Ultrafast BritainBroadband report

Author: Dan Lewis

IoD Policy Report Feb 2016

About the authorsDan Lewis has been working with the IoD since 2011 on Energy Policy. Since March 2014, his brief has been expanded more broadly to include Infrastructure, incorporating energy as well as roads, railways, airports, ports, utilities, telecommunications, flood defences, waste and local amenities. His role is to meet and engage with the business community on infrastructure and energy issues, develop and write policy papers and contribute to the media on behalf of the IoD.

Dan has been working in the public policy world and contributing to the broadcast and print media for over 10 years; originally as Research Director of the Economic Research Council from 2003-2009. He subsequently left to start two new organisations - Future Energy Strategies www.future-es.com and the Economic Policy Centre www.economicpolicycentre.com which has fostered two new platforms - www.ukcrimestats.com, the leading independent crime, property price and energy data platform by postcode and www.ukgovspending.com (in development) - a deep insight into government spending.

Prior to 2003, he worked in banking, asset management and corporate treasury in both Luxembourg and London.

Dan LewisSenior Adviser – Infrastructure Policy

dan.lewis@iod.com

IntroductionThere are times in economic history when making the right decision has long and lasting repercussions for an entire nation. Getting the information revolution right is one of those seminal decisions. The good news is that Britain leads the way in embracing the digital revolution. Some 12.4% of our GDP in 2016 is expected to come from the internet economy, more than double our closest competitor in the G20 - South Korea, which sits at 8%.1 California may have the mecca for start-ups in the shape of Silicon Valley, but the internet is set to account for only 5.4% of the US economy this year. Equally impressive, some 23% of all transactions this year are expected to take place online, streets ahead of our nearest competitor.2

The entrepreneurial revolution is not limited to digital products, of course, but for start-ups and larger firms alike the internet can represent a fast, easy and cheap route to existing and new markets. With the world’s most advanced internet economy permeating every area of British life, it provides opportunities even for non-digital firms to start, operate and flourish. The fashionable firms may be in financial technology in east London, but even crofters need to fill in online tax returns. The infrastructure that surrounds the digital economy – broadband and mobile internet – is now the fourth utility. Its importance cannot be overstated.

Yet Britain lives a paradox. It has some of the worst broadband speeds in the developed world, some of the least reliable broadband in rural and urban areas alike, and patchy mobile coverage. Our digital economy has grown in spite of, not because of, our digital infrastructure.

Our digital infrastructure therefore needs improvement now, but that is not enough. We must attempt to future-proof it for increased demand.

Data consumption is currently growing at around 50% or more per year. There are three main drivers:

• The high dependence on service sector firms in the UK economy; historically productivity gains have been far easier to achieve (and measure) in manufacturing than in services.1

• Faster broadband speeds beget more demand for internet use. Between 2014 and 2015, the average broadband speed increased from 23 to 28 Mbps, and the average monthly data usage increased from 58 to 82 GB.3

• Bandwidth hungry uses are proliferating. Faster internet speed has enabled the use of video on demand services which are the highest consumers of data.4

This is particularly interesting for two reasons; one, according to Professor Andrew Ellis and his team at Aston University, we are already approaching a capacity crunch for fibre. In short, internet traffic is growing faster than the ability of the backbone fibre optic network to carry it. A point may be reached in 7 years’ time when consumers may have to be rationed and pay more to access the internet as maximum capacity is reached – a rather unwelcome return to the days of peak and off-peak dial-up access.5 Two, we are coming ever-closer to the arrival of the ‘Internet of Things,’ the much-predicted network of sensors and wireless products that will be internet connected, sending out new packets and volumes of data that did not exist before, where the internet and broadband do not at the moment reach. “The internet” is soon to become much more of a two-way immersive experience.

