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.

DSAC an appropriate test for assessing LRIC cost-orientation

Today’s CAT judgment confirmed that Ofcom’s use of distributed stand-alone cost (“DSAC“) was an appropriate method to assess whether a regulated Communications Provider who had been found to possess Significant Market Power in a particular market was charging in a way that was ‘reasonably derived from the costs of provision based on a forward-looking long run incremental cost approach, allowing an appropriate mark-up for the recovery of common costs and an appropriate return on capital.’ The judgment went on to confirm that where charges had not been compliant with the cost-orientation obligation that Ofcom had correctly exercised its discretion by ordering repayment of the amount of the overcharge.

DSAC is  a test that distributes the stand-alone costs of a broad increment of services pro rata amongst each of the services within that increment. DSAC is not widely used outside UK telecoms regulation – during the trial BT quoted contestable market theory in support of the proposition that combinatorial tests were the appropriate method of assessing compliance, and in the original dispute the complainants argued that fully allocated cost (or FAC) was the right test. However, the court found that DSAC was well-known and understood in the context of UK telecoms regulation (appearing, by way of example, as a price ‘ceiling’ within BT’s published regulatory accounts). The court considered these various tests, as well as alternatives including international benchmarking, and found that in this instance that there was ‘no satisfactory alternative’ to the use of DSAC, albeit that it should not be used in a mechanistic way.

The background to the case was that on 14 October 2009 Ofcom resolved a dispute between (i) Cable and Wireless UK, COLT, Global Crossing, Verizon and Virgin Media; and (ii) BT, by finding that BT had overcharged by more than £40 million for particular regulated wholesale leased lines (known in the UK as partial private circuits or PPCs) and ordered BT to repay to BT the amount of the overcharge.

BT appealed Ofcom’s decision in December 2009, with a six day trial heard in October 2010. The trial involved witnesses of fact and significant expert economic evidence. BT’s appeal had a numbers of grounds:

  1. Ofcom misused their dispute resolution powers 
  2. Ofcom failed to give proper regard to economic harm
  3. Ofcom’s refusal to consider trunk and terminating segments in aggregate was flawed and improper
  4. Ofcom made an error of law and appreciation in the approach to cost orientation and their use of DSAC
  5. Ofcom misused their power under s190(2)(d) of the Communications Act 2003 to order repayment of the overcharges.

The Court unanimously found against BT on all grounds.

BT may apply for permission to appeal – I await their decision with interest.

The Watcher needs to declare an interest: he represented the overcharged companies in the dispute before Ofcom and subsequent appeal, so readers should ‘filter’ this post accordingly.

Funding content, funding networks: what matters?

On 16 February we will be hosting an event for the UK Chapter of the International Institute of Communications. The event’s title is ‘Funding content, funding networks: what matters?’ and will be addressing the perceived disconnect between content creators and the telecoms sector and the consequential impact of network and content investment.

The discussion will be moderated by my partner John Enser, who amongst his other activities has for the last five years been the co-author of the Olswang Convergence survey – which looks at convergence in terms of its effects: “it means the technological developments which result in an end-user having much greater choice and control over his or her consumption of content in the home and/or on the move, such that he or she decides what to watch, when to watch it, and on what devices, rather than this being determined by technological constraints…for us, convergence is…increasingly about how well-informed consumers will use the functionality and content which is available to them across the full range of devices, platforms and services they own or receive”. As one of the major issues identified in last year’s survey was the increasing ability and willingness of end-users to pay, he is well placed to challenge and referee the other speakers.

The other speakers are:

  • Will Page, Chief Economist, PRS Music. His role at PRS for Music is to provide analytical support to colleagues within the organisation and to provide economic insight to the media industry as a whole. His most notable work to date has been a collaboration with Eric Garland of BigChampagne titled ‘In Rainbows, On Torrents’, which asked whether the Radiohead legal free offering could compete with illegal free.  He also challenged the popular Long Tail theory, illustrating how the demand for digital music followed a log normal distribution – where the gap between hits and niche widens, as opposed to narrows. His most recent work has been focused on the impact of ‘editorial’ in digital media markets, and this has involved exclusive collaborations with services like We7 and Spotify, His Economic Insight papers have been covered in The Economist, Financial Times and all major broadsheets and blogs.

 

  • Antony Walker, CEO, Broadband Stakeholder Group and Director of Strategy, Intellect. In 2002 Antony was appointed as chief executive of the Broadband Stakeholder Group (BSG), which was set up by government to advise on the development and implementation of the UK’s broadband strategy. Antony has been closely involved with broadband policy development since the BSG was established and is the author of three major BSG reports to government.

 

  • Matt Rogerson, Senior Public Affairs Manager, Virgin Media In the time Matt has been with Virgin Media he has focussed on issues ranging from Ofcom’s pay tv market investigation, the BBC funded Project Canvas or Youview as it’s now known, the Digital Economy Act, and the Coalition Government’s developing Broadband Strategy and BDUK pilot process.

Technology permitting, I will try to provide a live ‘tweet commentary’ during the event, and blog about the issues discussed afterwards. Tickets are available from the IIC, so I hope to see some of you there.

Vertical integration the industrial logic for M&A: Vivendi / SFR and Comcast / NBC Universal

My eye was caught last night by a story in the Financial Times this morning reporting analyst speculation that in the wake of the approvals of the US Federal Communications Commission and Department of Justice for the purchase of 51% of NBC Universal by Comcast, which in turn enabled Vivendi to complete its exit from NBC Universal, that Vivendi would make an offer to buy Vodafone‘s 44% stake in the French telecoms operator SFR.

What intrigued me was the logic for both deals – the vertical integration between content provision (NBC Universal and Canal+) and distribution networks (Comcast and SFR), and the consequential ability to provide bundled consumer offers.  In the UK, this logic also underpinned Sky’s entry into the broadband and telephony market. Following launch it will be interesting to see how the YouView customer proposition stacks up against triple play offers of Virgin Media and Sky.

Merger rationales very seem to come in and out of fashion – and this logic seems to currently be very much in vogue. Personally, I’ll be intrigued to spot the CEO who decides to espouse the contrary view of focus, and see how the market reacts.

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.