Labels: ASSIA, BT, IPSL, John Cioffi, John Papandriopoulos, Melbourne Ventures, next generation networks, Rim Semiconductor, VDSL

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One advantage of being your own boss is that you can tell granny how to suck eggs without getting the sack. So at the risk of teaching an old dog old tricks, today's article is going to go back to basics and draw a picture of a baseline network.

Under normal circumstances we might just draw a cloud in place of the detail below because the detail, like the network itself, is only relevant when there are problems that need to be understood. Once those problems are solved, we can all go back to drawing clouds.

The time to examine those problems is now. This week, Ofcom launched its Next Generation Access (NGA) consultation which appears to run alongside the efforts of the Broadband Stakeholder Group (BSG) activities and Stephen Timms (MP)'s efforts to convene a summit. Whether all these acronyms offer parallel efforts or something more in keeping with the market trend for convergence, we shall see.

While the focus is on the local loop and the peak capacity that can deliver, the situation is a lot more complex than simply opening the gates yet further.

Transition
We are in transition from dial up to "true broadband". In fact we may always be in transition because after true broadband we should probably expect the next next-generation lobby to be pushing for something that they might have to call "true true supersuperfast broadband, honest". Drawing lines in the sand though - at say 100Mbps - gives a target that helps us plan for the next stages in the evolution, but it is worthwhile noting that there will never be enough to satisfy the high end users.

We know that video streams are an elephant in the room, which some have estimated will account for 98% of internet traffic within two years. This is a serious problem so that means getting into more detail about the network and the factors that are creating the problems.


The first point to make is that for all the fuss about Fibre to the Home (FTTH), that is only one part of the jigsaw in delivering video to people's homes. The local loop is one of four major choke points on the access network side that need to be considered. Sitting alongside those access issues are considerations of how the internet routes packets and how and where those packets are stored.

In fact, for all the hype, it may be that FTTH is one of the least pressing of the issues that stand in the way of the internet's ability to deliver the larger and much more lumpy video traffic on the horizon. At some point, the last mile will again be the most significant bottleneck - as it was when all we had was dial up - but right now, how many people would be able to use a 100Mbps local loop if it magically turned up on their doorstep?

Would the architecture support it? Would there we enough capacity in the home and on the core network to use it? How many knock-on issues would we need to solve before we spend the money on fibre in the local loop? A chain is only as strong as its weakest link...

The Home Network (x, in the diagram above)
A good place to start: it is undoubtedly the most complex issue because of the anarchy that exists in this space. There is no control over end points and how they are attached to the network, or indeed which network they are attached to. Security? It is best not to ask - denial is a wonderful thing...

Consumers are truly left high and dry to build the wireless / ethernet / homeplug network for themselves. If they are really lucky, they can get a friend / son / daughter to do it for them.

This makes the introduction of new hardware and new services that would use the 100Mbps a significant challenge. The customer may not have a network, or it may be "a bit flaky" such that when they come home with shiny new CE equipment, they are disappointed (or worse) to find that it doesn't work. So they make a call to the ISP but after a long wait, they find that their "service" provider isn't there to help.

Do you phone a friend every time you want to install a new device in your home? How soon before your DIY network starts to creak and your friend's generosity starts to get seriously tested? If everyone suddenly had 100Mbps to the home today, very little of it would be usable because the capacity of the last yard is significantly below that. Before FTTH, we need a solution that simplifies the home network and extends management of that to a real "service provider".

The Local Loop (y)
No-one is happy with the current state of affairs. That is not to say that everyone agrees that access networks are too old and slow and are in dire need of an upgrade - LLU has yet to be fully exploited, so perhaps we should start getting the best out of that? There are two conflicting priorities that need to be managed: ultimate speed is one of them, but at least as important is ultimate reach.

Looking first at speed, there seems to be a clear assumption made by many that we need more than ADSL2+. This point is worth explaining because this is not about headline speeds: 24Mbps for all would be enough for a fair few years. But ADSL 2+, like ADSL 1 speeds degrade with distance, so only anything substantial can only be delivered in real time over relatively short distances.


This table is from the BSG report, Pipe Dreams. Links to articles covering that and other articles can be found on the Digital Divide section of this site.

In summary, only 30-40% of the population are close enough to their exchange to get 8Mbps or more on copper. You can get more on cable but cable also covers less than half the population, similarly concentrated into densely populated areas. For some therefore, there is a vibrant market and the local loop is no barrier at all. Certainly not one requiring life support from a quango or two.

The role of the quango should be to concern itself with the areas where the market does not have an answer. In the local loop, this includes a significant number where there are signs emerging that the market for connectivity beyond LLU will fail. This failure will occur because the market needs huge investments by Openreach to shorten the copper loops but for the monopoly it is hard to see any extra revenue to pay for the new investment.

So 60% of us might be stuck with the speed we have today - it doesn't matter whether we use ADSL1 or 2+, the result is the same because the line length is the problem, not the technology at the exchange. And because the copper replacement case is so weak, you might have to move to a new build estate to get fibre to your home...

BT IPStream and ADSL1 (1)
There are very clear signs here and now of market failure in the provision of basic broadband access. Fortunately this only impacts a very small minority who cannot get 512k or more - a rare enough occurrence that some even appear as "news" these days.

This market failure today is very small indeed, but there is the prospect of many more (perhaps 15-20% of the population) getting left behind in the rollout of LLU. Although there is no doubt that competition here has led to cheaper products for all, those price reductions came at the expense of the digitally divided for whom competition in the local loop is a double whammy.

Competition means that investment from all players, including BT, has focused on the denser locations where the business case is best. For most, that means higher speeds and lower prices but the money taken out of the value chain through price competition, is money that was once used to cross-subsidise services where the business case didn't make sense. For the minority on the other side of the divide, LLU enshrines a two tier system.

Two Tier Pricing
A two tier system means two tier pricing, but it is worthwhile understanding what that two tier system means. It does not mean people miss out on broadband: almost everyone can get affordable broadband connectivity if they want it - 99.x% have access to some form of broadband and prices are universally below £20.

Two tier pricing may mean that the basic product is available for free on LLU exchanges and for £10-£15 more on IPStream, but even that is not the problem. The problem of the two tier pricing system as it is evolving, is the impact that it is having on the affordability of broadband capacity once you have the basic connectivity.

This manifests itself as usage caps and fair use policies because broadband capacity (as distinct from broadband connectivity) is hundreds of times more expensive on IPStream than on LLU. For these consumers on the wrong side of the digital divide, competition in the market means that the cost of actually using the service is prohibitive.

Every action has an equal & opposite reaction
This two tier system is the direct product of "managed competition". IPStream's prices are maintained artificially high to allow room for competitors to build their own infrastructure at a cheaper rate than they can lease capacity from BT.

Solving the two tier pricing problem may distort the competition that has been so carefully created because it means BT selling IPStream at rates comparable to LLU. This would undoubtedly stop future LLU investments and throw into doubt the commercial viability of many existing deployments. It also requires that BT have an incentive to cut prices for the least profitable exchanges in an environment where there is no competitive pressure demanding that they do so.

There is a significant difference between now and 2004 when BT held back enabling the least profitable exchanges with ADSL1 because the promise of returns was non-existent. The difference is that now BT has to compete with LLU; in 2004 they were a monopoly and could cross-subsidise more effectively.