And what about businesses? How do IoD members use the internet? 6

3

Ultrafast Britain

1 Boston Consulting Group, The Internet Economy in the G-20, 20152 Ibid

3 Ofcom, Connected Nations 2015, 20154 Ibid

5 Daily Telegraph, “Internet ‘rationing’ needed as UK cannot keep up with demand”, 3 May 2015

6 Results from a survey of 1,159 IoD members via an online platform – “Policy Voice” – from October 14-29 2015

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But more than these everyday activities, with ever-faster speeds, new capabilities and new industries emerge. Virtual reality is set to burst into life this year; high-quality broadband infrastructure is crucial to ensuring that British companies are able to innovate and thrive in new industries that could well be key drivers of economic growth in the future. The digitisation and automation of transport will require adequate digital infrastructure, but could be revolutionary; self-driving cars could well become reality, Network Rail believe they could increase capacity by 40%, and the National Air

Traffic System hope to increase capacity in the air above us by reducing the gaps between planes from 9-10 miles to just 1. And what about the flexible job environment? If ultrafast broadband becomes the norm, distance becomes less significant for our army of commuters, potentially reducing the need to be in central cities and lessening the load on existing transport infrastructure.

The Government is committed to speeding up the UK’s broadband, of which more later. What impact do our members think that would have on their own organisations?7

7 Policy Voice survey, October 2015

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Table 1

Aside from everyday activities (email, browsing etc), for which of the following activities do you and your staff use your broadband connection?

Downloading large media

files

Video conferencing

Video or audio streaming

Uploading large media files

Activity which requires a very

high-speed connection

0%

10%

20%

30%

40%

50%

60%

70%

58% 56%49%

45%

17%

Table 2

What would be the impact of a significant increase in broadband speeds on your organisation?

Improve our productivity

Increased flexible working

Greater revenues

Invest more Hire more staff

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

78%

56%

38% 34%

13%

8 Department for Culture, Media & Sport, Britain’s Superfast Broadband Future, 16 May 20119 Department for Culture, Media & Sport, Government plans to make sure no-one is left behind on broadband access, 7 November 2015

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Perhaps unsurprisingly, considering the UK’s disappointing performance on this score compared to competitors, more than three quarters of IoD members believe faster broadband would contribute to improved productivity. More than half of our members too suggest that they would be more inclined to allow greater use of flexible working, which neatly aligns with wider trends in the job market towards just that. Government, too, should not ignore the fact that more than a third of members would be keen to release investment as a result of faster internet speeds.

Britain’s telecommunications network and resulting broadband and connectivity woes did not appear overnight. They are the result of nearly two centuries of evolution, dating all the way back to the first nationalisation of communication mediums in the days of Disraeli. It was only in 1981, with the introduction of the British Telecommunications Act, that any Government had seen fit to roll back the monopoly powers of the Post Office and set in motion a period of

Ultrafast Britain

“ Access to the internet shouldn’t be a luxury; it should be a right – absolutely fundamental to life in 21st century Britain. That is why I’m announcing a giant leap in my digital mission for Britain. Just as our forebears effectively brought gas, electricity and water to all, we’re going to bring fast broadband to every home and business that wants it. That’s right: we’re getting Britain – all of Britain – online, and on the way to becoming the most prosperous economy in the whole of Europe”9

David Cameron Prime Minister

demonopolisation and competition (of which more later) that has continued to this day.

All Governments have promised to do great things with the internet. In December 2010, the then-Coalition Government published Britain’s Superfast Broadband Future, with the expressed aim of Britain having the best superfast broadband network in Europe by 2015.8 ‘Best,’ of course is a vague term; then-Culture Secretary Jeremy Hunt clarified that this meant price, coverage and speed in a 2012 report.

Since then, the new Conservative Government has gone further, announcing early plans to ensure that every home and business can have access to fast broadband by 2020, through the creation of a broadband “Universal Service Obligation” of 10 Mbps. At first sight, it seems a laudable aim – but the situation today demonstrates just how much of a challenge ‘being the best’ really is.

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A national average of download speed is not, in truth, a particularly useful measure; the UK does not have an equal geographic distribution of population or economic activity. Very high bandwidth and world-leading speeds in remote corners of the UK will never have the same positive dynamic impact as in a concentrated bustling city centre with thriving digital businesses. So it has to be a concern that London, Europe’s biggest city by almost all economic measures and a key driver of the UK economy as a whole, has such a poor ranking compared to other capital cities; ranking, according to one analysis, just above Minsk at 26th in the league table (right).10

This is not an isolated survey. The European Digital City Index, created by NESTA & the European Digital Forum, placed London at the very top of the tree for start-up digital businesses.11 The combination of innovative entrepreneurs and access to finance in the City represents a remarkable ecosystem. However, London ranks just 12th in Europe on the quality of its ‘digital infrastructure,’ 26th for download/upload speeds and 28th for mobile internet.12

It’s not just the capital. Cambridge ranks as the 11th best city for digital start-ups, but again, lags in digital infrastructure; download/upload speed at 22nd, mobile speed even worse at 31st. It is a similar story in Oxford; 13th overall, but 20th for download/upload speeds and 32nd for mobile speeds.13

What about outside the major cities? Rural areas continue to suffer from extremely poor quality broadband. About 1.5 million premises – a full 48% of all rural premises – are not able to access the 10Mbps speeds that the Prime Minister wants.

