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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Suddenly everyone is a power user. I bet you didn't see that coming...

Wakey Wakey!
The iPlayer is a wake up call because we can all now see the beginnings of the final product. ISPs have known about it for years - the market estimates have been openly shared - but perhaps because the development process and consultation took 4 years, they might have forgotten that this day would someday come. Now the product is out there - with a prized place on the BBC's web site - all those light users that made the economics work (just) are suddenly potential power users too.

The BBC's online media organisation is formidable and is a mass market proposition. bbc.co.uk is the 5th most popular UK site according to Hitwise - most of us have sampled online video and radio from them already. Streaming clips validated the concept of online video, but the iPlayer brings the promise of what has been lacking so far - stuff that lots of people want to sit back and watch. Only the networks - with their threats of throttling and extra charges - stand in the way of mass market adoption.

They Got Themselves Into This Mess
It is hard to feel sympathy: we all know that ISPs have made decisions that have put them where they are today as they fought their way through the land grab over the last few years. The result is a market where customers think they are buying one thing, while their suppliers are delivering something different. What does " unlimited " mean to you? What does " unlimited* " mean to you?

The asterisk is vital as we all know, but even if you read the Terms & Conditions to find the Fair Use Policy (FUP), you are unlikely to be left with the impression that it is going affect you. The policies talk of using P2P and filesharing applications like they are some sort of nasty disease that you are very unlikely to catch. Some ISPs were up front about it - capped products were launched - but they really weren't very popular. Because they were trying to grow numbers in an expanding market, there remained the option to go unlimited* for just a little bit more money each month. And for a while, the model worked, especially when the market price hit the magic £17 per month tipping point.

Problem, What Problem?
Power users were simply not a problem for most ISPs because they became such a small corner of the base. As prices fell, adoption rates soared and ever lighter users were added to the network reducing average usage and actually making the price cuts work financially.

The trick with fixed price models is to set the price at a point where even light usage customers choose it anyway because it gives them certainty in their monthly bill for a reasonable price. The "under-utilisation" of your new customers actually makes average usage fall which reduces cost per customer. Set the fixed price too high and you only get the power users for whom the service is still cheap. Set it too low and you know what happens...

But the chickens are coming home to roost. The market is saturating and the inevitable has happened: light users now have the urge to use video filesharing applications too. Only we're not talking about mininova or some diseased video pirates now, it's the iPlayer from that bastion of British media, the BBC.

P2P: The Disruptive Force
Has the BBC caught the disease too, or are the ISPs wrong to treat filesharing as a parasite? It was certainly easier when P2P meant bootleg content. Then, service providers probably held the moral high ground even perhaps protecting the interests of media organisations in a strange sort of way.

Now though, mainstream media is using P2P technology because it delivers them a lower cost for their distribution. P2P was necessary in the piracy world because viewers were not paying customers and a way had to be to offload the cost. The solution was brilliant - use the spare CPU, RAM, Disk and Bandwidth of all users to remove the need for central servers that would a) be traceable and b) cost money. Is this a necessary move from big businesses or is it predatory?

Big media have turned the poacher into the gamekeeper. Of course P2P saves them money but it also helps their DRM by fragmenting the file into disparate pieces on its journey across the internet. The technology works in their interests but it does so at the expense of the ISPs. I'll save writing about the black arts of P2P economics for another day, but suffice to say, P2P generates a lot of extra upstream traffic and disaggregates traffic flows making them very difficult to manage (ie. it costs more). There are solutions, but that too is another article.

If big media was paying their share of distribution costs then perhaps the ISPs concerns would have a hollow tone. This is just not how the internet works: the BBC grant free peering much in the same way as peasants receive an invitation to one of the Queen's Garden Parties, something that is inconceivable in reverse. The fact is that users want this content out there and they don't care who their ISP is as long as long as the connection is free(ish). The ISPs are over a barrel.

What is Really Happening Now?
But lets take a reality check and look at traffic across the LINX peering point where the iPlayer's impact on network bandwidth is likely be seen first. Although traffic is up this week, it has almost certainly been due to wind and rain rather than diseases running wild over the network.