The key question that we need to be clear on is who are we trying to deliver fibre to? Is it the top x% where a little shove makes the business case work? Or are we going to let the market work on that while aligning regulation and politics to deal with the bottom y%?

Backhaul (z)
Backhaul is an issue that is best summarised quickly here. There are more details in a previous series of articles written by Keith McMahon and I a few months back.

Backhaul has been a severe inhibitor to the development of broadband in the UK for the past few years but it appears that BT have been quietly upgrading capacity of even some of the long tail of exchanges to fibre (I have heard anecdotes of exchanges on the 95th percentile being glassed up). This, combined with their new BNS product for LLU operators described by Keith in the above article means that we are much closer to removing capacity constraints in backhaul.

That is not to say that backhaul is universally cheap though, as the model is heavily distance dependent and profitability is reliant on customer density. The pricing scheme is built to deliver service to those with their own core networks close to the exchanges being unbundled. The model is designed to clearly benefit the decreasing number of larger players.

Backhaul competition exists but the BNS introduction certainly took the price floor down a few notches. Additionally, there is a subset of exchanges colocated with the core network itself but these have a much easier life because there, core networks are cheap and plentiful and the backhaul circuits are simply internal wiring.

Would backhaul survive an overnight upgrade of local loops to 100Mbps? For the vast majority of users, the answer would have to be yes but what would break would be the business model because backhaul pricing is based on today's usage and not what you would see with 100Mbps in the last mile.

Backhaul Pricing
This final point deserves explanation because the way that prices are set is a self fulfilling prophesy. In simple terms, there is a "budget" for backhaul - ISPs and even consumers buy as much as they can for that budget. They will expand their usage gradually to fill it and then throttle back use so that they fall within the budget, until the price falls and the cycle starts again.

Dropping prices means more capacity would be available within the budget, but it does not often lead to absolute gains in total revenue because people still spend the budget. Of course it is recurring revenue so you need to keep cutting prices to keep the business - most assets require between 3 (hardware), 5 (system) and 15 (infrastructure) years of use at a recurring fee to pay for itself.

The problem for those selling capacity is that when you drop the price, it takes time to recover the revenues you have given away in the reduction and even when you do, you often find yourself back to square 1 as the throttling caps the upside. So it makes most sense to hold tight and wait for someone else to make the first move.

This point is clearer working through an example... Say you have 100Mbps of used capacity at £5 per Mbps and are charging £10 per Mbps to your customers. Your total cost is £500, your revenue is £1,000. Say that you then upgrade that circuit to 1Gbps at £1.25 per Mbps (total cost £1,250).

At that point in time you are making a £250 loss - what do you do? If the market is saturated you face a problem because you somehow need to be able to get users to pay more than their budget (£1,000). Even if there is still some growth room from new users, do you hold on and sell slowly at £10 per Mbps? Cut the price by the same proportion as the cost to £2.50 per Mbps (total losses now £1,000 and a breakeven point of 5 times your existing sold capacity)? Or something in between? Does this change if I tell you that your competitor is selling at £4 per Mbps...? £3.95, perhaps?

The problem is that prices are increasingly lumpy with ever larger upgrade steps (100Mbps to 1Gbps is 10x as is the next step to 10Gbps). Such steps cause problems because available capacity increases far in excess of demand. Pricing on the basis of availability would leave the owner with pennies in comparison to pricing on the basis of usage, although the latter has the effect of stagnating growth.

Backhaul Competition
Extending the core networks to get increasing numbers of exchanges on-net is the only way to take the recurring cost off your books, if operators want to. Putting their own fibre into exchanges sounds attractive, but it is even more attractive to wait until someone else does and then needs to sell the new capacity. At that point the wholesale customer can start to drive the price down aggressively at the expense of the facilities-based carriers who undercut each other progressively downwards.

There is an incentive problem for operators who may be considering investing in their own backhaul builds. They are better off waiting for some other idiot to make the first move...

If competition is going to stretch into the provision of local loops, it must first address the much simpler issue of backhaul competition. It is simpler because it is a fraction of the cost, but the issues are the same: protection of existing assets, build cost, site access, asset sharing, equivalence, price fixing, price regulation, period of regulation, certainty, etc. Perhaps it is a safer place to experiment with various solutions?

Content Issues
In simple terms, hosting content on your own servers is cheapest, next comes content on peer networks that can be reached through internet exchange points while Transit is the most expensive.

Transit originated as a way to get access to US content, but more and more of the big US properties are now hosted on caches that can be reached through in country peering (from my ISP, you can get to google.com through LINX). Transit still plays a big part because it is the only way to reach everything else (youtube.com goes through transit). The difference between transit and peering is that you can't transit peer networks as a general rule.

Transit networks themselves host a lot of content but their value primarily lies in that you can go over one of these networks to reach something the other side. So instead of maintaining thousands of smaller circuits with everyone else, Transit takes care of that in one interface.

How would content hosting be impacted by 100Mbps in the last mile? It might be ugly for a while as the shock of an overnight upgrade kicks in, but as we are unlikely to wake up tomorrow and find the tooth fairy has given us all fibre, we have some time to consider the impact on the electrical grid.

Space is not a problem: in the late 1990s data centres the size of football pitches were constructed which are still being filled now. Network connections are not the problem as most are on multiple fibre rings.

Power on the other hand is a real concern, particularly given climate concerns and the ever increasing cost of energy. We really do not understand the power consumption increases driven by fibre to the home - this cannot be ignored as delivering new electrical capacity may be even more problematic than laying the fibre.

Bigger Lumps of Data
Video is not necessarily going to be the most popular internet application but it doesn't have to be to cause the predicted impact. It is not where people spend the most time that necessarily drives the traffic: a second of HD video is 65 times as much data as a second of high quality music. Put another way, 1 hour of video is 65 hours of music or 315,000 page views on google.com...

For video files of that size, there are storage implications, but storage capacity is far more advanced than network capacity so it becomes more a question of where do you keep it to minimise the distance travelled and subsequently the cost you incur. If you can control it there are suggestions of charges for premium delivery to help monetise the downstream access network assets.

Whoa! Network Neutrality alert - but looking at how this is being played out, there is a question whether the content applications will cooperate to allow the ISP to exert such control. P2P is an example of how content companies are trying to work their way over the top of ISP platforms.

P2P vs Client Server
The concern with video applications is understanding the direction the market will develop. Will it be the wild west all over again with P2P data everywhere (forcing much of traffic onto transit networks) or will the video market evolve to work with the networks (much of the content locally hosted). At stake is the bill that ISPs pay transit providers for global access.

The choice of application is as much political as it is technical. If P2P wins, it will be increasingly hard for ISPs to do anything about monetising the increasing volumes of content but it may deliver an inferior user experience - something the ISPs can comfort themselves with. ISPs would be much happier with client server as that is something their networks have been built around and something they can control the quality and cost of.

Fibre and 100Mbps access certainly plays into the P2P corner as it blows away one of the fundamental limits of P2P - upstream bandwidth. In a DSL environment there is only the capacity to create perhaps a 10th of the capacity there is the potential to consume. In a fibre environment, it can all be P2P.

I believe that we need to look at how and where the networks route P2P and move routing closer to the edge to reduce tromboning. This is because applications would perform much better and network demands may well be lower, even allowing for the additional Layer 3 technical and operational overhead. Geo-aware P2P might work for everybody, but that is a story I have written up before.

