Ofcom 2010 Communications Market report

If it’s August, it must be Ofcom’s CMR – a regular part of my summer reading, stuffed as it is with facts and figures about the UK communications world. The 2010 version came out last week and I’ve been picking my way steadily through it: it’s the usual authoritative source of details and opinions about the changing ways in which modern communications is influencing our lives: as Ofcom’s press release points out, we now spend half of our waking hours connected to some communications device or other, be it TV, mobile or pc – often simultaneously, with the current phenomenon of social viewing – and we’re also doing a lot more networking.

All this demands increasing amounts of bandwidth, which places additional demands on communications network providers. Yet – as the press release also points out, broadband prices continue to fall, forming an unhealthy backdrop to what is an extremely costly investment and an illustration that markets occasionally produce misleading signals and are not always the efficient allocators of investment resource that they are claimed to be.

Here’s my illustration of the data contained in Figure 5.92, buried at the back of the section on Telecoms and networks, on p. 354:

From a communications provider’s point of view, it doesn’t look good: ever-increasing bandwidth at ever-decreasing prices (albeit that they are no longer falling as fast as they were). In fact, these years (set at constant 2009 prices) have seen a 33% fall in the monthly price we pay for bandwidth, while average connection headline access speeds have dramatically risen (actually, by 1,267%). Earlier in the report (Figure 5.64), Ofcom had reported that monthly household communications bills also continue to fall, with the fixed voice and broadband component (i.e. all household communications bills excluding mobile) falling in the same period by 17%, and fixed voice bills by over 26%. This is important since network providers looking to upgrade their networks and replace the old and increasingly redundant copper pairs with costly (glass-)fibre are having to do so on the back of falling prices, both in the direct market and in potential cross-subsidising ones. At the same time, the future – marked by falling broadband bills despite more and more bandwidth – is looking somewhat inauspicious from the point of view of building a convincing case around the scale of returns that can be made on that investment.

Apart, additionally, from the effects of any double dip recession in making any investment case even more uncertain.

Public policy seeking faster and better communications networks (and for all citizens) makes sense both economically and socially. Equally, however, we have to recognise that BT – the vehicle by which that public policy can most effectively be implemented – has not been in the public sector for some years and that private sector investment environments, not least of all those in regulated industries, tend to be fragile and frequently capricious things.

In this light, politicians need to recognise that carrots as well as sticks are a good tool; while regulators need to recognise that competition in the direction of achieving cheaper prices is not the be all and end all of regulatory policy – that investment is important and that it may be crowded out in circumstances where falling prices make the case for that investment harder to sustain. One reason to re-visit the dropped parts of the old Digital Economy Bill putting a new statutory requirement on Ofcom to take account of the impact of its decisions on investment, I think.

[Edit 27 August:  Analysys Mason comments this week that the average price of a fixed broadband bundle dropped by €5 per month across Europe during the past six months (despite an increase in speeds), but was still more expensive than mobile broadband. So, it looks likely that there will be further pressure on fixed broadband prices right across Europe – where all fixed line network operators are facing similar expensive investment decisions. And while mobile broadband is cheaper, it doesn’t deliver quite the same user experience, being slower, with more drop-outs and less reliability. And market forces dictate that fixed broadband prices need to drop further to compete, even though fixed network operators to invest to deliver quicker, more reliable connections. It’s a mad world out there.]

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