These damning findings are mirrored in surveys of our own members.

While it’s clear that more rural members than urban members are stuck at the bottom of the broadband race, it’s also clear that dissatisfaction is far more prevalent amongst our rural members than in other areas.

Even aggregated across the UK, the UK does not seem well placed for winning the global race, ranking 23rd for download speed.14 Even this may be only a temporarily high

The situation today

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Table 3

Hot-spots, not-spots, and sort-of-mild-spots

Rank City Jan-15 Speed (Mbps)

1 Bucharest 80

2 Paris 79

3 Vilnius 60

4 Stockholm 59

5 Reykjavik 50

6 Bern 49

7 Copenhagen 48

8 Bratislava 44

9 Riga 43

10 Helsinki 43

11 Vienna 42

12 Oslo 40

13 Budapest 40

14 Luxembourg 40

15 Dublin 39

16 Amsterdam 39

17 Tallinn 39

18 Sofia 38

19 Prague 37

20 Lisbon 35

21 Madrid 33

22 Kiev 33

23 Berlin 27

24 Brussels 27

25 Warsaw 26

26 London 25

27 Minsk 18

28 Sarajevo 13

29 Zagreb 12

30 Rome 12

31 Belgrade 11

32 Athens 10

33 Nicosia 9

10 House of Lords Select Committee on Digital Skills, Make or Break – The UK’s Digital Future, February 201511 Nesta, European Digital City Index, 21 October 201512 Ibid13 Ibid14 InternetSociety.org

ranking; developing countries are investing in new technologies which could well see them leapfrog the UK.

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Ultrafast Britain

Table 4

What is the potential download speed of your fixed broadband connection? 15

0%

5%

10%

15%

20%

25%

30%

35%

40%

Up to 2 Mbps 2-12 Mbps 12-24 Mbps 24 Mbps

Rural

Small/medium-sized town

Outskirts of large cityUrban/City-centre

Table 5

Overall, to what extent are you satisfied or dissatisfied with the overall product or service provided by your broadband provider? 16

0%

10%

20%

30%

40%

50%

60%

Rural Non-rural

Satisfied

Dissatisfied

35%

43%

53%

24%

Table 6

How satisfied are you with your download and upload speeds? 17

Satisfied

Dissatisfied

0%

10%

20%

30%

40%

50%

60%

70%

33%

51%

Fixed-line downloadRural Non-Rural

60%

23%

31%

50%

Fixed-line uploadRural Non-Rural

55%

23%18%

60%

Mobile internet download

Rural Non-Rural

39%

31%

15%

60%

Mobile internet upload

Rural Non-Rural

33% 32%

15 Policy Voice survey, October 2015 16 Policy Voice survey, October 201517 Policy Voice survey, October 2015

It should be noted that while the price of broadband in the UK remains relatively low by international standards, the cost of communications (Post, Telephone and Internet) has been rising – uniquely, in fact, compared to other major European nations.

One reason for this upward trend is the increase in Line Rental charges. Ofcom, until 2006, controlled line rental charges; the decision to deregulate in 2006 on the grounds of increased competition in the market seems premature and has clearly been felt in the pocket of both businesses and consumers alike.