Busy Hour Planning
There is a huge difference between how computers are used on the internet and how TVs are used. Watching television is much more heavily concentrated: peak audience (of all channels) is around 2.8 times the average audience over a 24 hour period, whereas for web surfing this is nearer 2.1. P2P actually generated very good peak load efficiency because the ratios of download applications that use P2P is around 1.4.

What on earth does this mean...? In simple terms, you need to provide 33% more capacity for watching TV as you would for viewing the same volume of data on the web because you have to build for the peak unless you want congestion on the network. Furthermore, congestion for streamed services like TV is far more serious than for web access (where building to the 95th percentitle was commonplace).


The chart shows how the usage of various applications varies and where the peak loads are on the respective networks. There is no weighting for file size - the area under each line has been rebased to 1,000 units. The aim is merely to show the peak to mean traffic profile of video is significantly higher than for web and P2P.

This reiterates the point above that for the same volume of data, you need more network for video than you do for other internet applications.

Which makes a situation which is already very bad, even worse - the capacity that we actually use today is only a fraction of what is available on existing local loops. Average usage of around 5GB per month on a 2Mbps circuit uses 0.8% of the connection's maximum capacity. There are over 8 Exabytes (8,912 Petabytes) per month of unused capacity on existing networks.

A 2Mbps link is enough capacity to deliver 146 hours of 1080p programming per month - the average household watches just over 100 hours per month. What we have today could deliver what we need tomorrow.

It highlights the inefficient use of the total available resource... The problem is "on-demand".

Conclusion
Video is the only application that looks remotely like driving demand for fibre. Assuming for today that we need to move video over from its existing broadcast platform - a case worth exploring in detail in another thread - it is clear that there are a number of key areas where we are not ready for fibre to the home.

We do not have the ability to deliver service because of networking issues in the home and commercial models in backhaul and hosting are going to have to change in light of the new traffic demand. But these are functions of evolution that will follow the technical capability as it grows.

Where there are serious questions to be asked are in the supply of power for the next generation capabilities and in the efficient use of the resource that is in place today. Every routing hop is another drop of oil gone forever and do we need to build nuclear power stations next to data centres to support demand there?

It is also clear to me that we are not using what we have in place today. Perhaps we should stop to think about that too before ploughing huge sums into delivering yet more peak capacity?

The removal of the bottleneck in the backhaul means that it is only the commercial model preventing full-time wirespeed usage of connections. For 70%, this is 2Mbps plus. Even if you need 10Mbps for the video itself, technology is evolving that predicts what a user might want "on-demand" and pre-loads it for viewing at 10Mbps.

This offers the network provider a way of maximising resource usage. If you can fill the unused capacity on the network today instead of pushing the headline speed, you don't need the expensive infrastructure upgrades.

There are clearly areas where there is a vibrant market for connectivity because of recent regulatory efforts to encourage competition. But this risks leaving a subset of the population behind with access speeds below what might be necessary - 30% cannot get 2Mbps. This is the area where lobbying and regulation should concern itself, not with the drive to 100Mbps.

Labels: BT, digital divide, FTTH, next generation networks, Ofcom, timeshift TV, video on demand

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Or is that a dunce's hat they are wearing?

Do Ofcom Have a Clue?
The most subjective point that I made in my recent iPlayer series, and in particular in my article on The Regsiter, was that Ofcom know what they are doing. I have had a fair amount of feedback along the lines of the following:

"Ofcom really don't have a clue about anything and just are pushed from pillar to post by the amount of lobbying going on. You are really naive if you think that someone in Ofcom is really the Wizard pulling all the levers in the background."

Is BT the Power Behind the Scenes?
This thesis holds that actually, it is BT that holds power. The theory goes that BT are able to make a weak minded Ofcom accede to their every wish through their use of Jedi mind tricks.

I agree that the Force is strong with BT. Their Regulatory department is staffed by the brightest people in Telecoms, whose role it is to confuse the heck out of the rest of us. Furthermore, there is evidence that BT seems able to pull victory from the jaws of defeat when it seems that they have been beaten into submission - but does this mean that we are under the spell of a great magician? Or is it just that (unlike everyone else), they just get on with it when decisions go against them?

In the late 1990s, it is certainly true that Oftel were pulled from pillar to post. They were naive and believed Mercury every time a grievance was raised. Similarly, they fell under the spell of MFS magicians who worked tirelessly for changes to the market that altered the telecoms landscape in the UK and throughout Europe.

Many of those same people who fought BT in the 90s have now found themselves at BT since the company's renaissance in the 00s. Another example of poacher turned gamekeeper in telecoms...

BT has Good Reason to Like the iPlayer
It is certainly true that BT wins from the iPlayer's launch. Their wholesale product still covers 34% of the market (excluding Retail) and the Capacity Based Charging scheme means that any extra iPlayer driven usage within this base just adds to BT's profits. The price of the BT Central product is worth noting - £155 per mbps per month.

In the long term, the iPlayer driven LLU may cost BT subscribers but certainly within the short term, the additional usage will drive wholesale revenues that more than fill any gap. Over the long term, the iPlayer is likely to drive backhaul circuit investments from LLU operators, which is revenue to BT too.

A Strategic Decision to Go Ahead
Of course the BBC Trust made the final decision to go ahead - but if Ofcom had turned to them and said, "look, there's an £831m bill, the ISPs don't have that kind of money", the Trust's hand would have been forced.

But Ofcom did not say that - the discussion probably went more along the lines of "look, there's a £831m bill, the ISPs will grumble but the investment is for their own good". In fact when the MIA was announced to the world, the press release made no note of the cost whatsoever and you have to work down to page 103 before you get to the detailed assessment! So did BT persuade Ofcom that the bill was an acceptable cost and not to make a fuss about it, or did Ofcom make its own mind up about that?

I see no evidence of BT being more prepared than the other players which is often a dead giveway that a decision has gone their way. In fact the initial suggestion that they too were fighting the launch, however off-the-record and however quickly retracted, suggests that there was no grand plan behind this. BT executive were clearly not all quite on-message.

My view is that Ofcom are now pulling the levers. More specifically, it seems that the levers are being jerked around violently as Ofcom battles to reign in the huge range of stakeholders over whom it has an influence. My conclusion is based on the fact that it seems that they can do no right by anyone which suggests to me that they are trying hard to balance opposing interests.

Equality of Hardship
Let's look at who Ofcom have upset recently... First came structural separation - it cannot be argued that this has helped BT because of the amount of work involved to demerge Openreach and create a set of systems and processes that could support the new design of wholesale market. It might be in the group's long term interests, but that is more due to the quid-pro-quo that saw the chains removed from BT Retail.

Then Ofcom upset the Broadband Stakeholder Group and a previous Ofcom boss, Kip Meek who feel that we are not doing enough to prevent Britain becoming a digital backwater. Next Ofcom upset customers and the market with their tacit acceptance of two tier pricing, before they upset the politicians who questioned whether the organisation was too big for its boots and was making political decisions.

Just when I was beginning to think that the interests of investors in LLU broadband were the only ones that had not been targeted, came the iPlayer. Having had a good run of it for a couple of years, the iPlayer brings down the hammer to signal the start of a new and much bigger wave of investment for those players.

