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.

Sky clouds the picture

Sky has been much in the news these last 24 hours, not least for the continuingly spreading tentacles of Hackinggate, for Offsidegate, which has – rightly – now claimed Richard Keys (albeit via a resignation) as well as Andy Gray, and for Culture Secretary Jeremy Hunt being minded to refer to the Competition Commission NewsCorp’s bid for the majority of BSkyB that it doesn’t already own on the grounds of the threat to media plurality (although he has given NewsCorp more time to come up with a bit of a defence – if you like, a sort of opportunity to re-examine an assistant referee’s offside decision).

Somewhat squeezed out by all these MBs of bandwidth coverage, but also of considerable importance in its own right, is Sky’s purchase of The Cloud – a network of 22,000 urban Wi-Fi hotspots across Europe. Other operators are also in the market, with the key aim of being able to retain subscribers across a range of platforms rather than loosing them to other operators in different locations, so Sky’s acquisition is absolutely within the prevailing market strategy. The Cloud – both in its own right as well as via its arrangements with market leader BT Openzone – is likely to have a large market share but, with a nod to the impact over time of Sky’s obvious pulling power, this is not a question of market dominance of the Wi-Fi hotspot market.

But, the news was broken by The Sunday Times – which, of course, is also in the NewsCorp stable. So, a newspaper arm of a media company (and one which charges for online access) gets first dibs on the story of an important business acquisition of another company in the same group. Perhaps Jeremy Hunt might like to focus on the media plurality aspects of that when he sits down to ‘negotiate’ NewsCorp’s bid for BSkyB with The Digger over the next few days. That’s right – negotiate. In the context, what a terrible word. Perhaps Hunt should, as advised by Ofcom, have simply blown for offside. One aspect of the ConDem’s attempt to ‘return policy to ministers’ is that we end up with this sort of undignified haggle over terms which leaves the process itself completely lacking in integrity.

Tesco Mobile reaches 2.5m

One of my more enduring posts on these boards is the one(s) relating to UK mobile market share. Outside the big four/three (plus 3…), the mobile world is dominated by virtual network operators of which the largest are Virgin Mobile (which pitches up on the T-Mobile network) and Tesco Mobile (which uses O2) – thus neatly putting each on either side of the everything everywhere/3 and Vodafone/O2 network duopoly.

So, in this context, I noted with interest this week Tesco Mobile announced that its subscriber base had topped 2.5m (indeed, it was one of the company’s bright spots in an apparently disappointing Christmas period). Tesco Mobile reported this Christmas as its ‘best ever‘ [NB Not sure about the longevity of this link], increasing its subscriber base in each quarter and the total by 25% over the course of 2010 (thus adding 500,000).

The company believes it is ‘well on the way to becoming the No. 1 MVNO’. Last time I posted, Virgin Mobile had a total of just under 3.2m subscribers although these refer to the end-2009 position. Whether Tesco is gaining ground needs to await further figures from Virgin Mobile – and there is no reason to assume that Virgin Mobile, as a separately-owned company, is sharing the same woes as T-Mobile. Nevertheless, 25% growth in a saturated market – there are over 80m ‘active’ mobile subscriptions in a country of 60m+ people – is an impressive achievement and the gap is evidently likely to have narrowed sharply.

Ofcom published its 2010 second quarter market update figures just over a week ago; this was the first quarter in which joint figures were published for Everything Everywhere (the merged T-Mobile and Orange operation). This indicated that Vodafone had 17.3m subscribers, O2 20.7m and Everything Everywhere 27.1m (Section 3 on the mobile market, Table 4 – p. 20). The data is incomplete since it excludes 3 and also, apparently, both Virgin Mobile (now) and Tesco Mobile, but it evidently shows a mobile market for the top players of 65.1m subscribers, leaving the rest therefore with 15m. These would divide roughly as follows: 3 claims 6.2m subscribers (a figure which is in all its press releases, the most recent of which is here); while Tesco Mobile now has 2.5m. This would leave room for – say – c. 3.6m with Virgin Mobile [Edit 20 February: I was over-generous: it’s actually 3.1m (Table C4, p. 20)] and the remaining 2.7m or so as various re-sellers and niche players and a market structure something like this (figures approximate):

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.]

Not very Digital Britain

Last Thursday’s broadband industry event saw Jeremy Hunt, Secretary of State for Culture, Olympics, Media and Sport, put back to 2015 the commitment to extending a minimum broadband access speed of 2 Mpbs to all UK citizens. The existing universal service commitment, set out in last summer’s Digital Britain report (Chapter 3a, paras. 32ff), was to realise this by 2012 and, up to now, it has been shared by the Tories (while being derided as recently as last month as ‘pitifully unambitious‘ – a strange context in which to set an extension of the deadline).

Hunt’s announcement, however, abandons this consensus. Indeed, the whole Digital Britain initiative is, quietly, being dropped – it has disappeared from the current pages of the DCMS website and the report is accessible now only courtesy of the National Archives. An extension of the deadline sends entirely the wrong signals about how urgent the government sees the universal broadband service commitment – itself an issue of social inclusion which, it seems, is not on this coalition government’s agenda.

