Connected Research

Union policy research in the 21st century

Posts Tagged ‘Openreach

Australian government issues draft broadband law

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The Labor Government in Australia yesterday published its draft ownership, governance and sale framework for NBN Co, the new company being established to fulfil a 2007 manifesto commitment to form a nationally-owned high-speed broadband company charged with rolling out major investment in a A$43bn (£25bn) fibre-to-the-premises network across Australia.

The plans go hand-in-hand with a proposed – and evidently controversial – plan to compel (albeit on a voluntary basis) the structural separation into wholesale and retail arms of Telstra, the former monopoly telecoms company. A bill detailing the break-up was due to be laid before the Australian senate this week, but looks to have been delayed as ongoing, and highly complex, government talks with Telstra continue over the valuation of telecom assets being folded into NBN (leaked, apparently by mistake last October, as being between A$8bn and A$40bn, depending on assumptions). [Edit 26 February: It was indeed delayed [registration required; limited viewing time] as a result of what the Labor Communications Minister describes as filibustering by the conservative opposition – a situation which he later decried in the following terms: ‘If the opposition is serious about improving competition in the market, they need to stop playing opposition for opposition’s sake and allow the debate to begin.’ So, a centre-left government launches a Bill designed to enforce the structural separation of the telecoms company in the name of boosting competition – but this is filibustered by conservatives. It’s an upside down world.]

Meanwhile, more on the union view on structural separation and NBN appears at the pages of the relevant part of the CEPU here.

The draft framework – which has also been controversial, not least because it appears at least partly to be being used as a tool in the negotiations with Telstra – outlines that the government will continue to hold a majority stake in NBN (i.e. at least 51%) until five years after the network is ‘built and fully operational’, scheduled for mid-2018, after which point it will essentially be privatised. The ultimate decision here, however, could be delayed annually, and perhaps even indefinitely.

The key part of the draft as regards the structural separation argument is that NBN will be a wholesale company, selling wholesale products on an open and equal access basis, and that, while private participation (up to 49%) in the venture is welcome, no retail operations are allowed (though the goverment does seem to be reserving the right for NBN to sell services on a retail basis to ‘certain end users, for example government agencies’). This therefore puts Telstra in the position of either agreeing to structural separation, and folding its assets into NBN (for which the terms of engagement have already been announced), or else taking the chance of competing with it via its own infrastructure build. Additionally, the right reserved to NBN to sell retail services to government agencies also adds pressures on Telstra as a result of its own government contracts, the loss of which would clearly undermine its commercial operations.

Comment on the plans – billed as an ‘exposure draft’ – is being taken until mid-March, with legislation due later this year.

Of interest to the UK? Certainly, as regards an alternative (albeit very difficult, given the structural separation aspects) model of rolling out a fibre access network – and one owned by the government, to boot (at least in the first instance). Secondly, there is evident interest from a UK perspective given the circumstances of the creation of Openreach in the UK – when BT was forced to separate itself functionally to avoid a Competition Act reference. Thirdly, the comparative scale of the investment needs to be noticed. Rolling out fibre-to-the-premises across Australia is an immensely significant project which, if the predictions about broadband investment are right (and these things can be subject to hyperbole), should deliver an enormous boost to the Australian economy. The population spread around Australia is important – most of Australia’s 21m people live around the coast – so this changes the dynamics of the investment. Nevertheless, this is a huge sum, both on an absolute and a per-head basis, on which, leaving aside the controversial aspects with which the plans are associated, it is good to see a government taking a lead.

Written by Calvin

25/02/2010 at 1:59 pm

BT in O2 managed services deal

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BT’s Wholesale business has announced a five-year managed services agreement with Telefonica O2 UK under which it will consolidate O2’s fixed and mobile networks in the UK into a single network. In a nod to the problems that smartphones have caused the O2 network, via rapidly rising volumes of data traffic, the intention behind the deal is to provide O2 with access to reliable capacity while also allowing it to focus on customer services rather than network investment.