8

Price18 Redburn, Submission to Ofcom Strategic Review, 201519 Ibid

IoD Policy Report

1998 2000 2002 2004 2006 2008 2010 2012 2014

European Union (28 countries

Germany

Spain

France

Italy

Netherlands

Austria

UK

Table 7

Price comparison across EU-28 - Eurostat Communications CPI 18

-40%

-50%

-30%

-20%

-10%

0%

10%

20%

1996

Table 8 19

12

10

14

16

18

20

22

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

6% CAGR

10% CAGR

9

20 This number has been taken from Openreach; however, there is some confusion on this figure.21 Financial Times, “BT under pressure as race for broadband market share speeds up,” June 29 201522 Policy Voice survey, October 201523 House of Commons Hansard, 12 October 2015 24 Competition and Markets Authority, CMA response to Transport for London’s private hire regulations proposals, December 2015

Ultrafast Britain

The IoD has a Royal Charter obliging us to “encourage and foster a climate favourable to entrepreneurial activity and wealth creation” and, as such, we are inherently wary of areas in which there are questions of limited competition. Since 1981, there have been moves to deliver increased competition in a market that had for more than a century been held back by the restrictions of public ownership. The early years of Oftel (the industry’s first regulator, bundled into Ofcom) were very much geared to creating competition where there was none. Whilst Ofcom has done much in the intervening years to open up previously closed markets, we are a long way from perfect competition.

So-called “local loop unbundling” regulations – which originated from the European Commission, laid down in December 2000 obliged all dominant parties across Europe (BT in the UK) to provide third parties with unbundled access to their ‘local loops.’ In essence, this gave third party providers the ability to install equipment and sell services from the exchange directly to customers at the end of the network. This unbundling has been successful in increasing the quantity of standard broadband providers (up to 17 Mbps) to 93, according to one source, albeit not all simultaneously available in one location.20

However, there are only around half as many providers of superfast broadband; dominated by BT, TalkTalk, Sky and Virgin Media. The market share of the non-Big 4 is declining.21

Competition

80

60

Table 9

20

0

40

100

20152014201320122011

BT

Virgin

TalkTalk

Sky

Other

This chart is interesting for a number of reasons, not least when compared to the so-called ‘Big Six’ utility providers whose market share sits at around 86% and whose dominance of that market led to a Competition and Markets Authority investigation.

Further, there is no obvious sign of a coming decline. Of consumers upgrading to superfast broadband, according to Ofcom, at least 74% of the upgrades have gone to BT, compared to 40% for all connections. IoD members, from right across the business spectrum, confirm other studies; some 53% receive broadband provision from BT, and the closest competitor – Virgin Media – sit at 9%.22

The Government has not done enough to harbour competition in the sector. Indeed, the rising market share of the lead incumbent has emboldened critics of the government’s tax-funded programme to roll out superfast broadband faster across the UK. Some commentators feel this ongoing market share increase would not have been possible if BT had not won all 44 of the contracts for Phase 1 of the programme, to ensure superfast access in 90% of the country. BT then won 42 of 47 contracts in Phase 2, for the next 5% of the country. Phase 3 is in the early stages, and does seem to be more open than it has been previously both in diversity of suppliers and technologies deployed but it is a much smaller segment. This has led to criticism. Labour’s Stephen Timms MP, for example, has argued that the design of the auction for broadband contracts, in contrast to the more open process in the 3G auction in 2000, failed to make sure that there would be new entrants in the market. “The consequence today,” he said, “is that BT has Ministers over a barrel.”23

While there does seem to be scope to make the market more competitive, the IoD does not want to suggest that this necessarily means that BT, or any of the other three major players, is providing a bad service for customers: indeed, of those members who receive broadband from BT, 46% of members report satisfaction against 31% registering dissatisfaction. We would merely note the Competition and Market Authority’s

10

If this report has painted a bleak picture, all is not lost; we are on the cusp of a technological revolution which could go a long way towards addressing many of our internet connectivity concerns.

Fibre to the PremiseFibre-to-the-premise (FTTP) is for now the highest performing internet connection, and extends a fibre cable from the exchange to individual homes, rather than simply from the exchange to the cabinet. This makes a significant difference in quality. By bringing a fibre cable into the home or office, symmetrical upload and download speeds become available of 1 Gbps with very low ‘latency’ rates (high latency causes buffering, low latency reduces it). Costs to serve premises have fallen dramatically due to the use of micro-trenching, achieved by using a motorised saw that can dig a shallow trench at a depth of 23 inches in the pavement or road above any other utility connections at a rate of 400 metres per day. Today FTTP in the UK is being deployed by CityFibre, Gigaclear, TalkTalk, Hyperoptic, Community Fibre and others. It is also easy to upgrade and maintenance light – only 20-30% of the cost of copper once installed. Gigaclear is currently trialling a 5 Gbps service. US Internet in Minneapolis have for a year been offering a 10 Gbps service.

