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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Ofcom becomes Off-com

Ofcom today confirmed plans for a 28%+ cut in its budget over the next four years – with the vast bulk being front-loaded: 22.5% of that cut will come in 2011/2012, with a cut of £27m, taking the overall budget to £116m.

We need to see Ofcom’s forthcoming Annual Plan – due out ‘shortly’ – to see what this means in practice (although the confirmation of the dimensions of the cut seem to indicate that this draft is likely to be substantially unchanged), but (on the back of the experience of year-on-year budget cuts) Ofcom believes it can nevertheless maintain its ‘capability and effectiveness’ in delivering ‘effective and targeted regulation’ and, as if to prove ‘business as usual’, it chose today to launch a new consultation on Openreach’s wholesale pricing. Though this tells us little other than that the regulator is on-message.

Ofcom is already in the process of finalising cuts to 170 jobs – 19.5% of its workforce as at 31 March 2010 (see Table 6) – and it’s difficult to believe that this will not have an impact on regulation in the sector. Cuts to Ofcom’s governance structure and the closure of its Consumer Panel have already been made, while I note that those employees remaining in the companies defined benefit pension plans are faced with the loss of future accrual on top of a two-year pay freeze. We are also likely to see the loss of Ofcom’s role in encouraging digital participation and rationalisation of its research programme.

Time will tell. The earlier removal from last year’s Digital Economy Act of a greater role for Ofcom in promoting investment in the industry is already a critical loss since this would have counter-balanced the existing statutory duty to promote competition which is proving problematic to the shape and direction of the industry. The impact of a smaller – perhaps more focused – regulator on the dynamism of the industry is yet to be seen, as will be its ability to compel the government to see through its ambitious plans for the communications industry (about which this blog has previously been critical – see, for instance, here). The signs are clearly not hopeful – but the ideological gap between what I’ve just said about the role of the regulator in driving the industry forward and the practical reality of the government’s market-driven approach is immense.

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.]

Information superhighway in the slow lane?

Confirmation of the need for the UK government to take a more proactive line [registration required; limited viewing time] with its broadband policy has come in a press release recorded on totaltele.com. I’m going to be a little circumspect here since I can’t find anything on the websites of the two major organisations involved – the Fibre to the Home Council Europe and Heavy Reading.

Nevertheless, the press release records research produced for the Council by Heavy Reading which concludes that the UK would be the last nation in Europe to reach what it calls ‘fibre maturity’ and which it defines as being 20% of homes connected to fibre networks on a FTTH basis (as opposed to Fibre to the Cabinet – FTTC). The research records that the UK will not reach this figure until 2020, some 2-4 years later than France, Germany and Italy, and that unless the UK gained greater momentum behind FTTH, there was a danger that this lagging behind would have a ‘serious long-term negative effect on the national economy.’

The report looks a little behind the times, not least because BT’s announcement last month of its extended investment in fibre, taking roll-out to two-thirds of UK homes by 2015, indicated that one in four homes would have fibre to the home solutions: this would indicate about 17%, so not far off ‘fibre maturity’ some five years before the figure indicated by the Heavy Reading report.

It’s perhaps not so much of a surprise that a report for the Fibre to the Home Council calls for expanded investment in FTTH – well, NSS. But in political terms, it continues to be worth highlighting its concern that the government cuts programme will push FTTH investment to the sidelines, as well as the policy issues which have contributed towards inhibited fibre investment. Its articulation of the current lack of a clear funding mechanism for local authorities to bring fibre to rural areas that are not likely to attract commercial operators, and that the government has a key role in facilitating investment, as well as in bridging the digital divide, also adds to its credibility.

Cuts in government expenditure will have a knock-on effect on the ability of the private sector to finance ambitious investment programmes – and a prolonged period of austerity will itself freeze investment. The government needs to recognise that such a time will have a major impact on the ability of the private sector to achieve what ambitions the government has for the timely coverage of high-speed broadband networks.

ConDem ambitions for broadband

Jeremy Hunt, Secretary of State at DCMS, has produced some further detail on the coalition’s broadband plans. Not much of this is a surprise; it had been mooted before the election, not least in a Guardian Tech Weekly podcast at the back end of April, including the scrapping of Labour’s plans to find independent regional news consortia and the diversion of monies scheduled for pilots into superfast broadband instead.

What was new, however, was the announcement of the potential regulation of sewer and other utility infrastructure ducts to deliver opportunities for fibre network investors – this is, as Hunt acknowledged, further than had been envisaged in previous announcements, and it needs much greater detail – not least concerning the capacity, suitability and potential of utility networks to deliver fibre communications infrastructure. Some of this will certainly come at Broadband Delivery UK’s scheduled industry event on 15 July (though BD UK still has precious little web presence). Also new was the announcement of three ‘market testing’ pilots to bring high-speed broadband to rural and hard-to-reach areas and to act as test beds by which ‘possible government intervention and investment in “superfast broadband” in the future’ can be better targeted. Again, further details are scheduled for BD UK’s industry event next month.

Much of this is welcome, not least in continuing the previous Labour government’s intention to ensure a better cohesiveness between broadband-rich and broadband-poor areas than would have been delivered by a dogmatic reliance on the market. If Digital Britain is to become a reality, this cohesiveness in approach is vital. Politically, it’s also a welcome commitment to deliver the benefits of high-speed broadband equally throughout the nations and regions of the UK.

But the scale of the ambition set out in the statement:

Within this parliament we want Britain to have the best superfast broadband network in Europe,

against the background of where Britain currently is, simply won’t be achieved without public investment and backing. Rory Cellan-Jones’s BBC blog took the opportunity offered to lampoon – and hit the back of the net with it. Ambitious goals are well and good – but practically unachievable ones are not. Politicians – actually, of all flavours – need to recognise that, if this country wants to have ‘the best high speed broadband network’ then it’s got to pay for it. That either means much higher prices to the consumer, a (much) more relaxed regulatory environment for BT – as the only network operator with the scale to deliver – and a much more high profile for the involvement of public sector cash. And probably all three. Quite a few political/philosphical shibboleths generated over the last thirty years need to be sacrified to achieve all that, and I suspect that the ConDems simply don’t have the ability or the courage to produce – regardless of the call which decent investment in broadband infrastructure, i.e. for fibre to the home solutions, would make on public finances apparently facing significant cuts also ‘within this parliament’.

But, in the absence of the sacrifice, we need to recognise that this scale of ambition remains just a playing around with words.