Telco 2.0™ Research

The Future Of Telecoms And How To Get There

Digital Britain - a grand vision but an impractical plan

Any UK citizen would applaud the ambition of the Digital Britain Report:

"to secure the UK's position as one of the world's leading digital knowledge economies"

We believe that the breadth of the scope of this ambition is the real problem of the report: too many intertwined companies are affected, especially when the government is pursuing a policy of Industrial Activism, which is longhand for intervention. Only time will tell whether benefits outweigh the costs of this intervention, but our initial impressions are not good. In this note, we examine three of the key findings which have the largest impact on telcos.

The Universal Service Commitment (USC)

"11% (2.75m) of households today cannot enjoy a 2Mbps connection. We will correct this by providing universal service by 2012."
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People have criticized the headline speed and whether this is sufficient for future proofing for future applications. We are more concerned about the mechanism for delivering 2Mbps to each home. The diagnosis of the problem is as follows:

  1. Problematic home wiring (c.1.9m homes);
  2. Telephone line too long (c.550k homes);
  3. Random network effects (c.300k homes).

Home wiring is expected to be solved by self-help in 800k homes and public funds will required to solve 1.1m homes. Obviously, the big question here is why some people should get their home wiring problems solved and not others? Even in the days of voice only, homeowners were responsible for their own home wiring and paid for it. Line length is planned to be solved for 420k homes with FTTC investment, presumably from the USC funds. Random network effects for 100k are to be resolved by "special investigation". We would have thought that random network effects should be solved as a normal part of business by whoever is providing the network - either OpenReach or Virgin Media. This leaves around 330k homes which will have to be remedied by delivery via wireless or satellite technology.

In summary, the Universal Service Commitment is of unknown cost/benefit. However, the report recommends establishing a new quango - the grandly titled "Network Design and Procurement Group" with initial funding from the Digital Switchover Help Scheme, which the BBC will fight tooth and nail not to give up as it comes directly from their budget. Even worse is that the government hasn't factored in how many of homes will not even want broadband once the lines are upgraded. A recent OFCOM survey showed there is a significant percentage of home-owners who are self-excluded for reasons of not being interested in the internet. In addition, there are a significant proportion of homes in the UK which are mobile only and don't have a fixed line.

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Next Generation Broadband

A key finding of the report is that the market-led deployment of Next Generation networks, whether by BT OpenReach or Virgin Media, will only lead to 60-70% of homes being covered. The report then makes the massive jump to saying that funding will be provided to extend this coverage to 90%. Note, not 100%, but 90%. The funding is to be provided by a new tax on fixed lines of 50p/month, which would raise approximately £150m/year or £1bn to 2017. Again, the "Network Design and Procurement Group" would be the gatekeeper to this set of funds.

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Again, the cost/benefit equation is not clearly articulated. The first question that springs to mind is why the "Final Third" should be subsidized by the 10% who will get no next generation network and the 60-70% who live in a market financed area. The alternative is, of course, is that the households who live in rural areas pay more. After all, is this not the current scenario with broadband? People who live in areas where there is limited unbundling or a cable network pay more for their service.

The next question is why the need for the quango to control the funds? An alternative would be just to give the money direct to BT Openreach. For sure, the give-away would have to be structured correctly to avoid the EU investigating for State Aid, but as long as it was open-network to all communications providers and didn't favour BT Retail, there is a large case to be put forward that there is a market-failure in rural areas. And further, it seems strange to be debating the last 10%' s position in 20 years' time when so little progress is being made delivering the first 10% now, or even the first 1%. Perhaps, the most important question is why the rush? Why not let the Universal Service Commitment give everyone 2Mbps and let the market cover 60-70% of homes and review the situation in 2012? In any case, we would suspect that there is little chance of any changes being enforced in law before the end of the current political lifecycle.

Further, if the last few years have taught us anything, it's that the regulatory environment is hugely important for the business models of the two infrastructure operators (BT and Virgin) and even more so for the independents using their networks. But the report doesn't settle what kind of wholesaling, unbundling, or network-sharing arrangements there will be for the NGN. Also, Telco 2.0 analysis of the iPlayer boom demonstrated that the question of backhaul is critically important to the survival of a competitive telco/ISP market. The report doesn't move it forward. Neither has it tackled the question of access to civil works - ducts and poles - effectively. Across the Channel, ARCEP chose the same week to reiterate its commitment to regulated open access at Layer 0. Without it, the whole issue is punted back to the question of regulated wholesale, unbundling, or network sharing.

Spectrum Still Going

With the parlous state of its finances, the UK government would love to raise some money by selling some spectrum to the mobile operators. Unfortunately for them, the MNOs can't seem to agree on the terms of any auction. The problem is twofold: firstly, the current imbalance of spectrum holdings amongst MNOs, and secondly, that at present it is not in the MNOs' interest to agree to an auction.

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As can be seen from the above chart only the original mobile licensees, Vodafone and O2, currently hold the most valuable 900MHz spectrum, and Three is a 3G only licensee. It is a challenge to appease all five MNOs given both their radically different spectrum holdings and their market shares. The government has been trying to license the 2.6GHz spectrum that has already been awarded in some European countries. The auction has been continually delayed since summer 2008 because of legal challenges by the MNOs.

Under the harmonised CEPT band plan it is divided into a paired component (2 x 70MHz) suitable for LTE and an unpaired component (50MHz) suitable for WiMAX. The 800MHz band will largely share the propagation characteristics of 900MHz spectrum - in other words it is much more valuable than the 2.6GHz. The common European band plan envisages paired spectrum (2 x 30MHz) which is being standardised for use with LTE. This spectrum needs to be cleared from its current primary use for analogue television. The Digital Britain report basically proposes a bandwidth cap of 2x65MHz and both Vodafone and O2 having to give up some of their 900MHz (GSM) spectrum to gain 800MHz (LTE) spectrum.

If the light is at the end of tunnel with an expected auction of mid-2010, there are still plenty of hurdles yet to overcome, such as yet another OFCOM consultation with potential for further legal challenges. The elephant in the room is whether, by the time of the auction, there will still be five MNOs left in the UK. Rumours of consolidation abound and, for a variety of reasons, the UK has the lowest return of capital of all the main European markets. Any consolidation will probably entail a complete revamping of the spectrum holdings issue.

Conclusion

All of the three proposed recommendations discussed above have little chance of being implemented in their present format. We believe that the path of bickering both behind closed doors and in public is likely to continue for the foreseeable future. We believe that the Digital Britain report was a wasted opportunity to change the digital landscape - it would be have been much better to have come out firmly on the side of one of the players, either the content companies, the communications providers, or the consumer. We believe that by trying to please everyone - the worst outcome has arrived - pleasing no-one.

The government comes out of this in the position of wanting various things, but not very much. They want to have competition, fibre deployment, and digital inclusion, and they would like to impress the content rightsholders - but they don't want any of these things enough to take decisions that might spoil any of the others. By contrast, the various lobbies involved want their interests very much.

It's been said that the US government's Pakistan desk will always struggle, because it doesn't deal with the Pakistani government's US desk, but with its Pakistan desk. The record of offering subsidies and regulatory easements to incumbent telcos in exchange for fibre deployment is not promising; the incumbents usually win. All told, if a lesson is to be learnt from the whole of the Digital Britain process is that consultations should be narrower in scope, more focused, and more action-oriented.