A Dirty Digest of the Executive Summary of Ofcom Strategic Review document

The Executive Summary of the Discussion Document for the Ofcom Strategic Review is 20 pages long and omits a key phrase from the main paper regarding the impact of regulation on investment “Whatever approach is adopted, its success or failure depends significantly on the trust investors place in the regulator. Investors value predictable and stable policy interventions:significant and poorly signaled changes of policy can damage investor confidence, and may increase the risk associated with new investments“. It then goes on to ask: “What might be the most appropriate regulatory approach to the pricing of wholesale access to new and risky investments in enduring bottlenecks in the future?”

Five years ago the lack of trust in the UK telecoms market was indeed such that fund managers were not interested in anything other than bottleneck removal with a payback in months rather than years. Over the past couple of years that appears to have changed. I therefore begin this digest with a consideration of how that lack of trust came about – before I digest the executive summary with that specific question in mind.

The Ofcom executive summary begins with a contrast between the scene today and that when Ofcom did its previous market review, a decade ago. This prepares the ground for a possible reversion for a return to the regulatory priorities set by Bryan Carsberg and dropped by Ed Richards (my convention in this article is to use the names used the decisions were taken, not those they subsequently received). We have moved from monopoly regulation in 1984, through encouraging duopoly (leading to infrastructure competition) in 1991 under Oftel , back via “access regulation” (alias local loop unbundling) to infrastructure monopoly under Ofcom and now to the beginnings (over the past year) of genuine infrastructure competition (as new players began to exploit the opportunities opened up by the run-down of BT’s investment and maintenance programmes). 

Directors and investors would benefit from a quick and dirty digest of the effect of those transitions on BT’s capital spend and share price. It is unclear whether any lessons have really been learned”when a cryptic comment in the Ofcom executive summary says that when the effectiveness of the attempt to encourage “end to end competition …  was shown to be limited, the emphasis shifted again to access based competition”.
The attempt failed because the Cable Companies ran out of cash while trying to fight planning permissions through local authority planning processes. Meanwhile BT was galloping ahead with an ambitious capital investment programme to provide “full motion video” (the original definition of broadband) to every home by 2002. Then came the switch to local loop unbundling  to protect the US bond-holders of the now bankrupt cable companies (NTL filed under US law) and the “redefinition” of broadband to include “125k always on internet”, (all the cable companies could guarantee nationally).
The consequence was a collapse in BT’s share price from a peak of £ 15 at the start of 2000 to a plateau of about £ 1.50 – 2.00 (from 2002 – 2012) with a trough of under £ 1.00 when Ben Vervaayen left and Ian Livingston announced plans to cut capital and operational spend by nearly 25% in the period  2008/9 to 2012/13. Michael Rake then oversaw the decision to invest management time and shareholders’ funds into content (Quad Play) rather than infrastructure (alias utility) services because he could not see how BT could make money out of the latter without political and regulatory changes that were then unlikely.  The price has since recovered to over £4.50 but Openeach is a said to be still heavily cross-subsidising the entry into content markets..

We can see the effect in the steady run down of BT’s annual capital spend (net of overseas spend and/or government subsidy): from £ 3 million in 1998 (when the BT share price rose from just under £5.00 to over £ 9.00), rising to over £4 million in 2001, falling back to £ 2.5 million in 2002 (after the share price tanked), rising again to £ 3.25 million in 2007-8 before being cut to £ 2.5 and then £2.25 from 2010 onwards. 

Meanwhile fund managers around the world (but not in the UK) increasingly saw the value of investment in broadband as a utility. The world’s most active on-line retail market (using the cheap consumer broadband enabled by BT’s past investment) is now dominated by US players using off-shore data centres and paying little, if any UK tax. Meanwhile many of their erstwhile UK competitors have been crippled by expensive and slow business connectivity (the leased line legacy).
BT now accounts for less than half the annual investment in communications infrastructure, fixed and mobile are converging and both are suffering from congestion and overload (back haul as well as local access) at peak times in hot spots and not spots. Meanwhile the problems with local planning have still not been properly sorted – although active local opposition is now considerably more muted than a few years ago, when I blogged on the Midsomer Broadband Murders.

The good news is that, at long last, we have a credible government strategy to encourage and support the investment that is so badly needed and action is under way to address the planning problems that caused the failure of the duopoly policy over 20 years ago.  

Now to the challenges and options on which Ofcom wishes to receive inputs.

It sees four strategic objectives, each of which pose challenges:

1)    Incentives for investment and innovation, delivering widespread availability of services with a need  to look at the evolving technology investment scene in the context of the “challenges” of:

Universal broadband: where the current perceived need is for about a reasonably reliable 10mbps, including at peak times,  “to benefit from the most popular on-line services” – not “up to 10 mbps, let alone up to 2mbps

Superfast broadband:  with claims of “availability”, whatever that means,  by 2017 still leaving many gaps, especially for SMEs.

Ultrafast Broadband: where debate is muddled by BT’s “announcement that it would deliver speeds of up to 500 mbps to most of the UK within a decade” – this is presumable a reference to a technology that is likely to deliver such speeds only to those linked to their local cabinet via less than 150 metres of high grade copper. Given that fibre is now cheaper than copper (and less attractive to thieves)  this is not a very credible way forward.

Mobile cover and quality of service: in practice the need for “fibre to the femto” to handle the volumes, plus the problems with inner city, let alone rural, not spots (particularly within office buildings using modern claddings that are “resistant” to radio waves), plus the massive rise in traffic volumes (e.g. over 5 million Sky Go customers already accessing TV on their smart phones) means that a transformation in back haul investment will also be needed.    