Ofcom Understand the Dynamics
Ofcom clearly understand the market - assuming they they are unique in reading their entire Communications Market Report. Their 2007 version was published today and is a veritable goliath as research pieces go. I have printed it double sided on A4 paper and even without the Radio sections, the report sits over an inch high on my desk. I am sorry for the tree, but this is the only way to digest so much information. I am assuming that Ofcom have digested it...

So is it a wizard at Ofcom or a Jedi at BT? It may well be both - but it does not appear to me that BT is being favoured by the regime. Where BT wins is that it plays the regulatory game where ISPs do not.

The Regulatory Game
The game consists of huge volumes of data and documentation being passed backwards and forwards. What tends to happen is that the crucial part is in a footnote on page 142 where one sentence changes the market. BT will take time to read this and reply in kind, whereas the ISPs just don't put enough effort into unravelling the mysteries that BT and Ofcom conjure up until it is too late - and the iPlayer launches.

Is it Ofcom's fault that the game is played this way? Should they be made to stand in the corner and be subjected to ridicule for allowing BT to run rings around them? In my view, the answer is no - detail is a feature of regulatory policy making or there will be loopholes. Every player in the market knows this and has used it to their advantage in the past. If some players in the market believe that there are higher priorities at a given moment than responding to consultation, then that is their decision.

Trying to play the victim when the result doesn't go your way just strikes me as bad sportsmanship.

Labels: BT, catch-up TV, iPlayer, Ofcom, timeshift TV

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"He's leaving for family and personal reasons" - really? With immediate effect?

I suppose it is just possible that a close family relative has suddenly been taken very ill and needs the now former Virgin Media CEO Steve Burch at their bedside for a prolonged period of recovery. I suppose that it is just possible, but surely that would be preceded by some form of compassionate leave before it was clear that this was the only sensible solution.

What a Load of Tosh
No, I don't buy it and neither does anyone else. We all know that these words are often trotted out when face needs to be saved. In reality there are one of two possible scenarios:

Scenario 1: The board have decided to sell Virgin Media and Burch disagrees with that decision because he thinks that he can still turn the company around. The company needs him out of the way to go ahead so Burch's contract was bought out.

Scenario 2: The board have decided not to sell Virgin Media because of the volatile debt markets and Burch disagrees because that was his exit strategy. Plan B was to throw his toys out of the pram until a compromise agreement was the only option.

It could be because of poor results, but even when that happens there is normally a gradual easing out of day to day duties, staying on as a Strategic Advisor of sorts while someone else is sought. Not this time - Burch is gone with immediate effect - which can only mean a pretty sizeable bust up has occurred, probably between Chairman and CEO. I wonder if there was shouting and even whether objects were thrown?

Either way, it is unlikely that we will ever told - they have obviously agreed some form of exit plan, almost certainly containing a gagging clause on both sides. It's a shame in some ways but all we will know is that there's a cover up going on. [UPDATE: Burch left with a £3.5m payoff. The Times has an inside line on the events that led to his departure]

Steve Burch RIP (2006-07)
Putting Burch's time in context, he joined in January 2006 and is leaving in August 2007. In that time the company spluttered through its NTL/Telewest integration, acquired Virgin Mobile, rebranded as Virgin Media and then Lost all of the relaunch's goodwill practically overnight. [UPDATE: This may not have been Burch's doing]. Oh yes, and they also lost their position as the UK's number one broadband provider.

Burch's major initiative was four-play. Since he joined the company they have done loads with the proposition. 4 for £40 makes for some great marketing. The imagery is attractive as you would expect from Virgin. There is nothing wrong with the presentation.

Furthermore, he reached out to the other 53% not on cable with a hybrid Freeview box making it clear that they were serious about addressing off-net. But they also made clear were not going to roll out any more access network of their own any time soon when they did their LLU deal with C&W.

The sales and marketing department will have been happy as it allows them to sell to the people they already reach with their message but aren't on cable. But commercially does it make sense to spread your resources still further and to compete where you have no advantage?

A Questionable Strategy
Some wondered whether four-play was what the market wanted. Personally, I thought that buying Virgin Mobile was a great move because loose bundles had already been working well for NTL locking in triple play spend and making customers less price sensitive.

My concern was that four-play meant of a round of price cuts and that NTL was shifting to focus on growth because my research showed that NTL's customer simply were not price sensitive. For NTL, cutting prices did not lead to growth and putting them up did not cost market share. It seemed that cable customers wanted something different from TalkTalk and yet the company misjudged this and tried to compete on price.

The end result was a lot of customer who did not need a price cut, got one anyway - taking chunks off the company's bottom line at a time when investors were sweating on a return. Yes, they increased the dividend by 50% earlier this year and last week by a further 33%, but this was to a paltry 4 cents - an annualised ROI of 0.7% on today's share price. They have been trying too hard to grow while their investors have wanted something different.

Virgin's Problems
The problem for Virgin is the basics. Service provision, customer care and billing (all the boring stuff that's so easy to ignore). They need to start being nice to customers - although they are not alone with this problem. BT, Orange, TalkTalk and Tiscali all join Virgin with less than half of their customers satisfied with the service.

What is under the hood at Virgin is probably a mess of diverse networks and systems from countless acquisitions and partially completed integration projects. When this happens in a Telco, random things break, causing customer outages and making staff look stupid because they don't have good information on what is actually wrong. The core network service delivery capability is there; Virgin's problem is making it work.

The Virgin brand was supposed to solve this perception problem, but this was a sticking plaster to deal with the result of a train wreck. The result was that the reverse has happened: "Virgin" now has the same negative vibes as "NTL" once did.

It was not always this way... NTL, if you recall, started as an attractive, cool brand too, with its football shirt sponsorship deals and the rest. Over time, the coolness turned to coldness as NTL became synonymous with poor customer service. NTL + Telewest = Virgin = Chaos.

Virgin Media hasn't helped itself. Its opening gambit, a PR move that was a victim's plea against the dominance of Sky, crippled the company. It might have worked for Virgin Atlantic against BA in the airline industry, but it is worth noting that Virgin Atlantic didn't tell passengers mid-flight that they might get Lost.

What Next?
So now they are back at square 1. They might even be at square -1 after the price cuts, but the rump of the business certainly has a future no matter who owns it. If it can survive bankruptcy, it can survive losing a CEO or two and even another change of ownership.

If they can fix the service issues and rebuild customer confidence, Virgin will need to go through a period of consolidation, much like BT has done since its rights issue in 2001. Virgin need to show that they can operate a cash cow for a few years, rebalancing their finances and rebuilding investor confidence.

Whichever way you look at it, it smells of anger ruling over reason. The value of the company has been diminished by Burch's departure - the share price fell by 1.5% following the announcement on a NASDAQ market which climbed by 0.5%.

Losing their CEO so suddenly is only going to increase the attractiveness of a buyout bid to shareholders, even if the bidders may now feel like reducing the price because of the commotion. If Burch was ousted to oil the mechanics of a sale, it will have been a very poorly calculated move for that reason.

Alternatively, if Burch left because the company wanted to remain independent and he wanted it sold, even now, he may still get his way. Losing another CEO may well be the last straw for some shareholders who may want to bail out now at whatever price they can get.

The problem with digging in is that bringing in a new boss is a long term project. Whoever they bring in will want to bring in their own people and conduct their own strategic review - all of which would burn another 6 months or more. The problem is that I just can't see the shareholders waiting that much longer for an ROI.

