherwise be made at all – i.e. in the rural areas – it’s unlikely to have any impact.

[5 May edit: Today’s The Guardian has a summary of all the manifesto commitments to technology, broadband and digital issues.]

Written by Calvin

04/05/2010 at 5:51 pm

IASB puts up new Exposure Draft on pensions accounting

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The International Accounting Standards Board has put up a new Exposure Draft proposing amendments to the accounting regime for defined benefit pension schemes.

The Exposure Draft is, essentially, the accounting profession’s way of publicly consulting on changes to the accounting standards which govern financial reporting regimes. Like everything else, accountancy is governed by global standards which seek to harmonise how accountants report company accounts; unfortunately, IAS19, which governs how defined benefit pension schemes are accounted for, is subject to the same short-termist approach as the rest of the corporate world, implying that it is inimical to the long-term nature of defined benefit pension schemes. Both it and its predecessor in the UK (FRS17) have been blamed, at least partly fairly, for contributing to the rush to close DB schemes.

The IASB has already been through a lengthy consultation process on its preliminary views on refining how defined benefit schemes are financially accounted for; this new consultation runs until early September this year. The Draft is available for public comment and the IASB aims to finalise its plans by mid-2011, with a view to the new standard becoming effective in 2012 or 2013.

The new Exposure Draft seeks to ‘improve’ (in the context, a word full of dread!) pension scheme accounting by requiring companies:

– to account immediately for all estimated changes in the cost of providing pension benefits and all changes in the value of plan assets

– to use a new presentation approach that would clearly distinguish between different components of the cost of these benefits

– to disclose clearer information about the risks arising from defined benefit plans.

Some of this inevitably needs decoding. According to KPMG, what this means in practice is that companies will henceforth have to stop booking a ‘profit’ in their accounts equivalent to the gap between expected investment returns and the interest cost paid on pensions liabilities. This ‘pensions credit’ is, essentially, a way of recording a paper profit from the pension scheme where schemes’ investment returns are higher – as they usually are, where schemes are investing in equities – than the AA corporate bond yield used to discount liabilities. The introduction of the amendments to IAS19, which will require the assessment of investment returns to be based on the same yield on AA corporate bonds, thus effectively ending the credit, will, clearly, lead to greater transparency in accounts – and, at the same time, to a further reduction in the attractiveness of running DB pension schemes.

KPMG’s press release quotes that this will ‘cost’ UK businesses £10bn in lost earnings, with the largest schemes facing a ‘loss’ of £50m per annum, while the ubiquitous John Ralfe believes that this will ‘cost’ BT £750m (turning a £500m ‘profit’ from the scheme on the existing basis into a £250m ‘loss’ under the new one). Ralfe has a long-standing antipathy to schemes investing in equities – as this blog has previously observed. In terms of the actual cost in individual cases, much would seem to depend on how much schemes have invested in equities – though (perhaps to disappoint Ralfe) this is unlikely to result in schemes adopting more cautious investment profiles in the interim.

Will it make much difference? Yes, clearly, to those schemes which remain open to future accrual (the BTPS among them): changes in accounting rules which take money away from the profit and loss account – however much such money was paper only, and regardless of whether pension schemes should have been used in this way to boost earnings – will have an impact on ordinary workers since that ‘profit’ will have to be found from elsewhere so as to retain the level of earnings. Whether it will lead to more schemes being closed, given the numbers of schemes which have already come crashing down and the weight of other arguments against running DB provision which already exist, is a moot point.

Certainly, however, it – together with the requirement for further ‘clarity’ on the risks associated with defined benefit provision – can’t help; I’m almost of the view that it’s the latter that is the most damaging feature of all this: regardless of the ‘losses’ which need to be made up, having to write (or read) even more stuff in company accounts about just how much risk is posed by running a defined benefit scheme may well end up wearing down even the most resilient of corporate defenders of DB provision.

Clearly, these remain tough, and worrying, times for DB schemes, and most of all for the members of them.

Written by Calvin

30/04/2010 at 6:19 pm

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Landline duty dropped

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The BBC is reporting that the proposed landline duty – the 50p/month levy on fixed lines to contribute towards building out high-speed broadband services beyond where the market would deliver – has been dropped.

The dropping of the proposal, on which a BIS consultation closed only last week, is not because the government is suddenly unconvinced of the need for the Next Generation Fund which the duty would have established; it has been dropped since the political controversy over it would potentially have held up the Finance Bill, which has to include the duty since it is a fiscal measure. This is one of a series of three measures – including also the rise in cider duty – which the government has dropped from the Finance Bill so as to ensure that it can complete its passage through Parliament before Parliament is dissolved later this week. Consequently, the landline duty is very much a victim of the election.