As far the communications infrastructure aspects of Digital Britain are concerned, there were five main initiatives which should have featured (largely) in the Digital Economy Act:

– a ‘final third’ fund (subsequently called the landline duty) raised on the basis of a 50p/month levy on phone lines and designed to assist with the extension of high-speed broadband to under-provided areas (dropped from the Finance Act prior to the election on the convention that controversial items are not proceeded with at this stage in the parliamentary timetable)

– a delivery authority for the ‘final third’ fund, now called Broadband Delivery UK (but which still has almost no web presence – perhaps a sign of its apparently shrinking role), and which didn’t actually need separate legislation

– a new statutory duty on Ofcom to promote investment in infrastructure in its decision-making (dropped from the Digital Economy Act at the insistence of the Tories)

– a new duty for Ofcom to publish a report on the state of the communications infrastructure every two years (still there in the Digital Economy Act, but has little relevance without the regulatory duty to promote investment. At the same time, if the campaigners on the government Your Freedom website have their way, this will also be lost should the Digital Economy Act be repealed: this occupies a leading priority in all three areas of the website)

– the USC (now put back three years as a ‘more realistic target’).

With a fair amount of temerity, Hunt blamed the previous government [registration required; limited viewing time] for having failed to put sufficient finance in place:

I’ve looked at the provision that the previous government made to achieve this by 2012 and, as I’m afraid with many schemes they announced, I’m not convinced that they put sufficient funding in place. [NB this precise quote doesn’t appear in Hunt’s speech on the DCMS website]

Despite this, Hunt had no new funds of his own to announce, being of the view that industry should come up with the goods, together with the £175m from the digital switchover fund and a repeat of the suggestion that this might be extended. Interestingly, Steve Robertson, chief executive of Openreach, is of the view that the government’s ambitious programme on high-speed broadband needs no less than £2bn of public funds to lubricate the wheels.

That’s way beyond anything the government is contemplating. Well, fingers crossed then, for the last meaningful bit of the communications infrastructure vision of Digital Britain. And as for the LibDems, despite support for Digital Britain initiatives right the way through to the election, they seem to have gone a bit quiet in government.

Racing online (well, jogging there, anyway)

A belated welcome for Martha Lane Fox’s Race Online 2012 initiative, launched last week following Lane Fox’s re-confirmation in her role as Online Tsar (having performed, well, exactly the same role for the Labour government). Continuity can, sometimes, be a good thing even in politics.

Some things in the initiative look a bit odd: figures like how much boost to the economy is given by job applications being filled in by currently ‘non-line’ unemployed job applicants do smack of desperation to grab headlines and of trying to compete in the public space; there may well be 10m ‘non-liners’ in the UK but not all these will be of the initiative’s ‘working age’ target group; there is a somewhat hectoring tone to the initiative’s public comment; and, crucially, public spending cuts mean that this part of public policy is going to be increasingly dependent on private sector support – a tautology, in my view, and an ultimately self-defeating one at that.

Nevertheless, the online world is an exciting one and, even if it’s not for everyone, it’s ultimately socially and economically beneficial for people to be wired up – although the Race Online slogan of ‘We’re all better off when everyone’s online’, apart from being a little cumbersome, does look as if it was sponsored by O2 (‘We’re better, connected‘).

Anyway, I was given the chance to recycle this rather old news by the current edition of The Guardian‘s Datablog – which also gave me the chance to re-hash another old theme of mine: that of the cheapness of broadband in the UK. The Datablog produces OECD figures which show that broadband in the UK is just about the cheapest anywhere, whether in terms of purchasing power parities or at nominal exchange rates.

Two points arise, really:

– firstly, the cost of broadband appears not to be an obstacle to getting people online (or, if it is, we’re really in trouble). It is, consequently, behavioural issues that Race Online will have predominantly to tackle if it is to achieve its aims.

– secondly, where is the money going to come from to roll out high speed broadband across the UK? It certainly ain’t coming from consumers’ pockets – not at these prices – and one of the little-appreciated aspects to the Labour government’s proposed landline duty was that it would have shared back a small part (a very small part) of the declining household fixed voice and internet/broadband consumer bills since 2005 as measured by Ofcom (Figure 4.55). Cheap bills for households might seem to be a good thing on the face of it, but there are two problems: it sets a falsely low value on a worthwhile commodity; and a market trend of more and more bandwidth at ever cheaper prices is, ultimately, going to come crashing down as a result not least of an inability amongst network operators to finance the necessary investment.

Openreach’s Steve Robertson today commented that high-speed broadband requires public funds of around £2bn if the government’s ambitious goals are to be realised – words which critically step up the pressure on the coalition. I await the results of tomorrow’s conference aimed at mobilising companies with interest. But, for now, it is increasingly apparent that confidence and hubris are not going to be enough: public policy goals require a public finance commitment if they are to be achievable.