It certainly sounds like the apocalypse may be coming but in fact there is no real evidence of any iPlayer growth in demand although you would not expect to see growth in August. There may be signs that the seasonal lull may not be as obvious as in past years, but that could just be the terrible weather this summer. It will be interesting to keep an eye on these graphs in the autumn when the days get shorter.

Supply is NOT Infinite!
Before dismissing the problem, look at the year on year picture at LINX. Peak traffic loads are close to double what they were a year ago so while connection numbers are only increasing by 15% on an annualised basis. 115% of customers have used 200% the bandwidth used a year ago, indicating that usage per user even before the iPlayer may be going up by as much as 75% every year.

Has your broadband bill gone up by 75% in the last year? Probably not... you have an unlimited* product. Maybe though the * is getting bigger and more ominous? Am I going to get punished for watching the Beeb?

If you feel like this you are not alone - it's going to be an issue for everyone very soon. Looking at some estimates of the bandwidth impact, you can see the iPlayer itself - one application - being responsible for as much traffic in 2010 as is carried from every other source put together now. Total traffic will grow tenfold if ITV, Sky and the others follow suit.

It has amused me to see the rekindling of the network neutrality "debate" in response to the iPlayer launch. Network Neutrality is not a debate, it is a faith and the debate is no more constructive than arguing with someone about their religion. I agree with Martin Geddes - he's my god on this issue.

No, the problem is not that ISPs want extra money for carrying this traffic just to increase their bottom lines - although they would of course take it if they could. The problem is that most of them still haven't paid back the last loans that took them into broadband and are going to have to find more money from customers with unlimited* usage to pay the £831m iPlayer bill.

We Could All See it Coming
Someone asked me once if I had £6m would I put it into their LLU project. Only if I had £60m in the bank I said, because it was clear a long time back that investment was a recurring theme of the broadband business model. That was before a public body came along and wanted to double the load on the networks and them with the bill. My father researched black holes for a living in his career as an astronomer. I often feel like I am doing the same thing when I look at telecoms economics.

ISPs knew what was coming in the iPlayer. Perhaps they didn't believe it possible that the BBC would get this far. Perhaps they took their eye off the ball in the price war deathmatch? You don't want to worry your customers unnecessarily - especially when you are in land-grab mode - but more should have been done by the big players to clarify exactly what they mean by unlimited* before the problem arose. Maybe that is what is happening now?

Even now though there are gains to be made and there is a game being played out. Tiscali are playing chief bad-guy, perhaps because if TalkTalk had tried taking on that role, Dunstone would have been given the Graham Taylor treatment. Others are staying out of it knowing that they haven't dug themselves in quite as deeply and may be able to profit from the negative PR that the two fighting the case will surely receive.

In spite of the fact that the problem that the industry has caused itself has become so apparent*, they are still looking for ways to get one up on each other. That's competition and it shows that the market is working as it has been designed to.

But has it been designed well? Will ISPs find a way to make extra charges stick? If they do not, where is the money coming from to pay back the LLU bill, let alone the iPlayer bill? Will we see a further wave of Telco bankruptcies as yet another round of investment is written off and sold for pennies in the pound deepening the vicious circle of price decline and under-investment? If no money is made from LLU, who is going to lend the money to build fibre?

ISPs need to act as a cartel* on this, but then that is illegal... We're back to the natural monopoly issue again.



* subject to fair use policy. See Orange's as an example. Shockingly vague - I have captured it here for the historical record as I suspect this may have to change! Tiscali's is a little better, but it still tries to brush the problem aside "If you don't use Peer to Peer or file sharing software it is unlikely you will ever be affected by this Fair Usage Policy"

Labels: catch-up TV, iPlayer, ISP Products, Ofcom

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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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It's not even a month since the last i launch, but tomorrow sees the launch of another service that could disrupt its industry to an even greater degree than Apple promises to do with mobile telecoms. This time though, thankfully, we won't have to pay the homeless to wait in line for us to get hold of it.

