Copper and fibre: the price relationship

An interesting report has been published on the relationship between the pricing of telecoms services over both old-style copper wiring and new-fangled, so-called next generation (glass)fibre.

Written for ETNO – the European Telecommunications Network Operators’ Association – the report was published initially last month by Plum Consulting, but I’ve seen it as a result of a news item concerning an ETNO workshop held this week and intended to raise awareness of the impact of the pricing of copper-based services on the case for investment in next generation networks.

Copper pricing, which refers to the bit that we pay for our residential telecoms services either to BT or, where the line is BT-owned but leased to another, to that retail provider, is a topical issue not least because Ofcom has recently launched a new consultation on the prices that Openreach – BT’s provider of wholesale network services – can charge its own customers (which then sell retail services to us). So, the timing of the workshop and the publication is highly important in the UK context.

Plum Consulting makes several points in its document, among them that the running of copper and fibre networks in parallel during the period of transition from old to new will present serious challenges as regards pricing – not least that falling copper prices may well discourage investment in next generation fibre since there would be less incentive for customers voluntarily to migrate to (more expensive) fibre. This would act in turn to reduce retail price levels for high-speed broadband, thus jeopardising the investment case. The prospect of fibre investment being treated in the same way as copper – by being subject to continuing price reductions – is also likely to provide room for second thoughts among investors.

In some ways, this might well be a ‘Well, they would say that, wouldn’t they?’ scenario given the nature of the commissioning body, but Plum Consulting is right to point out that adoption of, and investment in, next generation fibre is not a given and that the policy framework must seek to ensure that incentives to operators are correctly aligned with the public policy goals for high-speed broadband. This means, not least, that copper prices should be maintained at levels which support efficient migration to next generation fibre, thus assisting operators with investment cases, and that – inevitably – fibre pricing must ensure cost recovery and deal with the long-term nature of investment and the uncertainty of demand. The latter is uncontroversial – but the former ought to provide some considerable food for thought for Ofcom, and other regulators across Europe.

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Return of the landline duty?

thinkbroadband.com is today reporting that Internet Service Providers have put the issue of a residential broadband levy back on the agenda in a meeting with Ed Vaizey, Minister for Communications, Culture and Creative Industries, which took place earlier this week. The story first appeared on ISP Review, where there is a little more detail about the meeting.

The story is a little confused, not least by the context of the meeting being intended to discuss the controversial rating system for fibre installation, but ISPs appear to have suggested that the government institute an £8/year levy on residential fibre to the home connections of 1ooMbps.

The purpose of the levy is not clear, and neither is Vaizey’s reaction to what was apparently a ‘lively’ discussion. The last government intended to legislate to raise a £6/year levy on ordinary telephone landlines so as to generate funds to roll out fibre in the ‘final third’, but this was derided by the Tories in opposition, with George Osborne taking great delight in cancelling the by then already-dropped plans in June’s ’emergency’ Budget. It is not evident that this newly-proposed levy would be used in this way. Further mystery is added by the absence from this week’s meeting – apparently invitations weren’t extended – of both BT and also Vtesse Networks, the latter of which has made probably the most amount of noise on the issue of the rateable value of fibre installation which was, after all, the purpose of the meeting [Edit 14 January: ISP Review has since corrected its report to state that, although not being invited to the original meeting, Vtesse was represented, by its Finance Director, at this week’s re-scheduled one].

An £8/year levy on residential 100 Mbps connections isn’t likely to raise much money – though getting the principle in place would be a useful start to raising the sorts of money that would be required to make a serious dent in the ‘final third’. Neither does Vaizey have much political scope for manoeuvre on the issue, given both Osborne’s actions in dismissing the landline duty so comprehensively and the Tories having also dropped their manifesto commitment to reviewing the tax paid on fibre connections. Though this of course wouldn’t be the first policy U-turn by this ConDem government, even this week.

A broadband strategy worthy of the name?

