TELECOMS: Why are we waiting?

In a recent market survey, NTL found that the majority of respondents had not heard of the term ‘broadband’. What does it mean? – is it a problem; a solution to a problem we did not know we had; or a service or connection allowing conveyance of information, such as television pictures, at rates of more than 2Mbit/s (Oftel’s definition); or all of the above? The answer is a bit of all three.
The UK Government has gone on record to state that it intends to offer the “most extensive and competitive” broadband services of all the major industrialised countries by 2005. E-commerce minister Patricia Hewitt argues that wide availability of relatively inexpensive bandwidth is an important source of “vibrancy” for an internet economy, stimulating online businesses and the use of online services by consumers and businesses alike.
Hewitt also pledged to set up a £30m fund to help deliver high-speed internet access throughout the UK. The Government has decided against giving any larger incentives for local loop unbundling, but it is to offer contracts to operators that can provide broadband services to hospitals, schools, prisons and other public offices – an indirect investment in the sector. But if there is to be competitive supply, operators need to access BT’s existing local copper loops to stand a real chance of competing with BT for customers and securing a place in the delivery of broadband services.
EC Regulation 2887/2000, which came into force on 2 January, requires incumbent operators throughout Europe to offer unbundled access to their existing local loops on reasonable request. National Regulatory Authorities (NRAs), including Oftel, are required to ensure that the charges set by incumbents foster fair and sustainable competition and to take a role in dispute resolution. NRAs can also vary the reference interconnect offer that incumbents are required to publish, specifying the terms on which they will provide access to local exchanges and related facilities.
The European Commission’s communication on local loop unbundling states that a dominant operator has a duty to grant access to the local loop, and the Commission has emphasised that “refusing to grant access to the local loop to competitors requesting access, is likely to imply various forms of abuses of a dominant position”.
Condition 83 of BT’s licence implements the Regulation in the UK and also prescribes:
- the co-location services that BT must allow to other operators;
- the conditions on which BT is to allow access to its digital exchanges;
- the basis of pricing; and
- dispute resolution mechanisms.
Oftel’s guidelines set out the grounds on which the director may consider BT’s behaviour to be in breach of Condition 83, which include discriminatory behaviour. BT must also comply with the Competition Act, 1998, which prohibits abuse of a dominant position.
After vocal criticism of BT, and intensive lobbying, Oftel began to turn the regulatory screws on BT, by issuing a series of decisions compelling BT to open access to local exchanges and to pay penalties to rivals if BT breaks a service level agreement for the unbundling process. If BT fails to finalise its agreements with operators by the end of April, Oftel will determine the terms on which BT should provide access to the local loop. Oftel has also determined that BT should give competing operators space in its own local exchanges, or on its adjacent land, on terms as favourable as those it would offer its own business units. Final guidelines will be published by Oftel next month after further consultation.
A debate about forebearance, the extent to which regulators should stand back and allow market forces to regulate the sector, has been raging for several years. In the US, slow progress in the rollout of broadband services was largely attributed to the anti-competitive behaviour of the Bell companies and the failure of the Federal Communications Commission (FCC) and state regulatory commissions to ‘enforce’ the 1996 Act. Many industry commentators recommended splitting Bell into wholesale and retail companies to eliminate barriers to entry. To ensure that loops are provided on a timely and non-discriminatory basis, competing operators in the US have sought to include liquidated damages clauses in interconnection agreements.
Until a few months ago, Oftel adopted an attitude of forebearance, encouraging the market to negotiate directly with BT under the umbrella of Condition 83. This has not worked well: operators have encountered significant difficulties and delays when negotiating agreements with BT for access to the local exchanges, even for testing purposes, and Thus, WorldCom, Kingston and others have already withdrawn from tests, potentially reducing competition and the overall rollout of broadband services in the UK.
Time Warner/AOL is considering action against BT because of the delays in making high-speed internet lines available to competing broadband service providers, at a time when BT Openworld has continued to service customers and increase market share.
There are more sides to the broadband problem than any tardiness on the part of BT in unbundling the local loop. If local loop unbundling is mandated, other operators will be able to ‘own’ BT’s access network connection between the customers’ premises and the local exchange, which is usually a loop comprising of two copper wires. The customer would then be able to choose another supplier to provide service, and would cease to have a contract with BT.
And rolling out a broadband network in rural areas is an expensive business for operators, and therefore costly for consumers, who may not be prepared to pay the resulting high prices. Evidence from the US shows that the Bell companies are not servicing all rural areas, apparently because of the high cost and the regulatory burden.
There is also a shortage of investment funds. BT is suffering under a pile of debt, much of which was incurred in acquiring third generation (3G) licences. Capital markets have pinched the flow of new investment to this sector. The prospects for financing the rollout of a broadband network are not so good now, and operators are tightening their belts. Consumers’ enthusiasm for new expensive consumer devices is also less obvious.
Fixed Wireless Access, particularly in the 28GHz band, was expected to play its part in rolling out broadband access to more remote areas, but the recent auction in the UK produced no takers for spectrum in rural areas.
Germany is reckoned now to be two years ahead of the UK in broadband communications with DSL (Digital Subscriber Line) and local loop unbundling both available and cheaper. Operators with significant market power are required to publish the terms of their agreements. The regulator requires Deutsche Telekom to offer the same services to competitors as it offers to its own business units, on the same terms. Although the industry continues to lobby for a decrease in rates, the monthly charge for access to paired copper wire is only dm25.40 (£8.27), which is aligned to actual cost.
In France, two kinds of access are available to competitors: full unbundled access to the copper loop; or shared access with France Telecom, which must also offer co-location services. ART, the regulator, has taken a firm hold by directing negotiations on terms; with charges to be cost-orientated. ART will define the method of calculation, and will adjudicate disputes.
The UK has moved more slowly until recently. Oftel’s first statement on unbundling in November 1999, entitled Access to Bandwidth: Delivering Competition for the Information Age following a consultation in July 1999, stated that: “High speed, high quality electronic information is essential to the development of the information society in the UK. Always-on unmetered internet access, interactive home shopping, and video-on-demand are just some of the services that will transform the way we access information and communicate. A variety of new technologies such as DSL, cable modems, broadband wireless, third-generation mobile and digital television offer the opportunity for the widespread delivery of these services”.
In the circumstances, the 2005 target for broadband in the UK seems ambitious, and widespread access to high speed internet services may not be realised in that time period. The proposed reorganisation of BT may help. Under these plans, BT is considering splitting into a holding company and six subsidiaries – two in the UK: a network company, NetCo, for regulated wholesale supply at arm’s length basis to BT Retail and to competitors, and BT Retail; and four UK-based, but actually or potentially international, service providers: BT Wireless, BT Openworld (internet), Yell and BT Ignite (which carries out broadband data transfer for businesses). Up to 25% of Yell, BT Wireless and, eventually, NetCo may be floated.

Nicholas Higham is a partner and Kerron Edmunson an assistant in the technology, media and telecommunications practice at Denton Wilde Sapte.