Fibre on Hold
Whatever happened over the last few months and whatever happens in the next chapter, the big loser has been the UK market which needs a strong competitor to BT if the market is going to deliver fibre to UK homes. Lets face it, no one else is going to fibre up the UK at any point in the near future. It is BT or Virgin because they are the only ones with anything like the capacity to execute the build.

Clearly, BT aren't going to do so at the moment because there is no competitive pressure. They can fight LLU with 21CN, the only reason to do FTTH would be if someone else was heading in that direction but they are not - certainly now that Virgin is in further turmoil.

For BT, this means that there is nothing to be gained (or losses to stem) from the possible £10bn of incremental investment (to cover 90% of the population) because BTs existing network is good enough to give them control of over 60% of the market. Why spend £10bn when you get the rewards regardless?

The Market Needs a Strong Virgin
Virgin Media are the only other company in the UK competing with BT infrastructure in the last mile, but they are light years behind BT in their preparedness to upgrade their existing facilities. Virgin are not going to do FTTH until they have been through the same rebalancing that BT has been doing this decade. Would you lend Virgin money to do FTTH right now given their history? No, I didn't think so.

In order to rebuild the confidence of investors, they need to return some value to long suffering shareholders for a consistent period before embarking on a further wave of investment. Whether this return comes from ongoing operations or from a buyout doesn't actually matter. If the company is bought out, the new owners will need to get their ROI before embarking on another investment wave.

Hard Work Needed
One way or the other, Virgin needs to spend some time on a get-well plan.

Delivering the ROI from ongoing operations will take a massive effort to properly integrate NTL, Telewest and Virgin Mobile from the bottom up - not just on the company's brochures. Funnily enough, delivering an ROI from a buyout is going to mean the new owners have to do the same. Either way, there is a long term project ahead.

Investment will have to be inward during that time because it will take a huge amount of focus and a ruthless instinct to drive up margins by cutting waste. No-one is going to like working there while this is going on.

A Lost Opportunity
Perhaps it would have been OK had Burch not Lost his way and tried to take on Sky. [UPDATE: The Times suggests that this was not actually Burch's decision, that in fact it was taken by Bill Huff and Jim Mooney]

I think though that there were and still are much deeper issues that have been brushed under the carpet. There has been too much marketing and not enough integration going on in my view.

They cannot hide from the need to do the hard work. Buying companies sounds easy, but combining them effectively is one of the hardest jobs in the telco world. But it needs to happen because sooner or later, cracks will start appearing through the marketing - destroying the perception you are trying to create. If this means that innovation goes on hold until the work is done, then that is a cost of the acquisition.

If Virgin can do the hard work, they will be able to improve returns to shareholders meaning that eventually, there will be another window to invest. This may be five years away or more whichever ownership route they take, although they need not worry too much about their competitive position as no-one else is likely to take the step to fibre before them. BT will just be milking the profits of their broadband and 21CN investments in that time. They don't have to move until Virgin do.

Which is why we should all be sorry at Burch's departure. More specifically, we should be sorry at Burch's failure, because in it we have lost yet another period of at least 18 months and probably a lot more in our race to fibre up the country.

Labels: BT, FTTH, next generation networks, Vigin Media

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When you write to a word limit, as I did in my iPlayer Politics piece for The Register, there is often a fair amount that hits the cutting room floor. This article is going to pick up on a few of those themes and tries to answer an excellent question I received on the piece.

The Question
The question from Chris Fraser really gets to the heart of the debate from a user's perspective. An educated user, yes, but a user nonetheless.

"Why is it that once again we are being told by UK ISPs that our systems are not capable of delivering the type of service that has been available on the continent for some time? I am willing to believe that maybe the infrastructure is not up to the task. If that is the case why are they not willing to make the same investments as their European counterparts?

"Please can you give me a legitimate reason why Ofcom should not be forcing these ISPs to put their hands in their pocket and actually pay for a less out of date infrastructure when some of them are posting huge profits in their yearly financial accounts reports?"

History of UK Internet Access
The answer to this starts in the mid 1990s when internet access was via dial up and the vast majority of internet content was in English (US English to be precise). At that time, France, Italy and Spain in particular lagged behind in adoption rates because of the language barrier and so when DSL came along in the late 1990s, there was little to lose for the industry to make the step straight to DSL.

The other factor was the pricing schemes for dial up access. In the UK thanks to Freeserve, as elsewhere it became well established that dial up was via a local rate number. The difference was that local rate at peak times in the UK was close to 4p per minute. In France, Sweden and the Netherlands it was closer to 1p.

The UK's 0845 scheme was set up to provide artificially high (excess profits) to companies willing to invest in voice switches. This decision was made before dial up access was popular and was originally intended to spur competition in the voice market.

The result however was that dial up minutes swamped everything else and new entrant voice operators (OLOs) were guaranteed the lion's share (~70%) of the consumer price. A lot of this went in revenue share to ISPs, who had control over whose network their users 0845 minutes were carried by.

So with this nice gravy train benefiting OLOs and ISPs alike, no-one really wanted to do broadband. It took until 2003 for the latent demand to explode and DSL to really be taken seriously. This was fully 4 years behind France - a gap which we are probably still seeing today.

Other Factors
Population density is also a factor - Paris, Amsterdam and Stockholm is where the most notable OLO FTTH projects are now appearing in Europe. There you have a lot of multi-tenancy buildings which are much cheaper to connect than the individual dwellings we prefer here in the UK.

Laying fibre is not cheap, £600 per home in a city or thereabouts. If all you are doing is spending money to serve the same amount of revenue (prices do not go up when bandwidth increases) you get into the Broadband Incentive Problem. That's an article in itself but it is worth noting that BT may well soon start building fibre networks in new build estates - no copper, just fibre - where there is not the cannibalisation issue.

The Digital Divide and Natural Monopolies
The other issue that needs to be thought through is the whole Digital Divide problem. Is it right that ever faster broadband speeds are made available where it is economic and not where it is not? We have the luxury of being able to consider this still, because when you get to where France is now, you are on a one way street and may have to use significant state funds to address the problem. Do we as taxpayers want to do this in the UK?

The problem in my view is that telecoms infrastructure is a natural monopoly and competition is artificially imposed. The most efficient model is one network big enough to serve all and using cross subsidisation to level out inequalities in pricing and access speeds. Of course then the issue is not an economic one but a behavioural one.

Behaviour is less of a problem when you have multiple companies essentially reselling the monopoly asset at a regulated price, but then the problems are economic. All ISPs can do is stick a badge on the product and do some creative packaging. The value we as consumers see is not from the bits and bytes - they are a necessary evil - so we look for our broadband to be as cheap or as free as possible.

The LLU Factor Makes the Price War Worse
Some would argue that the last paragraph only describes the IPStream-based offers. LLU is different because the operators own the kit in the exchanges and control the circuits back to their core networks. LLU is cheaper than IPStream if you have more than around 300 connections off individual exchanges and its gets cheaper still the more users you have in that small geography.

There the ISP has an incentive to invest in LLU, but once you have made that incentive there is an incentive to play out a price war to grab market share. Consider the game theory behind the price war.

The reason ISPs lose their investment is because once you have made the investment, the next rational move is to reduce pricing in order to fill the network you just built because your incremental costs are extremely low. Obviously if everyone sees it this way (and they do) you end up with a continuation of the price war, only this time with a much lower floor.