Jeremy, er, Hunt today launched yet another new ambition for the government in the area of high-speed broadband: for a digital hub in every community. An ambitious government is a welcome thing and having a strategy for broadband is also applaudable (although I thought that Digital Britain had already set that out some eighteen months ago), while Hunt himself talks a good game – but, once again, I find myself regarding the scale of the ambition as being somewhat less than the words espoused to tout it. Again, we need some more detail about what exactly it means, but what Hunt is calling a ‘digital hub’ seems to me to represent little more than fibre to the cabinet solutions which, although clearly an advance and worth having by itself, does not seem to stack up to the futuristic concept of a ‘digital hub’. And the notion of communities then taking responsibility themselves for extending the network to individual homes raises the inevitable questions of how? and who will finance? without decent answers to which the notion perhaps ought not originally to have been raised, especially not in the context of what is meant to be a strategy.

It is also not by itself going to give Britain ‘the best broadband network [or system] in Europe by 2015’ – though here some more detail was fleshed out in that it will be a ‘composite measure‘, a ‘scorecard which will focus on four headline indicators: speed, coverage, price and choice’ (would it be too cynical to think that this means that Britain will, indeed, turn out to have ‘the best…..’, whether or not an independent observer would think the same? An early plea for the measure to be turned over to a sort of Office of Broadband Responsibility, if you like).

And another £50m for more pilot projects doesn’t seem to be a particularly forward-thinking other than an expression of the need to prove that Something Is Being Done: the existing four pilots, announced in October, are not really yet underway, still less in a situation of being able to identify the lessons which might – or might not – indicate the need for more pilots. A further delay in the timetable by which we might attain a digital Britain is, perhaps, in the interests of few of us. On the other hand, progress by a rolling series of pilot projects – provided they’re sustainable and link into the national strategy, is still progress – as is BT’s own pilot of a 1Gbps network in Kesgrave, Suffolk, also announced today.

A national strategy worthy of the name and the ambition would commit serious funds to a project of this type – especially if it is all ‘about jobs‘, with Hunt citing sources indicating that a high-speed broadband network could create 280,000 – 600,000 new jobs. Hunt again references South Korea in the context of 90% of the funding being committed by private sources – which seems to come from this report – but which seems rather conveniently to ignore the reference in the same report to this referring only to local access links to a $24bn high-speed core network built by the government (with the private sector investment also being drawn from soft loans). Facts do need to be straight.

In contrast, the UK government is offering £530m – the government has been speaking of £830m by 2017, but the remaining £300m comes beyond the life of the spending review period, and the lifetime of this parliament; and, even if it is to be drawn from the BBC licence fee whose six-year period stretches beyond 2015, we should ignore the additional £300m since it is outwith the period by which the government has committed itself to achieving its aim. The government needs to recognise that this is peanuts. No-one is seriously calling for government investment at the South Korean level – BT has committed itself to matching what is available publicly and can do a serious amount of work with it, as its partnership with the Cornwall Development Company proves – but if it’s South Korean speeds that we want, we are deluding ourselves if we think that this is going to come entirely – or almost entirely – from the private sector, especially when we are ignoring key facts about the use of South Korea as an example.

Broadband and the cuts

Broadband is reported today as having ‘survived the cuts‘.

Except that it hasn’t, of course. True, Bullingdon George outlined plans for £530m to encourage fibre investment in rural areas yesterday – albeit that £300m is pre-committed as part of the BBC licence fee, and which the Tories had said would be extended into the next licence fee period (and also now dictated settled), but the remaining element of which appears to be new money.

But in the face of the scale of the investment required to deliver next generation broadband rights across the country (about which I blogged below), and the need for the engaged involvement of the public sector if that is to happen outside the most profitable areas, let’s not kid ourselves that this is anything but a cut.

Public investment in fibre (again)

I blogged a few days ago about the public-private partnership lined up to provide high-speed broadband fibre throughout Cornwall and the Scilly Isles.

A couple more details have come to light here [paywall may be involved], albeit in the context of a weekly review on which the detail is scant. Essentially, however, the additional detail is that the take-up of broadband is 12% higher in Cornwall and the Scilly Isles than in the rest of the UK, which means that the risk of the investment to BT is a lot lower than otherwise; and the second is the comment from the development manager of the Cornwall Development Company (which is also involved with the project) that there is pent-up demand for high-speed broadband links in rural areas because of their isolation.