The BBC launches the iPlayer tomorrow, but unlike the iPhone launch where all you could find was praise and hype, the BBC faces nothing but criticism, doomsday scenarios and even calls for a ban on the eve of it's big announcement. No wonder the folks behind it have decided to find pastures new.

The problem is that the BBC is publicly funded. It gets its money from everyone in the UK with a TV set because we all need a license to own a TV. The BBC's license revenue comes in exchange for a responsibility to deliver a universal service, free of advertising to anyone who pays the license fee. Foreign readers may find this curiously eccentric in the 21st Century, but the BBC is a national institution and we are British so that's the kind of thing we do.

This is where the problems lie. The license fee was designed at a time when the BBC was broadcasting: it had no competition in 1922 when the license was introduced to cover radio. The TV + Radio license was introduced in 1946. The Sky empire was still just a twinkle in the eye of James Murdoch's grandfather at that time.

The company (if you can call it that) is now operating in a very different world, but for many reasons (most of them sentimental), the BBC is still funded this way. As a result, it competes with other TV channels (and web sites) on an unequal footing because their funding model does not expose them to market forces.

Because the BBC is publicly funded, it has been free of the commercial pressures that competitors face on a daily basis. Has this given it an unfair advantage...? How many R&D departments would be given 4 years and £3m to deliver a project? Surely, anyone else in the same position would have lost the faith of shareholders well before now and management would be history. The BBC's unique position has shielded the iPlayer and given it breathing space in which to develop the service.

On the other hand though, how many R&D departments would face an Ofcom Market Impact Assessment, a Public Value Assessment, a full review by the BBC Trust and scrutiny by parliament before it could launch? The kerfuffle about the lack of service on Macs and Vista - there is a petition with 11,000 signatures with Downing Street asking the PM to ban it - is frankly pathetic. Do people really expect the BBC to be able to launch the service working 100% and available to everyone on day 1 with no testing?!?

Anyone who has ever been involved in product management will know that this is a recipe for disaster. The BBC cannot eat the elephant in one bite, but because of its funding model it will be forced (they might say "easily persuaded") to deal with standards issues like no other entity. The elephant will be consumed.

The Mac and Vista options might be addressed by making the content available through other media players as long DRM issues can be resolved. I suggested in my LUI Part 6 piece, where we described a prototype of the future of IPTV, these players are likely to include the likes of Joost. Because of its universal service obligation, the BBC is not in a position to say no.

The BBC's obligation extends beyond the internet however. For those without a PC, the BBC is investigating Virgin Media's on demand platform. This still leaves a chunk of people with no access to the service because of technology constraints on the user's side (no PC, no cable, no broadband).

Even though Freeview does not offer the bandwidth, the BBC is sure to get embroiled in how to serve these users, where other competitors would simply write off the niche as too expensive to serve. This is the flip side to the breathing space they have had to develop the service.

We already have video on demand from Channel4, an evolving service from Sky and a promised launch of a service from ITV that looks spookily like that promised by the BBC. So what's the big deal with the BBC's launch tomorrow? I've said it could disrupt its industry to a greater degree that the iPhone, so I had better explain myself...

Driver for IPTV Adoption
Ofcom's MIA states that by 2011, the iPlayer is likely to account for 3% of TV viewing hours, which doesn't sound like a lot. This is in fact about 45 mins per household per week, assuming total viewing remains as today at around 25 hours per week.

But, as with Freeview, the BBC gives this new(ish) technology the credibility to go mass market very quickly. There will undoubtedly be a knock on effect on all other broadband television services because there may not be a more trusted organisation anywhere in the world than the BBC. If IPTV is good enough for the BBC, it's good enough for me...

Looking closer at the Ofcom projections: 3% of total viewing is 9% of the BBC's current viewing. It would be reasonable to suggest that competitors services might grow in line with the BBCs. This would mean every household in the UK watching on average 2 hours and 23 minutes a week of IPTV by 2011. Over 3 billion hours a year...

Bandwidth
The MIA also says "The costs of the broadband capacity required to support the services could in aggregate be between £399 million and £831 million over the next 5 years." Once the capacity is there "the additional capacity would also be available for use by a wide range of other services, including commercial on-demand services, [so] it would not necessarily be appropriate to attribute the associated costs to the BBC services in isolation."