The challenge is this: the superfast option being deployed across the UK by Openreach is fibre-to-the-cabinet, which can deliver speeds at up to 76 Mbps depending on the distance to the cabinet. The difference – 1 Gbps versus 76 Mbps – is an extraordinary one. In the UK, the penetration of FTTP is just 0.003%, comparing extremely unfavourably with other European countries.25

It is worth noting that penetration of FTTP with businesses is much higher – many providers, including BT, offer it to all of their business customers (at additional cost). This is perhaps why some 26% of IoD members have FTTP service, though this falls to 11% in rural areas.

Tomorrow’s technologies 25 Ofcom, Connected Nations 2015, 2015

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statement on competition in another context; that “consumers benefit from effective competition exerting downward pressure on prices and upward pressure on service quality and standards.”24

Digital infrastructure, of course, requires physical infrastructure – and the physical quality of the UK’s digital infrastructure is at once poor and unknown. First, BT does not have a clear record on the quality, positioning and connectivity of the copper network at the local level. The quality of the copper wire varies widely, depending on whether it is pure copper, a copper aluminium alloy, copper coated aluminium or even just aluminium, all of variable thickness with a corresponding impact on the throughput of data. This makes it hard for third parties to know what level of service they can offer customers. Similarly, BT offers a service of marking footways, to show where pipes and cables of other utilities are buried and at what depth to prevent other operators disrupting them. However, a lack of proper record-keeping in the early days of cable and pipe-laying means that there is even sometimes uncertainty about which side of a road they are located on, leading to unnecessary expense and time in digging up tarmac and pavements. This is not dissimilar to Network Rail not always having maps or detailed knowledge of where cables were laid in the 1960s and 1970s, which has impacted costs of the rail upgrade programme.

Further, unlike our power, gas and water networks that have to match capacity and demand in real time with prices, there are great unknowns within the whole telecoms network about quality, reliability and consistency of service. There are privately developed apps in early stages, but there remains work to do.

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26 Policy Voice survey, October 2015

Table 10

Fibre to the Premises Penetration

0%

5%

10%

15%

20%

25%

30%

35%

40%

Lith

uani

a

Swed

en

Latvia

Russia

Roman

ia

Norway

Portugal

Bulgar

ia

Slove

nia

Denm

ark

Finlan

d

Slova

kia

Estoni

a

Luxe

mbour

g

Nethe

rland

s

Hungar

y

Ukrain

eSpain

Turk

ey

Franc

e

EU-28

Maced

onia

Switz

erlan

d

Czech

Rep

ublic

Italy

Unite

d Kin

gdom

Table 11

What is the broadband connection to your primary place of work? 26

0%

10%

20%

30%

40%

50%

Fibre-optic to the premises

Fibre-optic to the cabinet

Copper wire to the cabinet

The internet connection is not

broadband via cable

Don’t know

Rural

Non-rural

Overall

13

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Satellite broadbandMany Britons have been receiving data from satellite for years since the advent of satellite TV broadcasting in the late 1980s. Satellite broadband is the same principle but with higher bandwidth, and can serve remote, poorly connected locations at much lower cost, more quickly. All of today’s broadband satellites operate in geostationary orbit at a height of 22,000 miles, which has a time delay effect known as latency (making playing video games like Call of Duty difficult and high frequency trading non-viable). However, download speeds are improving. ViaSat1 offers 24 Mbps at the moment, and two new satellites – ViaSat 2 (due to launch later this year) and ViaSat3 (which will be operative from 2020) promise far greater speeds of 100 Mbps and 1 Gbps. Satellite broadband is well established in America, with 700,000 subscribers, but there are only a few thousand in the UK. It is also used by commercial airliners, who offer internet access and streaming video services like Netflix to passengers. Unfortunately, the satellite broadband industry in the UK suffers from a lack of spectrum to operate in and, were they to have more access, the industry feels it could help build a hybrid and more resilient infrastructure that is not purely reliant on terrestrial hardware.

G-Fast (or Fibre-to-the Distribution-Point)BT is currently trialling G.Fast, which essentially moves fibre one step closer to the premise – a halfway house between FTTP and FTTC. While not perfect, it does provide ultrafast for download. BT believe they can roll out G.Fast to 10 million homes and premises by 2020.

