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Government won’t be paying for FTTH
By jpenston | September 19, 2007 |
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I was at The Commonwealth Club last night for the Broadband Stakeholder Group reception with Rt Hon Stephen Timms MP. Another grand sounding venue. Perhaps not on par with Blenheim Palace but it is conference season, and it was a chance to take in another set of views on the future of broadband.
It really was pure politics. Everyone agreed that they agreed. The future is fibre! As I saw it though, the key points were, for me at least, somewhat contradictory when what we really need is certainty.
The Minister
Mr. Timms, the minister for competitiveness, is perhaps bound by his job title to say this, but his clearest statement for me was that “government won’t be paying for it” because doing so would deter the private sector and undermine existing investment. That does not mean that the UK government won’t intervene - they will tinker with frameworks and facilitate the debate - but BT (or anyone else) is not going to get a big fat cheque from UK Plc to roll out fibre.
Of course, ‘government won’t be paying for fibre’ doesn’t mean that government funds can’t help make the business case. There are huge contracts to be won providing public bodies with access infrastructure not just for their offices but also for their teleworkers.
As you would expect though, there was a great deal of thought given to Digital Divide issues. Regional Development Agencies (RDAs) were instrumental in getting to 99.6% broadband penetration, even if some of their investment was also stranded when BT’s technology improved. Would BT have invested without competition from government subsidised bodies? Who knows…?
The Lobby
Kip Meek, Chair of the BSG, was extremely supportive of the minister and his efforts to push along the debate. “We need timely, efficient and rational investment by the private sector”, he said supporting the minister’s position. But, the public sector will have a role which may be leadership but “may be something else”.
Mr. Meek was at pains to make clear that the lobby has not already concluded that public money is definitely needed. There is “no ideological position”, he said, “we have an open mind” but “it may be that more than advice is required”.
At least we agree… even if we have different opinions.
The Playing Field
There are of course subtleties in this and that is what made this pure political theatre. Mr. Timms is no doubt aware that had he said anything but what he did, all hell would break loose. The spectre of a massive distortion in the market is already making participants nervous about their investments. And, while the prospect of fibre may placate a few, the taxpayer is sure to wonder why an industry that can apparently afford to give its product away for free, needs a massive public subsidy to keep growing.
Virgin Media, Sky, CPW, Tiscali and Orange have ploughed large sums into network assets that could be stranded should FTTH become a reality. These investments have been made because Ofcom policy has, for the last 2 years in particular, heavily favoured those willing to install their own competitive equipment within the network.
The Problem
But FTTH is a natural monopoly. The best question of the evening was left until last, would the minister for competitiveness accept that a reduction in competition is required to drive Next Generation Access (NGA)? He really couldn’t agree, even if most of the delegates did - competition has driven the rollout of Next Generation Networks (NGNs), he said, and he expects it to the same with NGA…
I have to ask though, is he right? Is it competition that has pushed BT to invest in their 21CN project? Or was it something else? Cost savings, the prospect of re-monopolisation of the backbone, a deal with Ofcom that freed BT Retail from regulatory interference… There are many reasons why BT is doing 21CN and competitive pressure is only a part of the story.
And, I have to ask, how much competition is there in the development of NGNs? And, how deep does this competition go? And, why did competition stop there and not keep rolling from the core backbones into the access network? How much new fibre has been laid to deliver LLU broadband? Or is LLU investment mainly in equipment that starts to use all the glass that went into the ground with Fibernet’s, C&Ws, and MFS/WorldCom/MCI/Verizon’ builds in the late 1990s when we didn’t fully appreciate the monopoly problem?
The History
What happened in the 1990s was that multiple commercial entities all came the same conclusion - build fibre along the railway lines because there you have largely resolved the most complex construction issues: rights of way (one entity with whom to negotiate) and construction costs (less concrete to dig up). The underground offers much of the same which facilitated the construction of a pretty impressive metro network in London (and other European cities, notably Paris).
If you want to get a picture of where there is already fibre, have a look at a railway map. Where there are inter-city trains, you have truckloads of fibre.
Furthermore you can see where there are fibre “branch lines” to places like Cambridge and Norwich. On these routes the fibre optic equivalent of Thomas the Tank Engine, ferry passengers to the main stations for Gordon, Henry and James to take them on their longer journeys. Wherever you can get without using a car will probably be commercially viable for fibre rollout because these NGNs are very close to the edge and the NGA requirement is therefore small.
But these fibre networks were a disastrous investment at least in the short and medium term. The effect of competitors having exactly the same routes was not understood by the business planners at the time - I know because I was one of them.
Once completed, the sales teams would go out and find that xyz co was offering exactly the same product - a BT tail to the premises at a regulated cost plus on-net transport using sunk capex on our facility. The BT tail cost was a cash outlay which prevented the price going to zero, but commercial pricing teams found themselves having to bid ever lower, because their competitors were doing the same - you had to make the sale and get something back rather than nothing. Of course, you couldn’t ring up xyz co and agree on a “market price” because that would be horribly illegal.