Ofcom's model says that the average capacity increase from the iPlayer will be 3GB per user per month by 2011.

Assuming that other broadcasters follow the same adoption curve, you are looking at almost exactly 9.5GB extra per user per month to serve the 9% of viewing hours at standard definition. This will add around 46kbps per user to an ISPs peak traffic load (approximately doubling what they have today). This is low, because I am using data that shows that early iPlayer alpha trial users had web-surfing-like peak to mean traffic profiles.

TV usage profiles tend to be much more peaky than web surfing traffic. Where you might get a peak to mean ratio on web traffic around 1.6, on TV viewing profiles, this looks more like 2.8. Cutting a long story short, this would push the traffic impact of the iPlayer from 46kbps per user up to around 81kbps additional traffic (easily tripling today's usage, from just one application).

Reverse engineering Ofcom's 3GB per user per month figure from the 3% penetration rate shows that they assume a 2Mbps encoding profile in their models. This suggests that high definition is not being taken into account.

If the BBC were to deliver at 1080p instead (as ABC.com in the US have announced they will), you might want to multiply the total capacity requirement by 5. With all content (ITV, Sky etc) as HD, the 9.5GB might be 45GB extra for every house connected to the broadband network. This would push the incremental peak load per user up by between 220kbps and 385kbps depending on peak to mean profile.

Money
Where there is demand, there is money, right...?

Actually, no. This is the other major problem with the BBC, the license fee and the universal service requirements. The BBC's iPlayer will not generate money from adverts (the BBC does not do ads), from subscription (the license fee already covers the service) and any other creative sources of income (including abroad), are likely to be relatively trivial.

This is not an issue for the BBC because the content is paid for already (its a catch up service of stuff already produced for broadcast). The service creation costs have been kept under control at £3m and rather than having to pay a big hosting bill, Kontiki's P2P client is being used, theoretically relieving the BBC of the burden of distribution costs.

The big losers are the networks who have to carry all this extra traffic and have no way of monetising it. This is again a BBC-specific problem because with other commercial broadcasters, the ISP is in a position to do an ad-revenue share agreement based on the unique element that the ISP can provide - the postcode. (We are going to come back to this point and the revenue opportunity from commercial broadcasters other than the BBC in LUI Part 10 early next week.)

The use of P2P actually makes the problem much bigger for the ISP. Historically, the BBC's web traffic, although significant, has been manageable via direct peering relationships between the ISPs and the BBC. Replacing this with P2P looks (to me at least) like a two fingered salute to the businesses that have to transport the BBCs product.

Summary
Even using the lowest results in the analysis, the iPlayer promises to double the traffic on the UK internet between now and 2011. On top of that the iPlayer opens the door to other broadcasters, which could mean that instead of doubling the volume of traffic, the iPlayer launch could drive an increase by tenfold or more.

I'm going to be watching the iPlayer's use of bandwidth very closely over the coming months. As I have done with Joost, Babelgum and 4oD, I will be running traffic source analysis and looking at where the Kontiki client gets its traffic from. Channel 4 also uses Kontiki, but using their service, I found that the scarcity of peers meant that much of the traffic was client server from the seed caches instead of actually using P2P.

I will be keenly examining the peer hit rates as that will determine the BBCs costbase. I will also be looking at where these peers are and whether BBC/Kontiki keeps traffic within the service provider's network or whether (like other P2P I have tested), in-country traffic source management is random. I will be publishing the findings here at periodic intervals.

If I can get the client from the website, the first set of data will be published here by lunchtime tomorrow...

UPDATE: no client = no data = no update. Sorry folks...

I got to the site by 7.40am, regsitered but have yet to receive the invite. I wouldn't say that the message board is on fire yet (10 ir so people grumbling about the same thing), but there are people who stayed up until midnight to register who are in the same boat.

They let Mashable in though, so if you are looking for a sneak peak that's the place to go. If you want a different perspective on possible adoption rates, I also found this.