[Edit 5 February: O2 said also this week that it had over 2m iPhone customers [registration required; limited viewing time] by the end of 2009, when its two-year exclusivity period ended. That means that about one in ten O2 customers have an iPhone. No wonder the network’s creaking! The exclusivity period ended on 10 November, when Orange started selling it, with Tesco (which uses O2’s network) added on December 15 and Vodafone (which turned down the opportunity of an exclusivity deal on the iPhone in 2007) on 14 January. We know that Vodafone sold 100,000 iPhones in the first week [registration required; limited viewing time] (half of which were pre-orders) and that the iPhone constitutes 25% of its new sales and that the company is expecting that to rise to 30-40% in the next 12-18 months [registration required; limited viewing time]. Vodafone has a larger amount of higher frequency spectrum than O2, so its network may be less troubled by such volumes, but these sorts of deals may well become more common in the future. Overall, there must now be something like 2.5m iPhones in the UK, currently less than 4% of subscriber numbers, but the one-way direction of this trend is clear.]

Three things are obviously worthy of comment here:

1. BT used to own O2 until the debt taken on as a result of auctions for 3G spectrum (largely, here and in Germany) forced a re-think of company strategy and the flotation of O2 in appeasement of the City for being asked to contribute to BT’s resultant rights issue. Speculation about whether this deal would have needed to occur had all that not happened is not likely to be all that productive – and this post is not about to start heralding the likely merger between the two companies – but the simple commoditisation of the relationship is interesting.

2. The deal illustrates the networks/services conundrum, with the communications world increasingly divided into providers of networks/network services and providers of communications services (to customers). Allowing one company to do the first allows another to concentrate on the second. To some extent, this has already affected BT internally, with the separation of the core of the company into network (Openreach) and services (Retail and Global Services) arms (Wholesale sits somewhat across both), although how far such a strategy is followed, either in terms of the regulatory approach or else in terms of BT’s own strategy, is a moot point (as well as one being subject to frequent rumour).

3. The fusion of fixed and mobile networks into a single platform – albeit via a third party – illustrates another aspect of the convergence of communications services. The converging of communications markets – a process which has been going on for some time – merited its own section in the most recent Communications Market report by Ofcom (chapter 5) although the convergence between fixed and mobile did not feature (although such a process is quite clearly on Ofcom’s radar – see para. 2.34)). At the same time, the increasing use of Internet Protocol technology within the networks world clearly endows such agreements with a deal of rationality.

Given the typically lower levels of consumer satisfaction with mobile than with fixed networks, the deal may well bring its own problems to BT, although this may well only be around the margins and could well be lost in any further move towards ‘nixing the nines’: BT’s most recent Annual Report already refers to faults on the telephone line being experienced now on average every 13 years (p. 4) – a level which is likely to be more or less unnoticeable to most people.

Written by Calvin

02/02/2010 at 2:25 pm

Nope, still scrabbling in the dark…

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Amidst the discussions over whether or not the Tories are softening plans for spending cuts in the event they win the general election with enough seats to form a majority, Shadow Chancellor George Osborne also gave the BBC yesterday further (but not better) on the Tories’ broadband plans.

Looking at the transcipt, Osborne’s promises are, amidst the hyperbole, the confusion and the mis-statements, that:

– ‘the next Conservative government is going to aim to have a 100 megabit Broadband to a majority of the population by 2017’

– ‘And if there are some parts of the country where the market can’t get to (because I think the best way to deliver this is by breaking up the British Telecom monopoly at the moment, which holds back companies like Carphone Warehouse or Virgin) if we find the market can’t do that, then use the BBC licence fee, the digital switch over money in the BBC licence fee, to get Broadband out to the rest of the country. But let’s see, first of all, if we can have the market delivering that super-fast Broadband to the country.’

So, the ‘aim’ is to have 100 Mb access speeds to ‘a majority’ of the population, and the means of funding that (in response to Sophie Raworth’s direct question) will be to ‘[break] up the British Telecom monopoly’ and then ‘use the BBC licence fee’.