There follows interesting sections on:

  • Competition as a key enabler of investment and innovation with some contentious statements on the value of “access based competition” (e.g local loop unbundling and shared access dark fibre)  and “end to end competition  between telecom and cable operators operators in driving innovation and investment.

and on

  • ensuring availability beyond commercial provision where it is unclear what role a regulator should play.

2)    Sustainable competition, delivering choice, quality and affordable prices

This is looked at under five headings

2.1) Promoting competition in fixed telecoms. Here the choices are perceived to be:

  • Continue with the current approach – i.e. evolving fudge as pressures change
  • Strengthen the current model of  functional separation – i.e. to better ensure that Openreach does not favour BT’s content operations
  • Substantial deregulation and greater reliance on end-to-end competition  – hoping that head to head competition between quadplay operators and the grosing number of alternative network operators and shrinking number of resellers will not lead to a new set of customer lock-in and cartels

2.2) Sustaining effective competition in mobile

Ofcom, probably correctly, declines to comment on the impact of Gordon Browns’s “removal” of £ 20 b illion of potential investment funding from the industry (spectrum auctions) and the recent decisions of  Deutsche Telekom and France Telecom (EE) and Telefonica (O2) to withdraw from the UK market  when faced by the infrastructure investment needed to address urban and rural notspots  

2.3) Regulating to protect incentives for efficient investment

This section includes words on “risk adjusted rates of return” which are anathema to those of us who studied (albeit I did only subsidiary course at London Business School) regulatory economics under the late great Michael Beesley. Attempts to second guess incumbent players, let alone innovators, on “rates of return”, acceptable or otherwise, are always doomed.  Meanwhile the rise and fall of BT’s share price (and its current market valuation compared to those of, for example, Sky or ITV) indicates the views of the market.

2.4) Taking account of convergence

This section distinguishes  between:

  • different means of providing the same services
  • different types of network adopting a common architecture
  • different services collected together in the same retail bundle (e.g. TV content and fixed/mobile access) 

The regulation of abuse, to prevent players dominant in one sector (infrastructure, technology or content) from using that to leverage dominance in others as opposed to offering genuine choice, is probably Ofcom’s greatest challenge over the next few years. That is particularly so given the fluidity and uncertainty of change across all three dimensions. 

2.5) Securing a sufficiency of service for consumers and business

Ofcom refers obliquely to the fall (after separation from the rest of BT) and subsequent rise (after the Olympics and associated restart of recruitment and training) of the quality of service provided by Openreach and asks some excellent questions.  Improving the measures of delivered quality, as perceived by users, is essential for a society that is increasingly dependent on its on-line connectivity. But the problems now appear more acute with regard to mobile. 

Is it really sufficient to say that “quality of service concerns in competitive markets … may simply be because consumers and businesses are not willing to pay for higher quality of services”?

I am one of those who has long paid extra for BT (as opposed to unbundled) landlines and have mobiles on two different services (Vodafone and O2) while using Sky for TV. That is because of past personal experience (non- response as opposed to poor response) with other suppliers. I do not believe I am alone in wanting better access to reliable information on current service levels (including geographic cover) but have grave difficulty in finding out the truth, e.g. when seeking to help MPs faced by complaints from their voters. So do all those I know who are seeking to advise SMEs on the choices available to them.

I also hope that some readers may choose to comment on the role of Ofcom (as opposed to, for example CPNI) when it comes to reliability and resilience.  It was only recently that I learned the scale of unreliability (e.g. exchange, not just line, outages) across our creaking shared infrastructures.

3)    Empowered consumers and businesses, able to take advantage of competitive markets

The confusion of misleading information currently used in the marketing campaigns to persuade customers to switch supplier clearly needs to be addressed. That only 8% switch more than one service at a time is not in the least surprising given widespread hearsay of what happens when you try. “Better the devil you know”.

This is clearly an area where Ofcom should be far more active, perhaps in co-operation with the Advertising Standards Authority. But I also look forward to seeing what groups like the FSB, Countryside Alliance and LEPs and Chambers of Commerce have to say about the information provided to SMEs. 

4)    Targeted regulation where necessary; deregulation elsewhere

The current regulatory regime has grown in response to consumer complaints and industry responses, without pruning as technology changes and legacy systems and services are run down or withdrawn.  Ofcom is therefore seeking inputs on issues associated with the transition to an all-IP phone (as well as data) network and the termination of copper and leased line services.

It is also looking for inputs with regard to opportunities for deregulation where end-to-end completion can be promoted or promoted, services can be delivered by different mechanisms or regulation can be focused on specific bottlenecks or geographic areas. Its example of the effect of deregulating leased lines in parts of London is not, however, necessarily a happy one.

The argument that “reducing intervention to promote competition … could also risk resulting in higher prices for consumers” is also odd. That of greater inequality of service is rather less contentious.

The executive summary ends with “We welcome stakeholders’ views on areas where there might be further scope for either deregulation or simplification”. 

I now plan to make time to read the full paper  but my own immediate reactions are:

1)    Stop trying to measure return on investment. It is even less useful when technologies and markets are converging, diverging (in some cases) and evolving at unknown speed in uncertain directions.

2)    Focus on price, quality of service, clarity and accuracy of advertising claims and, above all, controlling predatory behaviour – particularly customer and technology/service lock-ins

3)    Pay equal attention to business and consumer needs because without the former the consumers will not have the jobs of the future to earn the money to spend on the services of the future