IWR were able to run an initial test and reported that a 30 minute programme was 108MB, which suggests an encoding rate of 480kbps. It is not known what the download speed was, which may be different from the encoding rate to allow for buffering. The picture defaulted to 400 x 200 screen size, which sounds small.

More on this when I get my prized invite...

Labels: 4oD, Babelgum, catch-up TV, iPlayer, IPTV advertising, Joost, Ofcom, timeshift TV, video on demand

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The Question
There's a question that I have been struggling with for a while now. The problem is that it is too difficult to answer, because there are just too many angles for my little brain to cope with.

What is the economic value of broadband to a country?!?

Why does it matter?
The answer dictates the role that governments should play in telecoms policy making and infrastructure build.

After concluding in a recent article that BT were right to return cash to shareholders rather than invest in FTTH, and looking at the (remote) possibility of anyone else doing the same, it has been clear to me that we will be hearing ever more pleas for government intervention (as in April's BSG report). These pleas have come from all over the place, why?

Partly because no-one wants to spend the tens of billions that it may cost, I'm sure. If I want it, but I can't afford it, of course the government should buy it for me, right? Seriously though, is it because the economic value of broadband to a country stretches far and wide, well beyond the "telco value chain"? Can the breadth of benefits ever accrue back to a commercial entity making the investment, without distortion from naive attempts at creating artificial competition?

Market Failure
Of course, post Adam Smith, we are predisposed to giving the market a chance to achieve development and innovation without intervention from public funds, but are the benefits from broadband (the Broadband Dividend) too complex for the market to work out quickly without intervention? Would we have a ubiquitous phone network without earlier (direct) intervention? Where would we be without the phone...? Is the whole market-based philosophy wrong for such a national asset?

Ofcom are busily trying to figure out the Digital Dividend - the value of freeing up the spectrum that is still used by analogue TV - but I wonder whether this is missing the wood for the trees.

They are spending 56% of their £126.7m annual budget on spectrum allocation work, so let's hope they get this right. They can probably afford to put a little of this into answering the bigger question: Is broadband worth anything? Or is it that it will cost us to not have it? The answer to these questions matter a lot.

While it makes sense to look at spectrum allocation policy, I am struggling to understand how this can be ring-fenced from other digital transmission, wired and wireless. In the end, it is all just ones and zeros that can be used for anything from a phone call, to a TV station, a public health service to telematics. Call it digital if you will, but in order to encompass what I think is a much wider view than is described by "Digital Dividend", I am using the term "Broadband Dividend".

What am I talking about?
What is the Broadband Dividend then? Do countries need broadband in order to compete? Or is it even more acute: do their people in fact need broadband to access basic public services - to take part as citizens in society? Perhaps not today, but is that where we are going?

Consider this vision of the Broadband Dividend taken from a Memo to the Select Committee on Culture, Media and Sport:

As connection speeds increase, this digital revolution will continue to change our lives as consumers, as professionals and, provided we create the right conditions, as citizens: a universal [my emphasis - JP] and affordable supply of bandwidth could underpin a sweeping transformation in the delivery of many public services, ranging from the distribution of public information and the administration of bureaucratic processes to the provision of on-line education and health advice. For individuals, organisations, communities and the UK as a whole, this could help unlock new worlds of efficiency, opportunity and productivity.

The source may surprise you - it is taken from a submission by NTL... Admittedly, its dated October 2005, but it was quirky so I thought I'd include it.

What's wrong with the approach?
If this is the future, then perhaps we should be challenging some of the core assumptions underlying current government, regulatory and spectrum allocation policy? Viviane Reding certainly seems to think we should. "I do not believe that high stakes auctions in which only those with the deepest pockets can take part would be effective. We need to encourage investment and competition — we need cheap, wide-band services for all"

If we auction the valuable resources, we artificially inflate the cost of access. Auctions are nothing less than an airwave tax which filter down to increased prices to users. But, argues Ofcom, "It is the organisations that have the business plans to make the most effective use of that spectrum and maximise revenues [that will win out] if we have an auction mechanism."