Hindsight
In one sense, Mr. Timms is right, competition did drive NGN builds but I wonder how many would do the same with the benefit of hindsight? The alternative was the virtual network operator model and the likes of VANCO did particularly well arbitraging the various different operator pricing models.
We believed at the time that you could not have enough glass because we didn’t bank on DWDM. With that in the picture, the reality is that very little physical capacity is required because optical equipment is so powerful. This is highly relevant when looking at the issues on the capillary networks - the places you need a car to get to.
LLU Competition
Once upon a time there was no broadband. Everyone, but the consumer was happy making money from dial up so it took an almighty regulatory kick to get broadband rolling.
Then for a couple of years we had a duopoly in the provision of networks. BT opened its network to any and every service provider and that got adoption soaring - but it hit a glass ceiling as there was no competitive pressure to invest.
Lets be clear about one thing. LLU primarily introduced competition on the networks at Level 2 and above. Level 1, the physical layer between the core nodes and the exchange, is still provided by BT in many, many cases because they are the only ones with networks extending beyond the 100 or so core nodes (that everyone has) and the 2,000 or so exchanges that warrant unbundling. Of course there are a small number of high density exchanges colocated with these core network nodes, but these are the exception.
LLU was a major strategic shift in Ofcom policy. It delivered tangible benefits to consumers in terms of speed, but it did so by constructing very significant barriers to entry that previously did not exist in the provision of voice (CPS) and internet (IPStream). It was a conscious effort to consolidate the market so that companies had an incentive to invest at level 2 and above knowing that they could make a return if they ran their businesses well.
LLU solved the problem of investment in ADSL 2+ equipment. The investment model is such that you need a reasonable share of the market to be competitive (upwards of 15% on a localised basis).
NGA Competition
NGAs require a further, and much larger step. Investment in the capillaries, which are two steps beyond where those that have built networks decided to stop. Here, you really don’t get a lot of bang for your buck - the build cost is more expensive per mile than the core networks because of rights of way are harder to obtain and the cost of digging in residential areas is higher than following the railway line. Furthermore the aggregation of users to pay for it all is much lower.
NGAs only make sense where the market share you get is upwards of 65% - clearly there is room for only 1 player with this in mind.
So what of the “Stockholm Model” where there is a monopoly infrastructure but the full separation of access and services? I was told last night that there are 67 service providers there delivering access-based services (with frills no doubt) and everyone can get fibre access. It guarantees return for the investor by removing the competition and setting a standard price. Bingo?
Back to Square 1
Haven’t we seen this movie before? Didn’t we have a monopoly broadband access infrastructure as recently as 2005 (at least for the 47% not covered by Virgin)? Why did we break out of that model and do what we did with LLU? Because there was stagnation in further development - firstly, there was no broadband at all and then there was no ADSL 2+.
At some point a monopoly will decide not to invest where a competitive carrier has to. Is fibre the end game or will there be another wave in, say 2020, and will the Stockholm Model still stand up then? Or will that too require “political intervention” be that facilitation or funding?
There are no easy answers, but the biggest problem is history. A shift to the Stockholm Model would be a complete about turn of Ofcom’s policies on LLU. That shift was necessary to repair the stagnation caused by a lack of competition in ADSL1, which itself had the benefit of at least getting us on ADSL in the first place - albeit 4 years later than some of our neighbours.
Uncertainty
In the end, it is uncertainty that is killing the evolution of the infrastructure. Uncertainty about returns comes from an unclear position on competition, regulatory and political policy towards fixed and wireless networks. If Mr. Timms really wants to drive the market, what he needs to do is to make difficult and often unpopular decisions that clear up the uncertainty.
For me, he started this last night, but I don’t know if everyone in the room heard him because it was not what some people wanted to hear. “Government won’t be paying for FTTH” is a clear statement that allows one uncertainty to be removed from one dimension of the investment case.
But as this is politics, full of ambiguity that allows for many different interpretations of what he said. If you don’t want to, you don’t have to believe that he really means this - how much are the public sector contracts worth for example? How much of the country will the RDAs get involved in? There are many other dimensions where the political problems may be much more acute and make taking an unambiguous position unpalatable - particularly with an election looming.
Conclusion
I hope you are not expecting any answers from me. I still believe that the market needs to be given a chance to work out its own answers but in order to work out how to make a return on such a big investment, you need to know what is in and what is out of the business case. What is clear is that there are a lot of issues, stakeholders, social and political influences that need to be worked through to remove the uncertainty. Until this happens and positions are taken, no one is going to put any money in.
Further Reading
If you still have the energy, I have written a number of previous articles on this subject, the collection of which can be found here.
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November 12th, 2007 at 1:27 pm
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