Should Labour win the election, it is likely to be re-instated – the government’s policy has not changed – perhaps in a second Finance Bill after the election. However, it is disappointing that the landline duty has been dropped since the policy which lay behind it – that of extending high-speed broadband on a socio-economically equitable basis right across the nations and regions of the UK – was both sound in principle and, actually, far more important than the levy itself. Without the levy, and the Fund, the UK has no practical, resource-based response to the need to spread high-speed broadband equally across the UK other than where the market – i.e. the major network operators – decide where it can be done profitably. That is likely to lead to the over-provision of networks in large urban areas and the under-provision of networks in less populated, more rural areas and, in turn, to a widening of the digital divide. It is also likely to contribute to the further economic overheating of the large urban centres.

For its part, the Tory policy on extending high-speed broadband beyond the market is ill-thought: based as it is on a reliance on the regulated opening up of BT’s ducts – a policy with which BT is happy to comply but which, as Ofcom has previously pointed out, is likely only ever to be a partial solution – backed by some money from the BBC licence fee otherwise earmarked for the digital switchover. The digital switchover is due to be complete by 2012 and the underspend in this budget is £200m, which Digital Britain had intended to use to meet its universal broadband service commitment by 2012. Any continuation of this budget beyond 2012 essentially takes money away from BBC programming – thus, for the Tories, killing two birds with one stone but which is likely to mean further cuts in the production of quality media content.

The landline duty was fair in the context in which it was originally put by Digital Britain – that households had received a benefit from falling telecoms prices in recent years and that it was thus reasonable to ask them to share some of that benefit. The Connect Sector of Prospect had always argued that it was a moderate, affordable and specific contribution from consumers towards the cost of roll-out of NGA infrastructure beyond the market, and we also supported it as a welcome sign of the government’s commitment to a policy of ‘industrial activism’.

The decline in consumer telephony bills has been well documented by Ofcom:

Source: Figure 4.55, Ofcom Communications Market Report 2009

The chart shows clearly the falling nature of household telecoms bills, which declined from 3.4% of monthly expenditure in 2005 to 3.2% in 2008 – the same proportion as in 2003. If we focus on the decline in the amount of expenditure on fixed voice and on internet and broadband – i.e. the sums going to the operators charged with responsibility for rolling out high-speed broadband services – we can see that these have fallen by £5.68 per month – at standard prices – since 2003 (a drop of 14.7%). In this context, a 50p/month levy was, and remains, fair.

This decline in return is not a rational basis on which to found an expectation that operators will roll out costly investment in fibre networks in areas where it is even partly speculative. They will, instead, concentrate only on the clearly most profitable areas. That will inhibit the roll out of fibre networks, putting the extension of fibre roll-out some twenty points lower than it otherwise would have been by 2017, and it will exacerbate the divides within the UK.

That would be a disaster for the UK both socially and economically.

Written by Calvin

07/04/2010 at 12:16 pm

Ofcom consults on opening up BT fibre investment

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Ofcom has today launched a consultation on opening up the fibre-based networks of both BT and KCom to competitors (Ofcom news story; direct link to consultation). The intention is to ensure that BT and KCom (in Hull) provide a wholesale access product so that retail competitors can deliver their own services over the ‘pipes’ which the two network providers have laid down.

The consultation is not a surprise – Ofcom has been working on it for some time – and, indeed, BT has recognised that it will need to open its fibre network to rival service suppliers (see, for instance, its announcement on the award of the Next Generation Broadband project in Northern Ireland; and also an interview with Ian Livingston in the Financial Times). Added political spice is given by the reference to rivals renting not just network capacity on a wholesale basis but also space in BT’s ducts although, as I have blogged previously, there is nothing new about this in terms of regulatory discussions and such a solution is likely only to be a partial one anyway.

Ofcom has spent a little time in its documents dismissing the idea that other operators than BT and KCom – for instance, Virgin Media – might be compelled to open up networks to rivals. This is on the grounds that only BT and KCom (within Hull) have what regulators term ‘significant market power’ (that is, a share of more than 25% of the market in which it is allowed to operate); Virgin Media’s share is, according to today’s Ofcom statements, just 19% (around one-third of homes passed by cable take the Virgin Media service and Virgin Media’s percentage of homes passed is just over 50%). BT has recently gone quite public in debating whether Virgin Media might also be compelled to open up its network to rivals.