The Politics
Network Neutrality the Sequel: this time the battleground is the ultra-valuable UHF spectrum, with Google arguing that this should not be hoarded by netcos as a defensive measure against competition for their sunk assets. The problem for regulators is that in many cases, the cost of sunk assets was a direct result of regulatory policy at the time of investment - like the auction of 3G licenses.

Although there may, even now, be a case to tear up history for the sake of the greater good going forward, doing so might trigger a lawsuit or two from those who have invested in the past in good faith. Companies bought licenses or sunk fibre on the basis that doing so gave them a certain competitive advantage over those who did not. If there is a risk that today's investments could be invalidated by swings in regulatory policy tomorrow, that investment won't happen and there will be no Broadband Dividend. That, I'm afraid, is the flip side of the argument: just tabling the possibility of a rethink may ensure a failure in the overall objective of encouraging investment in new capacity.

But that is not how some see it. Of course spectrum should be given away to anyone and everyone, argues Google, how else will users be able to get onto their services? How can we make money if users have to pay someone else first, they might ask (I made that up, but I'm getting an increasing feeling of a dark side to the big G).

Although I am uncomfortable with Google's role in the debate as they so clearly stand to gain commercially from the outcome, their position raises an important point on Broadband Dividend question that I think is being fudged because of the difficulties balancing past policy with future opportunities and needs.

The Greater Good
If broadband is required by countries, to establish favourable conditions for business and to citizens, to enable them to take part in society, we are now talking about a higher goal than can be catered for in a "business plan" as suggested by Ofcom. In fact, business plans and economics in general assume scarcity, whereas the higher goals mentioned require equality, ubiquity and perhaps even subsidy.

Does Broadband become a requirement in order to interact as a citizen with your government, and the public services that they provide you? If it is a requirement on the citizen to interact in this way with their government (because it makes government more efficient) or if it gives you advantages over your fellow citizens who do not have access, then does the government have the obligation to ensure that equality of access is available to all?

If the Broadband Dividend is significant, it suggests that countries need to ensure ubiquity of access within their territories to level the playing field for their citizens and maximise the use of scarce land & property resources. For business, high bandwidth might give the country a competitive edge with their neighbours so it may not be enough to simply ensure ubiquitous coverage - ubiquitous high speed coverage may be required. Is this a recipe for success in the global market economy? Or a lavish white elephant like the Millennium Dome?

Some Reference Points
The Central Development Corporation states that for Canada at least, the Broadband Dividend is CA$ 75bn annually (£36bn) or CA$ 2,500 (£1,200) per citizen. There seems to be no other source for that number, but if nothing else it's a stake in the ground.

When the Korean government undertook their thought leading intervention in 2004, they estimated that their project would add US$ 225bn of economic value over 10 years and lead to the creation of 820,000 jobs. Clearly, this is not a zero-sum game in their view... I wonder how much of this saving came from a reduction is the cost of the clergy?

Citynet quotes a study by the Allen Consulting Group in Brisbane, Australia into the value of broadband there, but it all seems a little woolly. Another stake in the ground, if nothing else.

Intangibles
What is a country's Broadband Dividend except a wild guess anyway? Measuring the impact has not yet started because we do not understand where all the benefits, and costs, of internet access are. Consider some of the contributing factors to an answer, and how little of these benefits will ever accrue back to the commercial entity making the investment in the infrastructure that makes all this possible.

Last week BBC Newsnight ran a feature on rural communities which included a piece on a Dipsticks Research. They employ around 30 people and are based on an old farm in Northumberland (far, far away from some of their competitors in Central London). "Emmerdale with Laptops", they said. Certainly, what they do is not possible without broadband.

Such outward migration of the population - away from the cities but still "connected" by broadband - can save companies and employees huge sums of money in rents and other costs and it leaves some of the benefit as new money into the host communities. This benefit might just be the occasional £50 for a tank of petrol at the local station or an employee or two deciding to relocate closer to work - increasing house prices - but all of it increases the wealth in general of the host community.