Jeremy Hunt is also reported by the Financial Times yesterday (in a very brief piece) to be intending to compel BT to open its ducts as a solution. It would not be a surprise if Jeremy Hunt didn’t read these pages that closely – but I would refer him to my piece on Friday last week (the one just below this one, in fact).

As Osborne didn’t quite note, the aim to get 100 Mbps to a majority of the population is of course easily accomplished since ‘the majority of the population’ of the UK live in urban areas – and quite densely populated ones, at that. (It also seems to ignore that BT currently plans to get 40% of the population connected to up to 100 Mbps services by 2012, so it’s not as ambitious as it sounds.) The trick, however, is to get similar speeds to those living outside such centres (who are in at least as much need of the same speeds, given the references Osborne made to telemedicine): there are clear socio-economic arguments why broadband must be rolled out on a socially equitable basis across the nations and regions of the UK.

Here, the notion that this can be achieved by ‘breaking up the BT monopoly’ is quite laughable. A map of exchanges which have been unbundled under the current programme is likely to bear a very close correlation to centres of population, as is the map of coverage of the UK by cable networks (a map that is unlikely to change significantly in the next ohh, seven years or so) – and there’s a very obvious reason for that. ‘The market’ won’t go where it can’t make a profit – so allowing ‘the market’ to intervene in areas that it has already quite clearly stated that it won’t touch on the basis of the economics of existing broadband, let alone the high-speed variety, is, quite simply, not a solution at all.

I’ll leave Osborne to explain how a retail market share of broadband of 34% (DSL plus retained unbundled loops) and a number of unbundled local loops which is larger than those held by BT Retail, constitutes a monopoly.

Osborne’s reference to using the digital switchover portion of the licence fee to fund broadband expansion is also very interesting in the political context. This amounts to 3.5% of the BBC licence fee, while Digital Britain reported that the underspend in this fund is around £200m (while the government is currently proposing to use this towards its commitment of a universal 2 Mbps commitment by 2012). This part of the licence fee is also due to expire once the digital switchover scheme finishes in 2012.

So, Osborne now needs to do three things:

1. explain how the Tories will meet the commitment to a 2 Mbps universal service by 2012, since he is proposing to subsume the funds for doing so for other purposes

2. explain how the continuation of this additional fund beyond 2012 differs from what the government is seeking to do with the 50p/month landline duty (which the Tories have both derided and promised to end). Presumably, after 2012, this part of the licence fee could, otherwise, be returned to licence fee payers, either immediately or over time, or used to fund other BBC services. Given that the Tories are unlikely to be sympathetic to the latter, its explanation of why, in contrast to the former, it is retaining a specific earmarked duty for a different purpose is going to be an interesting one. As thinkbroadband.com comments, this is more or less ‘a shift in one type of tax to another

3. Given that Osborne was making clear reference to access speeds of 100 Mbps, which will require fibre being rolled out not to the cabinet but to the premises – a much more expensive form of roll-out – Osborne needs to define where the money is going to come from and, perhaps more pertinently, which investors he thinks might have sufficient scale to have that sort of cash available and under what conditions they might want to use it to fund next generation access. This could of course be a political reference to the ‘up to’ 100 Mbps speeds which could be delivered by fibre to the cabinet – but some clarity as regards whether he is thinking of fibre to the cabinet or to the premises would be welcome.

In the meantime, carry on scrabbling…

Written by Calvin

01/02/2010 at 12:57 pm

Ofcom consultation on BT’s pension costs: apoplexy in west London*

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Ofcom yesterday published its previously-trailed consultation on whether BT’s regulated wholesale prices should in the future include any costs in respect of deficit repair contributions to its pension scheme, whether there should be some changes or whether things should stay pretty much the way they are (which is that BT’s reported pension service costs, as measured by the IAS19 accounting standard, can be included in the assessment of its costs).

So far, so usually esoteric Ofcom stuff. But the announcement of its consultation was greeted with consternation by BSkyB and Carphone Warehouse, who promised in newspaper reports to resist the ‘plain wrong’ move ‘as hard as we can’. Here, we should note that the consultation is not only open for business, so to speak, but is open-minded: Ofcom has not yet decided to do anything other than to ask the question of whether or not this is a good idea.