Aerial FibreTo avoid the costs of digging trenches in pavements and to the premise, in some cases it may be possible to deliver FTTP wound around existing telegraph poles and lines.

Hybrid fibre-coaxial cableThis is fibre optic cable to a cabinet, followed by a coaxial cabinet to the home. That is what Virgin Media use, having bought out the existing cables of NTL and Telewest laid in the 1990s. This offers speeds of up to 200 Mbps with the latest upgrade.

The Universal Service ObligationAs previously discussed, the Government now has a policy to deliver 10 Mbps broadband (an increase from the existing 2 Mbps) to every home and business in the country, and because it is a Universal Service Obligation this will, once formally introduced, be legally binding. This raises several questions.

What was wrong with 2 Mbps?2 Mbps was deemed adequate in the mid-2000s, just as BBC iPlayer was launched. Assumptions about technological advance made then rapidly became outdated with the advent of tablets and smartphones, and it took no consideration of the ever-increasing desire of businesses to use cloud-based backups and storage. In essence, the forecasts for usage proved inadequate .

Will 10 Mbps be high enough?On the face of it, a five-fold increase is highly significant to those communities that have 2 or less Mbps. But the shifting technological demands, from cloud storage to ultrahigh definition and the internet of things, will mean that within a decade anything than less than symmetrical ultrafast of 300 Mbps for download and upload are likely to again prove insufficient.

Is it possible to achieve 10 Mbps by 2020?Nobody in the industry is particularly concerned about missing this target; indeed, simply expanding 4G coverage and existing satellite broadband capabilities would solve this quite easily in existing not-spots.

How does it compare?Across all of Europe, only 6 other nations have a broadband USO and they have set the bar very low.

All in all, the policy will almost certainly be a success. Crucially, though, it will be a success largely on the terms it has set for itself, rather than the more demanding test of what business actually requires.

USO Speed Nations

1 Mbps Belgium, Croatia, Finland, Spain, Sweden

2 Mbps Malta

10 Mbps United Kingdom (TBC)

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IoD Policy Report

Openreach is BT’s arm’s-length infrastructure division, responsible for rolling out the fibre network across the UK. It was set up in the aftermath of Ofcom’s last strategic review in 2005, and is the ‘Network Rail’ of the broadband industry – it owns the kit, and leases cables to broadband providers. Openreach is wholly owned by BT, though it is worth noting that BT say the fibre delivery company is “heavily regulated” and “operates at arm’s length from the rest of BT.”27

It is fair to say that this arrangement has come in for criticism. Non-BT providers have claimed missed appointments, and – in TalkTalk’s case – have criticised what it sees as “slow and discriminatory” product innovation.28 Vodafone, a relatively small player in fixed services, but a significant one in mobile coverage, has cited its experience in the UK in negative comparison to its experience in Spain and Portugal, with particular regard to their ability to access the “physical infrastructure” of cabinets, ducts and poles and the cost of doing so.29

The IoD member viewOfcom is currently engaged in a review of the telecoms market and the continued monopoly ownership of Openreach by BT is expected to be high on the agenda.

The infrastructure: BT Openreach 27 ITPro, “BT clings on to Openreach amid calls for spin-off,” 1 February 201628 TalkTalk Group, Ofcom Strategic Review of Digital Communications, June 201529 Vodafone Group, Submission to Ofcom’s Digital Communications Review, October 201530 Policy Voice survey, October 201531 Policy Voice survey, October 2015

Table 12

To what extent were you satisfied or dissatisfied with the service your organisation received from BT Openreach? 30

Table 13

Do you think BT’s ownership of Openreach is positive or negative for the quality (coverage, speed, reliability and cost) of broadband services in the UK? 31

Very satisfied

Satisfied

Neither satisfied nor dissatisfied

Dissatisfied

Very dissatisfied

Very positive

Slightly positive

Neither positive nor negative

Slightly negative

Very negative

Don’t know/no difference

Ultrafast Britain

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IoD Policy Report

BT are firm in their contention that, at as an ‘anchor tenant’ of Openreach, it has a vested interest in investing in the service. They contend they have the greatest need for a fully-operative system so that they are able to sell network-demanding content like BT Sport and now, after a merger, EE. Detractors counter that this mistakenly conflates anchor tenancy such as a large department store in a shopping mall with vertical integration. Competitors also claim that, if Openreach was broken up, other providers would also be willing to invest due to their new shareholding in Openreach.