For centuries, populations have migrated towards the cities and the coastal regions (see this map of population density), driving property prices in those areas skywards. While this has driven growth in those cities, it has left great chunks of viable land severely under-utilised simply because people living there have the economic power of an ant. If that space can now be used by people to live in without compromising their employment prospects, we might be able to host larger populations - with the associated growth in the economy as a whole.

Consider also the ongoing change to working patterns, in particular, to the regular place of work. Broadband does not eliminate travel, but it can significantly reduce it: "In spring 2005 there were around 3.1 million people in the UK who worked mainly in their own home, or in different places using home as a base", according to the ONS. This was up from 2.3m in 1997, saving ever more time that would otherwise be wasted commuting. The economic and environmental impact of broadband driven reductions in travel could be very significant, but we do not understand the question let alone the answer. Don't forget the benefit to those that remain in the city - one less person trying to squeeze on the Tube in the morning...

Over and above the impact on travel, there is a positive impact on innovation and entrepreneurialism. Starting a business from an office with fixed costs from day 1 can break a business plan. Now of course, it is possible to run many businesses from home just as effectively as from the centre of a large metropolis. 62% of those home workers in the ONS data are self-employed and while many of them may make only a marginal contribution to the economy there are of course diamonds hidden in the rock that could make a big difference, especially in knowledge based sectors.

The End
I could go on working through the various areas where broadband can have a fundamental economic impact on a citizen or on a country, but like everyone else's attempts, it would be partially complete. Solving this question will take some big brains a lot of time (and money). My aim in this post is to get some thoughts going because as Confucius said "a walk of a thousand miles begins with a single step".

Labels: digital divide, FTTH, Google, next generation networks, Ofcom

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Any time politicians get involved in a debate, you know things must be bad. The Register today carries a detailed summary of Ofcomwatch's interview with Chair of the Department of Trade & Industry's select committee, Peter Luff MP. Vulture Central describe him as one of the most influential figures in telecoms, so hear ye...

But wait... Here is a politician who argues that Ofcom should look beyond the headlines created by the tabloid press and focus on strategic issues. Are you sure he's a politician? He certainly doesn't sound like one... Maybe he's jealous of all the attention that Ofcom are getting?

"Should a regulator find out what people want? That's the politicians' job, isn't it?"

In fact he seems very upset that the regulator has been dragged into tabloid politics (banning junk food ads or regulating roaming charges) and have neglected the technical side of their role (he is scathing of their input into the HDTV on free-to-air question).

This is so because Ofcom's success or failure is judged on political issues, he states. "I hope I am wrong, but I get the sense that therefore as a result [strategic issues] inevitably attract a lower profile within the organisation."

Luff clearly feels that Ofcom are micro-managing the market that the expense of the bigger strategic issues like understanding the role of telecoms on our international competitiveness and implementing effective separation such that there is an incentive to invest in future networks. Clearly, he's not a huge fan of Openreach as it exists today and why should he be? No sooner is the division created than the Broadband Stakeholder Group suggests that £10bn of government money is needed to make this happen.

There are some interesting notes in what Luff says that are worth thinking about. He says that the National Grid is a "perfect parallel" for Openreach and that they are doing "a first-rate job". There is more competition for the consumer's Gas and Electricity bills than there is for broadband, where Openreach has a "comfortable relationship with its biggest customer, BT".

He wants more competition for consumer broadband? Help! Or does he just want better competition for BT...? I could agree with the latter, not the former. I think we are in the mess we are now because of too much competition. The market was fragmented by past attempts to artificially create competition (Local Cable Franchises, NTS, CPS and IP Stream) and the cost of acquisitions to correct and consolidate such fragmentation.

"The telecommunications infrastructure is probably the most important one now. I would say it is more important than the roads."

It is very hard to argue with that. In fact it's hard to argue with Peter Luff, MP in much of what he says - he's a politician, remember. I may joke about his reasons for doing so - jealousy at the attention that Ofcom gets - but whatever his reasons, he makes good points and he is picking up on a thread that is emerging whenever Ofcom's performance is reviewed. What is its role? Does it represent government, industry or the people?

