Britain’s Digital Future II

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.]

Ofcom consults on opening up BT fibre investment

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.

KCom pensions review

KCOM is to begin a consultation exercise on a harmonisation of the Group’s ten different pension arrangements into a single, newly-created and Group-wide pension scheme for all employees. The proposal will, at the same time, close all the existing schemes to future service.

We firmly believe that KCOM Group has a responsibility to maintain the long-term promise it has made its employees to provide decent pensions. We would always advocate a rational response to proposals such as those which have been put forward, but we would not accept that this means putting up with severe detriment.

Prospect, which has already met KCom on the proposal, will continue to be active in the consultation exercise and is urging all Prospect members in the Group to read all the documentation, review their own pension situation and also to take an active part in the exercise.

In the meantime, Oxera Consulting today published a short review of defined contribution pension schemes in the financial crisis. Largely aimed at reviewing the policy responses in central and eastern Europe, the document is very good on the difficulties that are posed to individuals faced with the need to make investment decisions as a result of membership of DC schemes, and of the social jeopardy resulting from people retiring at different points of the economic cycle with the same contributions record but entirely differently-sized pots. It also makes the very good point that, for all the problems associated with higher-risk investments, the long-term return from equities is much higher than with safer forms of investment.

Switching increasingly into less risky investment vehicles is vital to protect capital in the run-up to retirement – but those needing to draw shortly on their pension, for example, those who would ordinarily have been looking to switch into safer forms of investment say in March 2009, would have been placed in the invidious position of having to consider whether, in contrast to this basic advice, to gamble on staying with equities in the hope of the stock market rebound. Over the course of 2009, such a rebound did happen, but its timing and extent were evidently far from clear at the outset. Playing with spare cash in that situation is one thing; playing with your retirement savings is entirely another.

As more schemes switch to DC-type provisions, there is a need to consider DC scheme design so as to achieve some means of a targeted level of pension benefit, not least in the (deliberately extreme) situation highlighted in the Oxera report. It has always been possible to design some form of targeted benefits underpin, with this re-appearing most recently in the collective DC approach which, although not fault-free, did at least offer some means of getting around the potential timing-based unfairness of DC and of sharing the risks associated with this form of provision more evenly between scheme members. The DWP has withdrawn from the idea of collective DC but it’s certainly possible to design on a private basis a DC scheme to suit such characteristics as are appropriate both to scheme members and to the companies offering them, so as to create a DC scheme which is both more fair and more balanced. The question remains one of whether there exists the will to do so.

KCom posts declining EBITDA

KCom Group produced its annual accounts for 2008/09 this morning. The figure that most Connect members will have had their good eye on was EBITDA – earnings before interest, depreciation and amortisation – since their pay rises are linked to the company’s achievements of its EBITDA target. Unfortunately, the news was not good at the headline level, since reported EBITDA declined by 6.1%, to £65.1m.

Interestingly, EBITDA in the largest part of the company’s business – Telecoms and Internet Services – rose by a healthy 6.2% to 66.1m. Unfortunately, this was counterbalanced by a drop in EBITDA in the company’s Integration and Managed Services and Information Services arms, as well as negative (albeit improving) ‘other’ figures (although, given that these latter largely refer to head office costs and support services, it is difficult to see how these can reasonably report positive earnings).

The pay review date is 1 July and full details of what – if anything – members receive this year will need to wait until the publication of the May inflation figures, which will be on 16 June (the other half of the pay formula is geared to the May RPI-X figure; in April, this was 1.7%, down from 2.2% in March). It must also be stressed here that it is not absolute EBITDA that is the key, but the company’s performance against its EBITDA target.

The company has been running a strategic review since the publication of its interim results in November 2008 which has resulted in a range of activity over the last six months, including the loss of 150 jobs in Integration and Managed Services, although our anecdotal evidence is that the actual job loss figures have been somewhat higher. We note with a fair degree of irony in this context the research recently published by Affiniti, KCom’s IT and communications solutions business, which reported that ‘cut now, suffer later’ philosophies could leave IT departments ill-equipped to meet commitments in the upturn. We have also noted the company’s apparent preference for abiding by only the minimum of its commitments under redundancy consultation legislation.

The company is anticipating ‘a significant period of change over the next twelve months as these initiatives are delivered and further refinements to [the] business model are undertaken’ but it believes that, nevertheless, it is in the process of gaining an ‘excellent platform on which to build’. Bill Halbert, who has been carrying out the the chief executive role while being Group Executive Deputy Chairman, has been promoted to the role of Group Executive Chairman. This would leave the company without a specific managing director and we would suggest that the company’s strategic positioning is unlikely to be assisted by the continued vacancy at that level.