IoD member data suggests that there is a net satisfaction rating of -8 with regards to member

32 Fibre to the Home Council Europe, Winners and losers emerge in Europe’s race to a fibre future, February 201333 Citi Research, European Telco Regulation – Towards an Open Duct Future, February 2013

experience of Openreach, and that there is a feeling that BT’s ownership is not beneficial to the quality of broadband services in the UK.

At the time of going to press, we are awaiting the conclusions of the Ofcom Strategic Review - some of which will relate to the future of Openreach. We would strongly urge the Competition and Markets Authority to consider in great depth the conclusions of the Ofcom review and, if they feel there has not been enough of a focus on increasing competition in the Ofcom review, should weigh up whether there is sufficient public interest in undertaking a full CMA investigation into the market.

Foreign Experience – What can the UK learn from abroad?All countries of course are different, and work within different legacy telecoms systems, regulatory environments, players and standards of living. However, that should not stop us looking abroad, and there are two very successful examples that the UK should pay close attention to when considering future broadband growth and investment.

LithuaniaLithuania officially has the third fastest connections in Europe. This is no small achievement, considering it has a GDP per head approximately a third of the UK’s and a fifth of the population density. Nonetheless, it is the leader in FTTP across Europe, and over 100 Internet Service Providers competing for business for 1.2 million households. This has not happened by accident. 32

In 2004, Lithuania’s equivalent of Ofcom – RRT – mandated the compulsory sharing of all passive infrastructure “suitably for construction of electronic communications networks.” To further incentivise network investment, RTT chose a very low cost-of-access model to ducts and poles. Together, these two measures led to a rapid build-out predominantly by so-called AltNets – essentially, the smaller players – in strong competition with the national incumbent TEO, who were then of course nudged into further investment themselves to keep up. In Lithuania, the typical price per metre per month of duct access is €0.028 whereas in the UK it is €0.078. There are no limitations on use in Lithuanian ducts and they can be freely used by mobile operators, as well as AltNets, unlike in the UK.33

New ZealandAcross the UK, many telecommunications

companies have been calling for Ofcom to refer BT to the CMA with regards to their ownership of Openreach. There is a well-functioning example of where break-up has worked, in New Zealand. In 2011, overseen by the regulator and approved overwhelmingly by shareholders, incumbent Telecom NZ Ltd was structurally separated into two separate companies, Chorus and Telecom NZ Ltd (which became Spark New Zealand). Chorus, the equivalent of Openreach, is responsible for the network infrastructure and Spark operates as an ISP and mobile operator. Crucially, Chorus was not sold-off, but spun-off.

This meant that existing shareholders were able to see an increase in value and retain enough cash flow for future investments. Since both being listed in 2011, Spark’s share price has increased 63%, and Chorus’ by 13%. In the meantime, New Zealand is racing ahead not just in delivering more fibre network investment but in a flourishing range of consumer choice and a goal of 75% FTTP penetration by 2020. The financing of New Zealand’s rollout is unique too. The Government is spending NZ$929 million over 8 years, but it is not technically a subsidy – investment is split 50:50 between unsecured and non-interest bearing debt and dividend free equity until 2025. The Government has also been careful to limit Chorus’ building share of the ultra-fast network to 70%.

Czech RepublicSo successful has the separation been that O2 in the Czech Republic voluntarily structurally separated in August 2015, spinning off their fixed and mobile infrastructure into a new company called CETIN. Other countries, not just the UK, are looking at this as a way to fund future network infrastructure investment beyond the resources of the incumbent.

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Ultrafast Britain

The United Kingdom is at a crossroads. We have the leading internet economy in the G20, and yet some of the poorest coverage and download speeds of any industrialised nation. The demand for data is growing exceptionally fast, but the fixed access network is woefully behind the curve for businesses and consumers alike. BT have done well to extend the life of the copper network, but this is not going to be an adequate solution in the future ; incremental improvements utilising pre-existing assets based on short-term targets are no longer appropriate in a non-linear digital world.

Britain needs to have ambition, vision and longer-term infrastructure planning. This requires looking further into the future than the next five years and estimating what demand and technologies will look like.