It appears that government is going to get ever more directly involved and that what the people want is going to be dictated by politicians too. Ofcom may benefit from simply being told what people want and be given responsibility for creating a market to deliver it.

My conclusion from Ofcomwatch's interview may be that perhaps, Ofcom should simply be industry - dictating standards and a commercial framework that operators can then all work with on a level playing field. Instead of asking industry bodies like NGNuk to come to an agreement on the finer points of interconnect, let Ofcom dictate how this is going to be. It certainly seems from Peter Black's last report that industry is struggling to dedicate the time and energy to such boring, detailed issues. Meanwhile, Ofcom with their £126.7m 2007/08 budget are tied up on "political issues".

But what of consensus...? I'm not a huge fan if I'm honest. It strikes me that the very act of building consensus takes so much time and money that it kills innovation. Surely it would be better to get quick decisions, accepting that there will be decisions that occasionally go against you, but knowing that at least you have certainty. Nothing kills innovation like uncertainty.

Take this concept a little further and you have a merger between Ofcom and Openreach. Virgin may not like that very much, but sometimes you need to move on and leave stragglers behind.

Such an organisation could be built on utilitarian principles and act so as to maximise the benefit of technology to UK Plc. Boundaries and universal service obligations would be dictated by government and the aspirations of the people and would act to frame the pure principles of acting for the greater good.

Ok, so I'm being mischievous. I certainly haven't thought through the implications of my slightly tongue-in-cheek conclusion to the role Ofcom should play. But there is the backdrop of an increasingly political environment in which policy will come increasingly from government. Because of the subjective nature of such policies, it probably makes sense to give those decisions to those who are accountable to the people via their need to be elected every 4 years or so.

Ofcom's market research is great but worth £126.7m a year? Not for me. There must be better value for money for me as a tax payer. What is it? I'd love to hear your views in comments...

Labels: BT, Ofcom

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"Winning ugly" is an expression commonly used in sport. How you play is less important than the results you achieve - at least when the stakes are high and competition intense. But, when participants put their results ahead of their principles, something of the beautiful game dies.

Ah, the beautiful game! The golden glow of ideology that keeps communities together...

The internet community has its own ideology. Open access, flat rate pricing. Ubiquity. Quite communist in fact.

But just as communism was shown to be inconsistent with competition, so we are seeing the destruction of the internet ideology by the intense competition for broadband access of the early 21st century. All animals are equal, but some animals are more equal than others.

Companies are [forced to] / [choose to] play ugly to win. The last bastion, ubiquity, is once more under threat as the largest providers decide that there should be one price for those with LLU and another, higher price, for those without.

We have been here before, sort of. The phased rollout of broadband between the late 1990s and 2005, saw many instances where your address determined whether you got superfast (512k) broadband or were stuck in the slow lane with dial up (56k). The ubiquity returned as BT pre-empted calls for a universal service obligation by announcing that it would offer broadband to 99.6% of the population. Unless you were in that 0.4%, you would be able to participate in "the revolution" regardless of what size animal your telephone exchange was.

So here we go again. Now that some can get supersuperfast broadband (24M), having only superfast broadband is again being touted as a social disadvantage. Is it? No one can say for sure, although that hasn't stopped people trying to paint a doomsday version of UK Plc as a third world country because we can only get 2M in the villages. Before you get too carried away though, consider genuine third world countries are still only connected by satellites to the backbone, with 500ms round-trip times. I live in a village and can only get about 2.4M, but take it from me, it's not third world.

Ofcom's response is interesting insight into political tap-dancing. To the service providers, Ofcom "can understand" their dilemma but (to the public), their hands are tied "it would be for the Department of Trade and Industry to decide whether to extend the USO to broadband"

It makes me wonder who Ofcom is representing? The government, the industry or the people? They have created the competition in the market today, which has brought a huge number of benefits to what was once a stagnant pool of underdeveloped metal beneath our streets. Are they washing their hands of the consequences? Policy has been so successful at creating competition that players in the market like AOL sometimes have to win ugly just to survive. Is Ofcom a proponent of the beautiful game...? Probably not, but I think we should be told.

Labels: BT, digital divide, Ofcom

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