Fujitsu announces UK FTTH roll-out to 5 million homes

In today’s connected world a lot of what passes for news is more of a rolling update – a snippet of new information that is not terribly unexpected. However, today’s announcement by Fujitsu that it is planning to deploy a fibre to the home (FTTH) network to over 5 million UK rural homes really is new, in that it was unexpected and market changing.

Until this announcement, received wisdom was that there were only two players in the UK’s next generation broadband infrastructure market – BT Openreach and Virgin Media. Both of these players have been focussing their rollout on the lucrative dense urban areas, and the expectation was that government subsidy to stimulate fibre deployment to the ‘final third’ (the third of the country where deployment is uneconomic without financial assistance) would be taken up by BT Openreach.

The project appears to be well thought through with two large ISPs – Virgin and TalkTalk apparently committed to purchasing the venture’s wholesale outputs. The underlying technology is fibre to the home, based on Cisco technology with initial speeds of 1GB/s, upgradeable to 10GB/s and above.

However, the deployment is predicated on two regulatory assumptions:

  1. Access to BT’s ducts and poles on  fair, reasonable and non-discriminatory terms; and
  2. Access to a significant proportion of the available government subsidy.

Neither of these assumptions can be taken as read. Whilst BT is progressing its passive infrastructure access product, there remain significant problems with its current offer and I understand that industry remains very concerned about the restrictions within BT’s current proposed contract.

So far as the subsidy is concerned, I would expect to see BT Openreach fight very hard to retain the subsidies it would previously have taken for granted. Competition for subsidy is good news for tax payers, provided that Fujitsu’s venture gets over whatever threshold it needs to get off the ground.

BT sets prices for passive access to ducts and poles

Before Christmas, this blog flagged that last-mile fibre access (also know as next generation access, or NGA) was a commercial and regulatory issue that would be high on the agenda over the coming years.  On Friday, BT announced its draft pricing and product proposals for ‘passive access’ to its ducts and poles in the UK.  (In the NGA world passive access is used to describe access to physical infrastructure, whereas active access means access to some form of wholesale service).

BT is careful to position the new draft product proposals as complementary to its existing (active) Generic Ethernet Access products which it ‘expects … will form the basis of most [of BT’s competitors’ offerings]’. However, BT’s competitors may of course have a different view.  In reality, the impact and usage of BT’s new products will depend on their pricing, both in absolute terms as well as relative to active products and the underlying technology used by its competitors.

In terms of pricing, BT is proposing that duct access will start from £0.95 per metre per year, with various additional charges for ancillary services, whilst pole sharing access will be around £21 per pole, per year.   In BT’s view the duct access is around 15% less than international comparables, although I haven’t seen any underlying analysis to support that contention.  Going beneath BT’s headline figures, the list of ancillary services is extensive and it looks like the level of the charges will be material for most purchasers, so the detail is well worth looking at.

So far as the regulatory background is concerned, the position is somewhat complex, with regulators in Europe and the UK both having taken an interest and the waters muddied even further by the interplay between traditional electronic communications regulation of markets in which players hold significant market power and BT’s Enterprise Act undertakings.  Regulation in the UK is of course subject to EU thinking, in particular the Commission’s  recommendation on NGA which takes into account views of the European Regulators’ Group (BEREC) .

The Commission’s recommendation makes clear in outline that the regulatory requirements on BT in relation to ducts and poles  should include:

  1. duct access on an equivalent basis (para 13 of Recommendation);
  2. cost-orientated pricing for access to existing civil engineering infrastructure (para 14);
  3. mandated reference offer (para 15);
  4. requirement to install capacity for other operators when undertaking future civil engineering works (para 16); and
  5. provision of information to a central database (para 17).

Some of this was picked up by Ofcom in its October 2010 Review of the Wholesale Local Access Market, where following a finding that BT had significant market power in the UK (except Hull)  in the market for wholesale local access services (being those based on copper loops, cable networks and optical fibre at a fixed location), it imposed a range of remedies relating to local loop unbundling (LLU), sub-loop unbundling (SLU), virtual unbundled local access (VULA) and physical infrastructure access (PIA) – with the last relating to ducts and poles.

The obligations imposed on BT pursuant to that market review specifically relating to PIA (i.e. ducts and poles) are to:

  1. produce a draft reference offer by mid-January (i.e. the latest announcement) – although this need not support leased line services at this stage;
  2. launch the product by the ‘middle’ of the year (which translated from Ofcom-speak,  I would take to mean that BT need to have something in play by September);
  3. pricing should be cost-orientated (which means argument is likely);
  4. provide network access, to not discriminate unduly, to keep separate accounts and to publish certain information.

Although not referenced in Ofcom’s market review, the various requirements under BT’s undertakings in relation to NGA and equivalence are also relevant (although, Ofcom has expressly decided to not implement a para 13 equivalence requirement), as is Ofcom’s separate consideration of industry-wide mandation of infrastructure sharing.  As can be seen, last week’s announcement is the start of a process that will play out over the rest of this year (and beyond).  Challenge at this stage is unlikely, but the experience of the launch of almost any new product (interconnection in 1984, LLU in 2000) suggests that disputes may well be on the horizon.

UK seeks views on principles of economic regulation

On 7 January the UK’s Department for Business, Innovation and Skills published a ‘call for evidence’ relating to principles of economic regulation

As those who have read my earlier post will know, in industries where network effects (or various economies such as scale) are present (such as telecoms) it is unlikely that an unregulated market will deliver the best outcome for consumers, so long term regulation is likely to be required. 

Why now?