The essential background both to the move and to the consternation with it was greeted by BT’s rivals largely consists of two factors: in other industries (e.g. water and energy supply), regulated bodies are able to take into account deficit repair costs; and the size of the deficit in the BTPS (and, consequently, the scale of BT’s repair costs). No doubt Ofcom would not have chosen this point in the BTPS deficit cycle – when the deficit is likely to be at its height (‘likely’ because the actual deficit, not the one measured by accounting standards, is not yet known) – to have launched such a consultation. The timing here is not entirely of its own making, however, since this issue (specifically, the discrepancy with how other regulators view the issue of deficit contributions) cropped up in BT’s response to the Ofcom consultation earlier this year on the pricing framework applicable to Openreach.

The concerns of BSkyB and Carphone Warehouse are, in one respect, evident enough: their costs as customers of BT will rise. Of course, the costs of all such industry customers of BT (including those of BT Retail, BT’s own customer-facing business) will rise, and by the same amount, so the issue is not one of a loss of competitive position but one of how those costs are then dealt with (either by being absorbed or else passed on to the customer – or, of course, some combination of the two). Neither will such customers be meeting the costs of the overall deficit in one year – it is the annual costs of the deficit repair charges that is the concern. [Edit 4 December to reference this blog post: some clear factual inaccuracies but, in the context of the WSJ being published by News Corporation, which owns 39% of BSkyB, quite a brave one!]

Nevertheless, we can’t escape the truth that these are costs that should have been present in BT’s regulated cost structures all along: pension deficit charges are a normal business cost and need to be treated as such. Say that Carphone Warehouse or BSkyB (just for the sake of example) ran a defined benefit pension scheme for their employees (crazy example, I know!) and that this was running a deficit: the costs of financing that deficit would be passed on to customers: the money to do so can’t just be magicked up, somehow abstractly from the results of trading activities (even in a paper-based world). Not to pass on the totality of such costs might even be treated as a company trading fraudulently. So, allowing regulated companies to encompass the totality of their pensions costs in their assessed cost structures is a sensible move.

BSkyB has also made serious accusations (see above link to newspaper reports) about having to ‘bail out BT for the mismanagement of its pension fund’. Perhaps, these are even libellous ones. Firstly, the job of managing the pension scheme is not the job of BT but of the trustees of the scheme. BSkyB seems to be over-focusing on ‘aggressive investment policies’ (partly, from a reference to investment policy in the consultation document). Yet, the BTPS investment policy has not been any more aggressive than others: it is a mixed one, designed to maximise investment returns (and therefore focusing, like any other investment manager, on more risky assets) but balanced enough with low risk investments to ensure that pensions can be paid. Ofcom’s consultation document makes it clear that the effect of the investment policy is that returns on assets have ‘consistently outperformed’ its benchmark and are ‘in line’ with a separate independent benchmark. BSkyB needs to think very carefully before making such allegations.

The other part of BSkyB’s accusations was that BT has ‘systematically undercontributed’ to the scheme in the past. There are two major sub-themes here, which also feature in the consultation document:

– BT has taken a pensions holiday from the BTPS in the past (when the legislation on pension schemes – and for fairly good reasons, at the time – sought to prevent companies from over-funding schemes, essentially using them as vehicles for tax dodging). With hindsight, that is a regrettable set of circumstances, although it should be noted that deficit contributions in the past few years have surely wiped out the holiday

– the BTPS has been used to bear the costs of the company’s leaver schemes prior to Newstart. This is to some extent true – although such schemes have not been used for several years, while the Trustees have also required BT to make additional contributions in respect of such costs.

Once again, we have to remember that pensions are long-term investments: an improving economy and growing investment returns will see pensions deficits falling – even to the point of schemes perhaps one day even again being in surplus (when pensions-based costs would clearly fall). (Shurely shome mishtake?) These are abnormal times and basing policy on the impact of such abnormality is, on top of the regrettable short-termism which characterises company policy-making, an unlikely foundation for rationality. At the same time, as Ofcom recognises, BT has already taken steps to reduce the costs of the BTPS by agreeing with Connect and the CWU changes to the scheme’s benefits structure. So, the costs of the deficit are not spiralling out of control and may well fall.