The prize is huge; at a time when politicians are obsessing over the UK’s “productivity” it is striking that more than three-quarters of business leaders believe increased broadband speed and reliability would boost their productivity, as well as boost the attribute the IoD feels is even more critical to long term economic success, agility.

Going forward, fibre to the premise has to be a big part of the solution for two reasons. In pure bandwidth limits, it is future-proofed. It also allows for modular innovation, linking up satellite, wireless, mobile and other connecting technologies for those areas of the country where laying cables is not financially practical, giving even the most rural businesses access to the digital economy.

Until 2030, policy needs to look at more immediate concerns. There has been a priority given to connectivity to the home, but business needs to be given much higher priority access to the faster networks and wants to see more competition in the market to drive up standards and drag down prices.

ConclusionAbove all, we need investors who seek a longer term return beyond the typical 3-5 year telecom company investment cycles. That means setting a longer term and more ambitious target than the Government has currently set, and finding ways to bring in some of the $36 trillion sitting in worldwide pension funds to our infrastructure investment.

As big infrastructure projects go, upgrading UK broadband is much lower cost, easier, and much more likely to make a healthy return for investors than many other unfunded and larger infrastructure ambitions on paper today. The alternative, business as usual, runs the terrible risk of spending twice or possibly three times on upgrading copper networks, remonopolisation and, down the line, increased regulatory oversight and burden.

The cost in lost business and opportunity before moving to a future-proofed 21st century broadband infrastructure is sizable, but so are the benefits if we get it right. The time for action is now.

18

IoD Policy Report

Ofcom will shortly publish the results of their strategic review, which may include a market investigation reference to the CMA on the question of Openreach’s ownership. The IoD takes no view on whether Openreach should be separated from BT, but would urge the CMA to seriously consider a full investigation (though this would be unusual), to see whether competition was being effected negatively.

Such an investigation should be undertaken with no prejudices and without political interference. There are good arguments on both sides of the debate, and the CMA’s record over the three years of its existence suggests it is run professionally and with sufficient rigour and independence to suggest it can handle a review of this scale. The IoD takes no view on whether Openreach should be broken up, but an investigation of this monopoly area of provision with such a crucial knock-on effect for our ever-more crucial digital infrastructure is now justifiable.

Ofcom should consult on how to significantly lower Physical Infrastructure Access charges to ducts and poles, if necessary lower than BT’s costs, and streamline and simplify PIA regulation to the point where they are no longer a barrier to entry

The Lithuanian model suggests that in lowering PIA costs, we would see significantly enhanced competition, increased speed and services and additional investment in the digital network. Not every country is the same, but sufficient lessons have been learnt to suggest that an Ofcom consultation is now justifiable. Small countries usually have stronger arguments than larger ones like the UK for incumbent monopoly power but Lithuania shows what can be done.

Policy RecommendationsSet a mid- to long-term target of 10 Gbps across the UK by 2030

The Government’s USO of 10 Mbps by 2020 is a welcome aim and it is likely to be successful. But it is time to be more ambitious , and the relaxed approach the industry took towards meeting the target when it was announced indicates its lack of the necessary ambition. Technological innovation is not a linear progression but an exponential one. A longer-term target would future-proof the network to ensure that British companies are able to innovative in new industries made possible by higher-speed broadband, radically increase the global competitiveness of UK firms, encourage foreign investment, and cement our place as a leader in the digital economy.

Design a new auction with the 10 Gbps target for 2030 that aims to bring in new entrants, and sets a ceiling on what share of the contracts any one supplier can win. The new rollout should start in 2017/18

The previous competitions for the roll-out of superfast broadband have been flawed in their design and have resulted in a lack of adequate competition. A new auction for ultrafast broadband is necessary in order to meet our proposed target, and built into this auction should be provisions to ensure that it is the beginning of a new age of digital competition.

Ultrafast Britain

The Institute of Directors

The IoD has been supporting businesses and the people who run them since 1903. As the UK’s longest running and leading business organisation, the IoD is dedicated to supporting its members, encouraging entrepreneurial activity, and promoting responsible business practice for the benefit of the business community and society as a whole.

www.iod.com

Institute of DirectorsFor further information on this report, please contact:

Dan LewisSenior Advisor on Infrastructure Policy020 7451 3280dan.lewis@iod.com

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