This is not a unique problem for telecoms. Washing powder and countless other FMCGs have the same dynamic - for them investment in LLU is replaced by investment in production capacity. Once you have invested and find competitors have done the same, you might as well throw the original business plan away because the pricing power assumptions you might have made are just no longer there.

Recreating the Monopoly
The way out of this predicament is to rebuild your monopoly power through acquisitions, but when you do that you are again paying over the odds because the companies are valued by stock markets knowing the very weak position in which the buyer finds themselves. That's why so many companies that went on acquisition sprees find themselves in a bankruptcy position. The Goodwill you are buying is just not real because the product is such a commodity.

The final problem is that if you are really successful and get too big or rebuild the monopoly too far, you have the spectre of regulation and consumer group pressure as the US carriers are now finding since the re-creation of AT&T.

The Incumbents
The above is a very long winded answer to most of the question, but it still only deals with the position of a competitive carrier. The position of an incumbent is very different indeed.

There are really two incumbents in the UK - BT of course and Virgin Media will all the old cable franchise assets. I'll come back to BT in a minute because that is where the profits that Chris mentions in his question are being made.

Virgin has found itself in a strong market position - a superior service technically to BTs for the 47% on a cable run - but in a mess organisationally. Trust me, acquisition integration is nowhere near as easy as the CEOs will perhaps suggest in their briefings to investors. I liken it to spaghetti - a lot of customer service and network management systems that have been designed in isolation but have been brought together under one brand. I feel a huge amount of sympathy for support agents dealing with quad play customers because the information they have at their disposal is so poor!

BT is very different - they have a monopoly over the infrastructure serving the 53% and they face a very different problem. They make huge, humongous investments on a periodic basis like they are with 21CN which give them far more capacity than they need immediately on the routes they build. They are regulated to wholesale this product but they can't suddenly drop the prices to their new costbase because there is no immediate demand, so they have to leak it out gradually.

Nevertheless, both incumbents are in the same position: they have made investments and their shareholders want a return before the next wave of spending is released. Virgin in particular need to give back before they take more - which is why Private Equity has been circling the company. Both BT & Virgin have assets and market power and are in a position to make significant cash returns by slowing investment.

There is also the point worth considering that if BT moved too quickly fighting tooth and nail for the attractive markets, it could obliterate the competition that Ofcom has strived for twenty-something years to foster. Sure that would address the speed and capacity issue for some, but leave BT as a re-established monopoly responsible for a widening Digital Divide. Be careful what you wish for...

Ofcom's Attempt to Solve the Problem
So onto the final part of the question: what is wrong with Ofcom's gunboat diplomacy - get all these players, the OLO/ISPs, BT and Virgin to invest in a network for the 21st century and not just the 202nd decade?

Perhaps nothing, it was a similar strategy that led to the change in attitude by BT which got us to where we are now. Line everyone's business models against the wall at gunpoint, shine a light in their eyes and ask them some difficult questions.

Notice that I haven't mentioned the iPlayer at all in this analysis because the picture is much much bigger than the BBCs rather limited application. It could as much apply to YouTube, Joost or any other mass traffic source like Google or Yahoo!

The problem it seems to me is that it is very difficult to work efficiently at gunpoint. What is needed is for the ISPs and the content owners to stand down from the confrontation that has been bubbling up ever since AT&T vs Google in the network neutrality debates and work on a better way to make sure that the money flows down the value chain. It is absurd to expect a commercial entity to invest without the promise of stability and an ROI. ISPs today have neither.

Conclusion
The iPlayer's unique position as a free, advert-less, quasi-publicly funded product makes it an ideal political football. We are behind because of the unintended consequence of a regulatory decision in the 1980s to regulate NTS - long before most people had ever heard of the internet - and Ofcom is using the iPlayer as a battering ram to solve the unintended consequence of its actions years ago.

There is a very real danger that yet more aggressive action could have further unintended consequences. Ofcom may argue that actually it was the BBC Trust that had the final say on the iPlayer, but it would be naive to believe that this approval would have been given had Ofcom raised the ISPs concerns more strongly than they did in the MIA.

They may have plausible deniability but I think Ofcom knew exactly what they were doing and perhaps it will have the intended result - but it is a high risk strategy.

Labels: BT, digital divide, FTTH, iPlayer, ISP Products, next generation networks, Ofcom

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If you haven't already done so, read Keith McMahon's post first, or nothing that follows will make sense!

So here we are, we have a business plan to take over Leeds (or at least 16% of it) with our new LUI offering. What is going to be different about it? For a start, we are not going to use traffic management, caps or fair use policies. If we sell our customer a 20M service, they should be able to get 20M.

You can tell we're making this up, can't you...

We now have gigabit links into each exchange and we have migrated our customers across. It took a year and we lost a few percent market share in the process because of downtime issues.

We blamed BT for most of these customers and fortunately most customers believed us. If we were honest though, we would have to say that a lot of the problems were caused on our side by the size of the task, which was much bigger than we expected and just didn't have enough project management and technical support staff to deal with the enormity of it all. Now that we are up and running, we hope to quickly make back what we lost because our service, now that it is stable, will be first rate.

Without a base to migrate across, the costs would have killed us. Why? Because before we unbundled we had a much greater degree of granularity to our costbase - now, in addition to the huge steps in capital that you have all heard about, we also have huge steps in operating cost. This only made sense because we had well over a thousand customers on each exchange...

In fact, we would be paying less today if we'd taken LES 100 circuits (or 2 x LES 100 circuits in 6 cases) because bandwidth per user has not reached the 75kbps tipping point on a customer base our size that would make it more effective to go with gigabit backhaul yet.

This is the part that a lot of commentators find hard to understand, and even harder to simplify into a soundbyte - with fatter backhaul circuits comes a lower cost per bit, but this has to be counter-balanced by a much lower utilisation factor.

The fill factor depends on the user numbers, which vary wildly by ISP and by exchange and the costs depend on the distance from the exchange to your core network, which also varies wildly by ISP and by exchange. You have to make a lot of assumptions to arrive at a soundbyte which is why they are so easy to pick apart.

The typical modus operandi for an operator is to make aggressive assumptions that give great fill factors at fantastic price points, only to find after the capex is spent, that the amount of money a customer is willing to spend increases by very little (flat revenue), although their expectations are of much higher speeds.

Unbundling is another example of capital expenditure largely justified by a cost-savings business case. The necessary evil of spending more to keep the same recurring revenue coming in is a cycle in telecoms. It starts with a regulatory shift that opens new opportunities, then companies pile in with forward pricing to exploit the new capability only to find everyone else doing the same. The floor falls out of the market and the price war takes everyone back to where they started only with a big financing cost and a capital asset that offers no differential advantage.

LUI is being realistic, we have unbundled not because we expect margins to improve. We have unbundled because were in the market already and we needed to lower the cost per bit so that the cost of servicing a flat revenue profile did not escalate beyond our means as traffic grows. We are going to have to make our margins some way other than by selling capacity, that much we know.

Even with this negativity in the background, it was a slam dunk choosing the new BNS product from BT. Not because it offered us better costs today though. The reason was because we knew we are going to need to capacity tomorrow and beyond and BNS gives us a better cost that a LES/BES or a similar service from NTL, Fibernet, C&W or anyone else.