Nevertheless, in the wider scheme of things, particularly were defined benefit schemes still to be the norm, it’s evident that treating the full pension costs of regulated companies may well be seen as one further nail in the DB coffin since, in a regulated environment, this is increasing the consumer-based pressures on companies with such schemes to get rid of them (either partially, as many have already done; or completely, as some are now doing). Should Ofcom decide not to include deficit repair charges in regulated cost structures, that puts pressure on the other regulators to re-think their approach which, in turn, puts pressure on good quality pension schemes in those industries.

Some tough thinking awaits.

* BSkyB lives in Isleworth; Carphone Warehouse in Acton.

Written by Calvin

02/12/2009 at 1:32 pm

Faster broadband speeded up

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BT has announced today that it is to step up the rate at which homes and businesses will be connected to high speed broadband networks.

Previously, it had announced that it would extend fibre-based network access to around 10m premises by 2012, of which about 1 million would be connected by fibre access built directly from their premises rather than from the nearest street cabinet (from where there would be a fibre link to the nearest exchange, coupled with a traditional copper-based link back from the cabinet to the premises). Now, however, it is planning to have 2.5m of these homes linked via purely fibre connections, and that this will be done not just on greenfield sites, which had been the previous plan, but via existing ducts and poles to sites already with copper connections.

Ten million homes represents around 40% of BT’s estate.

Fibre links are capable of delivering much faster speeds than traditional copper. BT has been investing in fibre links further up the network, but the further down the network towards the end customer that fibre goes, the faster the speed to the consumer. Fibre to the premises networks are capable of speeds of 100 Mbps (with ten times that being possible with further investment); fibre to the cabinet networks will deliver speeds of around 40 Mbps. This compares with a maximum speed under traditional copper-based links of around 24 Mbps using ADSL technology.

This is clearly good news for BT customers (whether retail or wholesale) and it is a welcome announcement. What does call to mind, however, is the need for a strategy to deal with areas which are less attractive to such levels of investment and where access speeds will remain much lower.

BT’s own press release points out that such investment would typically require public financing (well it would, wouldn’t it?) but it does remain true that, without that financing, less attractive areas will remain socially disconnected or, at best, an after thought. BIS’s plans for a levy to raise funds specifically for investment in ‘non-market’ areas is a start – but, given the suggested size of the levy, more is likely to be required to ensure full coverage, while the issue of the levy itself remains politically contestable and, because of that, vulnerable in the circumstances of any change of government. Some level of urgency is therefore required to ensure that this country isn’t faced with that level of disconnection.

At the same time, as others have commented, it does raise questions about the level of ambition represented by the commitment to a universal speed of 2 Mbps by 2012. This, again, is a welcome start – but it needs to be regularly reviewed over time to ensure that it does not become outdated, while upstream speeds may need to be addressed as well. Perhaps this might well form an interesting area on which Ofcom could usefully report on the state of the communications infrastructure, which will be required under the additions to its statutory duties by the imminent Digital Economy Bill.

Written by Calvin

09/10/2009 at 5:23 pm

BT’s Undertakings re-prioritised

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Ofcom has today issued a statement concerning the re-prioritisation of BT’s Undertakings, part of which concerns the separation of infomation systems and databases between Openreach and the rest of BT. Ofcom consulted on this issue back in May (blogged about here) and Connect and the CWU jointly drafted a response in July broadly welcoming Ofcom’s move.

The issue essentially considered the relaxation of several of the Undertakings as regards systems separation in return for a set of new commitments to particular service developments. We supported the move on the grounds that allowing systems and information development employees to approach the purpose behind their role from a perspective of writing new software for the new principles under which BT operates, rather than trying to make legacy systems, written in a different era and for different purposes, do things for which they were not designed, was clearly a rational way to deal with the requirement in the Undertakings for separation.