The predominance of the significant market power argument is about to be tested, since the BIS consultation on the Next Generation Fund proposes that open access should be a condition of all projects supported by the Fund: that is, should Virgin Media be a network partner in any successsful bids to the Fund, it would have to open its network to rivals regardless of whether or not it has SMP. In principle, this is a supportable position to take on the use of public money. Whether this represents a ‘thin end of the wedge’-type argument (if here, why not there?) is an interesting conundrum that Virgin Media will have to resolve should it desire to participate in Next Generation Fund projects.

At the same time, it is clear that the reference to SMP in telecoms regulation effectively creates a barrier to investment. As I pointed out recently, Virgin Media has little money to invest in extending its cable network farther than the 12.5m homes passed where it has been stuck for quite some time, while its approach to network expansion has depended more on what it calls its ‘off-net’ strategy (i.e. partnering with other network providers). But, should it extend its own network much further, i.e. by a further six percentage points, and that is quite easy to imagine if it is an active participant in Next Generation Fund projects, then it is likely to be caught by the SMP requirements and that raises a very interesting set of questions.

It’s worth making the point that other network providers much smaller than Virgin Media – such as H2O Networks – are building out their fibre installations on an open access basis (but then, this is a pure network provider, not one with a range of content to sell to customers).

Operators being unwilling to subject themselves to the constraints of providing wholesale access to rivals would be an indicator not only that the playing field is really not level but also that the requirement to do so is burdensome. That is something that needs to be recognised a little more openly than is currently the case. A discussion over whether there is a need to have a little more flexibility in the definitions of what constitutes SMP, as well as in the identification of which networks are sizable enough to be required to open up to rivals, may not be too far around the corner.

Written by Calvin

23/03/2010 at 1:07 pm

Virgin Media in fibre trial

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Virgin Media, the UK’s consolidated cable operator, has announced that it will commence a trial in which glass fibre, used to deliver next generation, high-speed broadband services, is strung overground over telegraph poles (company press release; news media story [registration required; limited viewing time]. Households connected locally in this way can then be linked to the rest of the Virgin Media network.

The trial, which is taking place in the small rural Berkshire village of Woolhampton and which will last for six months, is significant in policy-making terms for a number of reasons:

1. it will test the viability of using telegraph poles to deliver fibre. Such a solution has been suggested in previous Ofcom statements on NGA (see Section 7) and could essentially provide a short-cut to the civil works required to deliver fibre technology. Typically, fibre optic cables are passed through underground ducts, but this accounts for the most significant investment costs in delivering next generation access, particularly the farther we get from urban areas. Fibre strung over poles is, however, much more common in the US, Canada and in Japan – from where, it would thus seem, that interesting deployment lessons may also be learned.

2. Virgin Media is a cable operator and is used to working with a different technology standard (DOCSIS 3.0 and its earlier variants) to glass fibre. The trial will thus test not only Virgin Media’s ability to work with a different standard, but also, given that the local fibre connections will plug into Virgin Media’s core cable network further up the line, how well the two different technologies communicate with each other.

3. If the trial is successful, it may provide a way in which the Virgin Media network, which has been stuck at around 12.5m homes passed (about 52% of UK households) for a considerable amount of time, can be extended beyond its current reach. Virgin Media’s lack of cash for investment in cable, given the history of the development of the sector in the UK, loaded as it was with debt and bankruptcy of the US parent operators, has completed inhibited it from extending its network beyond the core which is, inevitably, focused on urban, more densely-populated areas. This, in turn, would provide a greater capacity for Virgin Media to compete with BT, whose network is, of course, universal. At the same time, it opens up the question as to the point at which the Virgin Media network, which is currently protected from the wholesale regulatory requirements imposed on BT, might be opened up to similar obligations.

Virgin Media is being quite conservative in its press release about the number of homes that may be connected in this way: it has identified one million homes that stand to benefit from the deployment of fibre over telegraph poles – although, at the same time, it is apparently:

Keen to ensure that all communities, in towns, cities and villages right across the UK, stand to benefit.

Clearly, there is an unresolved tension there. It might be that there are technological reasons why such a deployment is suited to so few additional homes – which the trial could well help to iron out – if, for example, glass fibre, which tends not to lend itself to corners, proves not particularly amenable to this sort of deployment. Or it may well be, for instance, that existing capacity on telegraph poles is limited. Of course, it could also reflect the company’s own lack of investment cash, or indeed a fear that widespread deployment would result in regulatory intervention imposing a wholesale obligation.

Nevertheless, the trial is a welcome test bed opportunity and could well act to extend the reach of the market of the number of homes connected to next generation access technologies outside urban areas. It is also an interesting test of the extent to which the growth of ‘market’ based approaches to the deployment of next generation access is reliant on, or fearful of, the regulation required to deliver both extended levels of access and effective competition.

Written by Calvin

12/03/2010 at 12:21 pm