We are under no illusions, video is being consumed online in increasing volumes. Data from Nielsen/NetRatings shows that there are now nearly 140m viewers of online video, up from just under 60m a year ago. YouTube has managed to grow its share of the market (37% up from 33%) in spite of advances by Yahoo! (11% up from 5%) and AOL (11% share in 2007).

All this will quickly push our capacity requirements skywards and for this reason alone, we need to be prepared. With our network in place, everything between here and about 300kbps per user is effectively free to us as we are just filling up the capacity we have just installed. This is why we are not bothered by customers using line rate - we have the bandwidth, so they might as well use it.

Where we need to be concerned is what happens when that 300kbps tipping point arrives. That sounds like a lot, but it works out as around 25GB during peak hours per user per month. Add in the off peak utilisation and you are probably looking at around 40GB per user per month total. We'd be happy for this 40GB to go up to 50GB or even 60GB as long as it doesn't affect the 25GB during our busy hours. For this reason we are looking at ways to incentivize overnight usage.

The 300kbps tipping point means a second wave of gigabit circuits and probably beyond that when we reach 600kbps we are looking for 10 gigabit links. I see that Keith has amortised the costs over a 5 year contract, which is probably what most commercial entities would do as it delivers the lowest capex cost (because of discounts) as well as a lower amortised cost (for obvious reasons).

My preference would have been to go for the 3 year contract and amortisation period because personally, I would expect the lifetime of these assets to be something less than 5 years. What lease contracts did you take out five years ago and are you still using whatever it is that you acquired? Or, are the last couple of years sitting on your books not delivering value (or worse, already written off)?

More from Keith shortly...

Labels: BT, LUI, next generation networks

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This article is a direct follow up to the piece that was posted last Friday on The Digital Divide. There were a couple of comments posted that warrant a detailed review and rather than try and squeeze that into a comment reply, I felt it would be worthwhile to create a new post for the purpose.

Firstly, on line lengths. I have had my attention drawn to the charts on page 21 of the BSG report, "Pipe Dreams?" These show the extent to which copper loops meander around the country on their journey from exchange to the home. So while my data in the original post showed that only 9% of households are more than 3kms from the exchange in a straight line, the longest 10% of loops are in fact over 5kms long. I am copying the charts here, the data for which originally came from Point Topic and BT.

Interestingly, this data has also been interpreted (by the BSG) to derive the speeds which the group expects users to achieve. The data shows that while in excess of 90% of the population should get 512k "broadband", only 30-40% should receive 8M "broadband" even using ADSL 2+.

Only 40% of the population will notice any speed difference from ADSL 2+ compared to ADSL Max. That is the point that David Brunnen makes in his comment and he is right: without any shortening of the loops, 60% of us are stuck where we are now.

David Harrington, Leader Regulatory Affairs at the CMA, notified me of the recent resolution passed by MEPs on 19th June, where among other things, they called on member states to ensure "a future where no European child and no individual involved in educational programmes is left off line in Europe".

"Think of the children" is an evocative call, but in this case I think it is a fair enough plea. Education is one of the major beneficiaries of the leaps in technology over the last 15 years, with the PC (teacher can now read your homework) and of course the internet (your homework might teach the teacher something). If the historical infrastructure that this generation has inherited is not up to the job in some places, there will be massive inequalities in the standard of education available to different children.

With that in the background, perhaps you might expect some leniency with regards to the state aid issues raised by Mr. Brunnen in his comment, when governments start trying to level the playing field between citizens and with their neighbours. The need for this levelling between countries is partly evident in the table posted over the weekend on the Broadband User Group site, that shows the average retail cost per megabit per second throughout the EU.

The UK is clearly in a 3rd tier with the likes of Portugal, Spain, Poland and Ireland. My suggestion to those in the UK wishing to lobby for the rules on aid to be set aside would be to take a step back and let those countries fight the battle for you. The EU seems to find it very difficult to say no when those four come cap in hand... For the big bad UK to come and demand special treatment evokes memories of Thatcher, Maastricht and Vetoes which we are still paying for in political currency even now.

The comment by JFK raises an interesting contradiction for me. The Digitally Poor in Kent and Essex clearly do not have the same ability to pull at heart-strings as do their peers in rural Wales, but they if they are disadvantaged to the same level is this fair...? There is a risk here that social jealousy can lead people to think that hey, these people are rich and can afford to sort the problem out for themselves, why should I pay for it in my tax bill?

The Digitally Poor in those counties may be Commercially Rich in comparison to the folks in Dyfed, but I would argue they are still not rich enough to be able to afford to rectify the problem for themselves. They can't go out, hold a village fete and expect the proceeds to fund a new telephone exchange - this is an expensive upgrade we are talking about here. You'd have to be David Sullivan to be able to afford to solve the problem for yourself.

At some point your economic prospects and social and physical well-being might be determined by the length of the copper wire connecting your house to the rest of the world. At that point, the residents of Essex and Dyfed alike might expect their follow UK citizens to ensure a level playing field, much as we've had in the past with the roads or the railways. Is subsidising the broadband access any different to the subsidisation of the transport system?

My illustration in the last post about how much difference two miles can make was a real-life case study. Two miles from where I live there is a village called Shepreth. Its a nice enough place, like every other village it has a recreation ground, but Shepreth also has a primary school and a pub that has been converted into a fancy wine-bar / restaurant - making it a home from home for the Londonders fleeing the nightmare of city dwelling.

On top of all this, Shepreth is lucky enough to have a wildlife park with a couple of tigers and a mainline railway station on the London line. Until recently, the only downside was that it had a pig farm and when the wind blew on a hot sunny day, the place earned its nickname - "Stinky Shepreth".

Shepreth though is connected to the Melbourn exchange, which as the crow flies is 3.5kms away, over the fields and across the A10. I can't tell you the copper lengths, but having lived there for 6 months, I can reveal that the best internet connection you are likely to get is between 500k and 1M, even on ADSL Max. Having moved two miles up the road and now that I am connected to a different exchange, I now have much higher speed access - not 8M by any means, but at least 5 times what I had in Shepreth. Is this fair or is it just life?

Of course I don't think that this is a life and death matter (yet), and any impact on welfare will take a long time to become clear enough to justify my council tax money going into subsidising the resolution of the issue.

When I first read the BSG Report my view was that we should let the market do its thing and I still believe that the likely result of interference is a massive knock on distortion of the rest of the communications market. What I had failed to consider at that time and is becoming more important in my thoughts now, is the shift towards using the internet for social welfare purposes where people, regardless of their economic power, deserve to be treated equally.

Labels: BT, digital divide, FTTH, next generation networks

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Prologue
In my recent Broadband Dividend post, I looked at some of the reversals in rural decline directly attributable to the availability of broadband in those regions. There is a strong case for governments to ensure that there is ubiquity of access, particularly as it is an effective means to maximise the utilisation of scarce land resources and provide welfare and social services to citizens online.

Philosophy
Is there a right to broadband? We are not there yet, but there is a point, when broadband is a driver of economic and social prosperity well beyond the telecoms value chain, that this question will arise.

Past experience suggests that when there is a technology step, densely populated areas get the service first, but the rest catch up in time. It happened when broadband first arrived. There was a time when some had 512k, while others has just 56k - no-one died... Slowly but surely people caught up.