In discussions with BT and other communications providers subsequent to the closure of the consultation, Ofcom has satisfied itself that the delay in meeting separation targets would have a limited impact on competition (and would also be ameliorated by the concomitant service improvements by Openreach), while the overall position had also been strengthened subsequent to the consultation both directly in the Undertakings themselves and otherwise in the production of a separate side letter from BT. Consequently, it has approved the changes. In particular, Ofcom believes that:

The Undertakings will continue to be a comprehensive solution to the competition problems identified as a result of the TSR [Telecoms Strategic Review].

This would seem to be a good outcome both for BT as well as for the rationality of regulation itself, where evident problems appear, to have a focus on a common sense approach within the overall aims while not over-focusing on detailed prescription.

Written by Calvin

11/09/2009 at 2:01 pm

Ofcom reviews BT Undertakings

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Ofcom, the regulatory authority for the UK’s communications industry, has produced two linked pieces of work on the Undertakings that BT gave in 2005 concerning its internal structure.

The Undertakings concerned the commitments given by BT to equivalence of input (by which BT would provide wholesale network services to all retail providers on a non-discriminatory basis), requiring in turn the functional separation of its delivery and systems functions (leading to the creation of Openreach). This was a solution to the competitive concerns identified by Ofcom which, otherwise, would have led to a Competition Commission reference.

The first piece of work is a review by Ofcom of the factors which led to the Undertakings being given – its third. It believes that the net effect of the Undertakings to date has been positive, but that it is at a critical juncture at which next generation access and core networks are coming on stream which may change the validity of the Undertakings. Nevertheless, for the time being, Ofcom believes that the Undertakings have delivered ‘substantial’ benefits to retail and wholesale customers to date and thus it remains of the view that ‘the Undertakings are an appropriate and comprehensive solution to … competition concerns.’

There nevertheless remain concerns over systems issues and the management platform over which Openreach delivers the equivalence of input obligations to all communications providers.

Further work on these issues is the subject of the second piece of work here, a consultation document on re-prioritising parts of the Undertakings which depend on the programme of separation of information systems between Openreach and other parts of BT. This was originally required so that other BT businesses would not be able to access information concerning Openreach’s provision of services to other communications providers and was due to have been achieved by June 2010. For new systems put in place subsequent to the creation of Openreach, this has been simple since they have been designed with separation in mind, but problems remain over meeting the deadlines concerning legacy systems, specifically the migration of BT’s legacy retail customer records to systems which are separate from Openreach.

BT has consequently requested a re-prioritisation of these obligations as a result of the increasing pressure that its systems resources have been coming under. Ofcom, which has been working on these proposals since early December, is thus proposing to relieve BT of the deadlines originally set out in these aspects of the Undertakings, in return for ensuring that Openreach delivers, as a part of the Undertakings, a set of new service developments in addition to developing enhanced functionality for existing ones.

If the proposals are supported, BT would remain committed to full physical systems separation, albeit not to the original timetable, but would gain flexibility to continue with the separation of legacy systems according to more pragmatic considerations but without a finite date. BT would also have to prioritise the separation of customer records above other aspects of separation, a form of separation which, Ofcom concludes, is particularly important in addressing potential competition concerns. Finally, the remaining milestones for BT to migrate its installed customer base to equivalence of input products would be removed from the Undertakings and replaced by new progress milestones based on the percentage of customers that have been migrated to equivalence of input products both by June 2010 and December 2012.

Ofcom is confident that its proposals do not depart from the aims which led to the establishment of the Undertakings and are consistent with the outcomes that the Undertakings set out to achieve; in particular, that they maintain a continued path towards functional separation and to the delivery of equivalence of input products albeit over a longer timescale for some systems and products. BT will gain from being able to be more flexible in the deployment of its development and capital resource, essentially by no longer having to commit systems design specialists to working essentially on unproductive work, allowing them instead to work on more rewarding, fresh design projects.

Connect will be considering further the issues raised by the consultation, which closes on 10 July.

Written by Calvin

29/05/2009 at 6:06 pm

Posted in Telecoms regulation

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