If true, this would turn conventional wisdom somewhat on its head (and we should also remember here that incoming money has made Cornwall, while still isolated, an awful lot less of a rural backwater than it used to be, which does make the county a more complex proposition). Of course, it may not be true (and the CDC may well still be in hype mode). If it was true, however, then the £100/head of public money which is being used for the project would seem to be much less risky an investment in the sense that public authorities could have confidence that take-up would be high and that investment on this scale would seem to provide value. At the same time, this brings us a little closer to the ‘crowding out’ thesis of the right – i.e. that public investment would, in this situation, be more or less replacing private investment since it would be more likely that, where demand was likely to be high, the private sector would be more inclined to get involved.

We can probably discount this, on the evident fact that the private sector is not getting involved in fibre provision extending into the ‘final third’ (or, indeed, not even as far as this). Nevertheless, it does raise the suspicion that, if there is pent-up demand, not only is the economics of fibre in rural areas less tough than hitherto envisaged but also that the telcos may be withholding somewhat.

Intriguingly, the £100/head of public investment being provided by the ERDF indicates, if the Cornwall example is generalisable, that the 20.6m people in the ‘final third’ (on the basis of a UK population of some 61.8m) would cost £2.06bn in public finance as regards rolling out extensive fibre connections – almost exactly the £2bn that Steve Robertson, CEO of Openreach, had already indicated would be the public cost of achieving the government’s ambitions of having the best high-speed connections in Europe (or less, given that there is likely to be fewer than 20.6m people in the ‘final third’). This is an interesting comment, given that there is extensive fibre to the premises solutions envisaged in the Cornwall project, on what could be achieved with a relatively small amount of publicly-sourced finance.

Public investment in fibre – a lesson for the UK government

BT has announced plans for a fibre project ‘to tranform the Cornish economy‘ under which next generation fibre-based network infrastructure will be rolled out to up to 90% of local businesses and homes in Cornwall (and including the Scilly Isles).

The investment is on top of BT’s existing £2.5bn national fibre investment programme and BT believes (although without citing evidence other than the sorts of new services that fibre investment will help deliver) that it will create up to 4,000 jobs and protect a further 2,000 in a largely rural economy which does not otherwise have a great deal else for local people once all the tourists have gone home.

Particularly interesting is that 50% of homes and businesses are expected to be hooked up to fibre to the premises solutions, delivering faster speeds and delivering some future proofing of the investment – nationwide (or, perhaps, outside the Cornish nation), the investment in fibre is expected to be much less, BT having estimated that one in four homes and businesses within its investment programme would have fibre to the premises (i.e. about 17% of the country).

Excitingly, the £132m investment programme (final costs dependent on demand) is split approximately 60:40 on a private-public basis, with BT being partnered not by UK public sources of finance but by the European Regional Development Fund, which is contributing £58.5m of the finance. This is the largest investment in England backed by EU regional funds, which the ERDF clearly sees predominantly in terms of its role in encouraging a lower carbon economy (according to Johannes Hahn, European Commissioner for Regional Policy). With the population of Cornwall being just over half a million people, the scope of the public investment is about £100 per head.

This looks a good deal to me – providing fibre to a large region on this cost basis illustrates what can be done when the public sector gets involved: a lesson for the ConDems that fibre needs more than just warm words and crossed fingers. The trouble is that only Wales otherwise has the requisite development status [possible paywall] triggering the ERDF investment: so the wider applicability of this particular project is scant (while the few areas of the UK that thus qualify on this basis is disappointingly small).

So, it seems we may reasonably expect a similar investment for Wales reasonably soon but, otherwise, a gap which will continue to remain outside the two-thirds which will receive fibre investment on a competitive basis while the ConDems – well, while they wait to see what happens. Actually, after they have finished their programme of public spending cuts, in the process winding up the regional development agencies which facilitate this sort of deal, there may not many public institutions left to broker such deals in the future. Shame.

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.]