The call for evidence seems to have been driven by last year’s change in government and the new administration’s desire to check that policy is on foundations that it sees as sound (bearing in mind the somewhat different political views on ‘soundness’ as between this government and the last).

The call identifies some issues with current practice:

1.  uncertainty as to how regulators should balance conflicting duties – in particular between economic, social and environmental duties;

2.  lack of clarity and communication generally, and in particular a lack of clarity:

(a) from Government to regulators on policy objectives;

(b) from regulators to regulated companies about outputs they are to deliver;

(c) from regulators to regulated companies around how long-term business planning feeds into price control; and

3.  weak dialogue between regulators on a common approach to issues such as price control, competition and consumer affordability.

Principles proposed for comment

The call then sets out proposed principles for comment, which I have copied below:

Accountability

  • independent regulation needs to take place within a framework of duties and policies set by a democratically accountable Parliament and Government
  • roles and responsibilities between Government and economic regulators should be allocated in such a way as to ensure that regulatory decisions are taken by the body that has the legitimacy, expertise and capability to arbitrate between the required trade-offs
  • decision-making powers of regulators should be, within the constraints imposed by the need to preserve commercial confidentiality, exercised transparently and subject to appropriate scrutiny and challenge

 Predictability   

  • the framework of economic regulation should provide a stable and objective eenvironment enabling all those affected to anticipate the context for future decisions and to make long-term investment decisions with confidence
  • the framework of economic regulation should not unreasonably unravel past decisions, and should allow efficient and necessary investments to receive a reasonable return, subject to the normal risks inherent in markets

Coherence

  • regulatory frameworks should form a logical part of the Government’s broader policy context, consistent with established priorities (vertical coherence)
  • regulatory frameworks should enable cross-sector delivery of policy goals (horizontal coherence)

Adaptability

  • the framework of economic regulation needs capacity to evolve to respond to changing circumstances and continue to be relevant and effective over time

Efficiency

  • policy interventions must be proportionate and cost-effective while decision making should be timely, and robust

Focus

  • economic regulators should have clearly defined, articulated and prioritised responsibilities focussed on outcomes rather than specified inputs or tools
  • economic regulators’ duties should be concentrated on economic considerations (including protecting the interests of current and future consumers, ensuring the operation of well-functioning and contestable markets and constraining the exercise of market power of dominant companies)
  • economic regulators should have adequate discretion to choose the tools that best achieve these outcomes

The watcher’s initial thoughts

At first read, these seem sensible and somewhat ‘motherhood and apple-pie’ (what is not to like?).  However, a few thoughts occurred to me as I read: 

Social and environmental impacts disregarded

There is a shift away from requiring regulators to consider the wider social or environmental impact of their decisions towards a narrower focus on the economic impact.  Whilst this would be expected with the change from Labour to the Conservatives, it is perhaps less obvious that environmental concerns should be defocussed given the green credentials of the coalition.  On a personal level, this seem right to me – provided that consideration of wider impact is picked up elsewhere within government.

Right of appeal

Somewhat surprisingly for those who have been following the Digital Economy Act and the proposals to make it harder to appeal Ofcom’s decisions, the principles seem to push in the opposite direction, enshrining a right of appeal.  However, I am not sure there is a really a contradiction here as within telecoms the right to appeal is here to stay as a result of the European Regulatory Framework and the DEA changes are just making sure that the pendulum has not swung too far over so as to encourage the appeak of every decision.

Predictable returns on investment

I absolutely agree with the predictability principles, and would be rather worried if any economic regulators’ current practice were to diverge from the proposed principles.  Within the telecoms sector where significant investment in fibre local access is yet to be made, these principles should help with decisions to invest in next generation access networks. 

Comments are due by 18 February, so if you have an interest do get involved.

 

Key telecoms regulatory issues for 2011 (do too many connectives watch star trek?)

With my first post done, I thought it best to try and provide a little substantive content.  Two years ago, I spent some time interviewing various CEOs, strategy and regulatory directors in various international communications companies to get their thoughts on the big issues that were coming up.  With the end of the year approaching it seemed like an opportune time to revisit that research and reflect on whether those issues were still current, and therefore worth continuing to follow.

At the time of the research, our over-riding thesis was that the telecoms industry was going undergoing structural changes that meant that regulatory structures well-suited to dealing with steady-state markets were being overwhelmed by the changes confronting them.  The market and regulatory result was likely to be similar to that experienced when other step-changes (competition, mobile telephony, broadband, etc) impacted on the market – confusion and delay.  Events over the past two years (even putting aside the small matter of the global financial crisis) would appear to have validated that idea.

The themes identified in 2008 were:

  1. Consumers, rather than the market players, were the long-term winners.  Amongst the market players, returns to the incumbents’ shareholders were better than the new market entrants.
  2. Next generation access (that is, high-speed fibre based last mile connectivity to the home or business) would be the defining issue for the telecoms industry globally.  Regulators however did not know how to approach the issue.
  3. The tension between the pipes and the poetry (telecoms infrastructure v content and services provided over that infrastructure) was starting to surface – and in particular how the costs of network upgrades would be financed.  Net neutrality had not at that stage really crossed the Atlantic, but the industry could see the way the winds were blowing.
  4. Spectrum availability,  in particular as an enabler of ubiquitous ‘current speed’ broadband, was identified as a critical factor issue to resolve, even before the iPhone and iPad.

Looking back, those themes still as relevant today as they were in 2008, so I will return to them in future posts.

Finally, the star trek reference of the title has got nothing to do with trying to spoof search engines, but in the real world it does strike me that we need less ‘next-generation’ ideas and more plain English action plans to actually make things happen.