They did catch up, didn't they? Well yes and no... Yes they got "broadband", but because of line lengths "broadband" for them means 1Mbps. For people in LLU areas "broadband" can now mean 16Mbps or more. We are seeing two-tier services and two tier pricing where the haves spend less and get more than the have nots - twas ever thus. Is this wrong?

Is it wrong for petrol to cost more in Norfolk than in London? Perhaps not, but is it wrong to expect the residents of Norfolk to ride a horse to work because there are no public roads? Maybe yes... but if it is wrong, then who has the responsibility to right the wrong?

Warning: Capitalism at Work
Certainly, without legislation or regulation demanding it, the operators themselves cannot be accused of being responsible for the Digital Divide. They are playing strictly by the rules of capitalism which is the basis of their existence.

To be fair to BT, they built out the basic service almost everywhere, even where the revenue for doing so probably wasn't worth their while. They have blended their costs enabling them to build out to all but 0.4% of the population (subject to line conditions and length...) and have improved performance further with the ADSL Max upgrade. BT have invited competition to help them grow the market, but they have made Wholesale work for them.

But for a commercial entity, there is a point of diminishing returns, where taking a hit for the brand value of broader coverage no longer makes sense. Competition from LLU in the markets that were profitable brings this point clearer into focus for BT, especially knowing that the current installed hardware requires an expensive refresh via 21CN to go any faster.

Consider the competitive environment: at a recent industry conference, a senior BT exec revealed the following approximations of LLU competition. Around 1,500 exchanges have at least one LLU Operator, of which

• 450 have only have one LLUO
• 625 have between 2 and 5 LLUOs
• 400 have more than 6 LLUOs
• 1 exchange has 11 competing providers

So there is competition for BT meaning ADSL 2+ available already to 80% of the population. To keep up / leap ahead (depending on who you believe) BT is building out its 21st Century Network.

21CN Solution to a 21C Problem
21CN is starting with a controlled rollout in Cardiff and will then cover the rest of the country, starting with the bigger exchanges. It will take a while for it to filter down to the regions. During that time the haves might have 20 times faster connections again than the have nots, but eventually the have nots will catch up.

It might be a bit more than 0.4% of the population that miss out this time, but my exchange is in the smallest 3% and the switched-on date for 21CN is in the Spring of 2009. So some people will have to wait... It didn't matter last time, so why should we be concerned about it now? I'll get ADSL 2+, just not for a couple more years.

It seems clear to me that the 21CN commitment will deliver me and almost everyone else in the country who live within 3km of our exchanges, a substantial boost in bandwidth. We might have to pay more for our petrol, but at least we can put the horse out to pasture.

BT Wholesale fairly recently changed to a tiered exchange pricing model, meaning that the operator's access costs more in the most rural locations, a bit less where there are a few more people and a lot less where there is competition. Does this condemn the digitally poor to forever receive higher priced services? If it does, it is not however, BT's problem.

The Case for Subsidy
If the government's act of opening the markets risks causing social inequality by removing BTs ability to cross subsidise, it may have to be the government that take responsibility for rectifying the issue using its own means of cross subsidisation: taxation.

The Mechanics of the Digital Divide
For sure, there is enough bandwidth for most people now, certainly enough to meet their basic needs. But there is an underclass for whom service is not going to improve without new exchange builds. Those stuck more than 3km from their exchanges are effectively stuck below 8M, whatever technology is used and even getting to that rate may cost a bit more cash. QoS looks like being most attractive where speeds are lowest (sound familiar?).

To go faster than this, copper loops need to be shortened. About 2.1m households are connected on copper lines more than 3km from the exchange. This figure is as the crow flies, so bear in mind that copper wasn't laid by the Romans and so tends to be a fair bit longer than its straight line distance.

Shortening the loops is where Fibre to the Node (FTTN) comes in. In the UK, where there are just under 6,000 exchanges, these connect out via 90,000 or so Primary and Secondary Cross-connection Points (PCPs and SCPs) and 2.5 million distribution points. These PCP/SCPs would need a massive capacity upgrade (the F in FTTN), but there is also a big problem with physical space, power, cooling and security, all of which would need to be enhanced. But it doesn't sound like BT wants to do it, and they are returning cash to shareholders instead of saving up for the next big upgrade.

A Digitally Divided Britain
What happens when the bandwidth required by "basic needs" reaches the 8M ceiling imposed by the copper line length for the 9% or so who live more than 3kms away? The availability of 20+ megs in some locations will allow services to develop to fill the available capacity. If those services are life changing, in the real sense that they offer new economic opportunities or provide access to enhanced personal healthcare for example, you have a problem.

At that point you can probably say that there is a Digital Divide, because for some, use of life changing technology will be impossible because of network constraints. The Digital Divide is determined not by the exchange you are connected to, but by how far you are from that exchange.

Rectifying this will cost a lot of money and such investments are likely to have low yields as the worst affected exchanges are the usual suspects - those that are hard to reach anyway, with low densities even before you break the base down further by extending the core network to the cross-connection points.

Where are the Digitally Poor
There are no surprises when looking at which regions are worst effected. 24% of Lincolnshire's population live more than 3kms from their exchange. This is 25% in North Yorkshire, 28% in Cumbria, 29% in Dyfed and 30% in Co Down. For the Scottish Islands and Highlands and rural Northern Ireland this % is much higher, but over this entire area the problem base is only 93,000 households - just 10,000 more than are impacted in Lancashire alone.

So don't think of this as a problem that just hits the hermits among us who like to live in the middle of nowhere. There are 83,000 people in Lancashire (near Manchester), and 66,000 in each of Essex and Kent (near London) that also have lines longer than 3kms. Here the inequality problem may be more acute. If you move to the Isle of Tiree, perhaps you are expecting to get away from it all - so what if you can't get faster broadband? - but if you live in Kent some might expect to be connected better than you are.

It is in these areas where the Digital Divide might be quite stark. If a village is stuck on 8M and you can get 20M two miles down the road (in the same "good school" catchment area), you might see an impact on that most precious of post-Thatcherite Britain's benchmark - the value of our homes. Why? Because by that time 8M is not enough and puts you at an economic or welfare disadvantage.

Regional Answers from Regional Government
Regional governments have in the past attempted to get a local broadband provider off the ground in order to address the digitally poor, but levels of success have varied from minuscule to none. The problem in many cases was that the investment was a one off and when upgrades were required, the underlying cashflow was not enough to make it self sustaining. An ADSL exchange with 100 households is never going to be profitable so many of the companies that were created went bust.

Alternative Access to the Rescue?
So what of alternative access? WiMax for example could fill in the areas where scale and geography are a problem. But that's not where WiMax or any other new technology is being deployed because in spite of the competition from wired and other wireless networks, it is still more likely to be economically viable using WiMax over the top of existing networks than it is filling in the gaps between them. The Digitally Poor are digitally poor because service providers can make more money deploying their capital in more densely populated areas, regardless of whether the technology they use is WiMax, WiFi, 3G, LLU or FTTH.

Any spectrum auction where service providers need to pay just to have the ability to offer service simply accentuates the problem by making the the commercial viability of providing access to the digitally poor even more remote. It may be that instead of the operator paying the tax man for the spectrum, it may be necessary in some regions to work it the other way around.

For the rest of the market (the digitally rich in the towns and cities), the overlay of yet another competing technology has the opposite effect. It will prove baffling to the consumer with so much choice on offer,