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Which appeals to you more this winter? Joining a luxury cruise in the Caribbean or getting on board a boat full of telecoms regulators?
If you’re tempted in this winter gloom to choose the more exotic option (and no one would blame you), let me set out the case as to why the regulatory boat is one you and your business should not miss.
Don’t let it put you off that the charterer is OFCOM, nor that the two big ‘boats’ are named the ‘Business Connectivity Market Review’ (BCMR) and Physical Infrastructure Market Review (PIMR). Sexy marketing was never part of the proposition.
But if I tell you that the BCMR and PIMR offer you the opportunity to shape your destiny in uncharted waters, does that not pique your interest just a tad more? These are key consultations on the future for fixed and mobile connectivity in the UK stretching out for the next 15 years. They are also the prelude to a mammoth review by OFCOM due to kick off in Q3 2019/20.
If you’re involved in telecoms in any way, the regulatory framework that emerges will govern your business’ costs, risks and opportunities for many years to come. The time to influence is now.
Both these consultations have been prompted by the Government’s ambitious strategy for the UK to become a world leader in digital connectivity. In the words of Jeremy Wright, former DCMS Minister, “We want to see 15 million premises connected to full fibre by 2025, with coverage across all parts of the country by 2033. We want the majority of the population to have 5G coverage by 2027.”
The UK is currently significantly lagging some of its major competitors in the roll-out of full fibre. 99% of premises have these ultrahigh-speed links in South Korea and 97% in Japan; in Portugal it’s 89% and in Spain 71%. But in the UK, the proportion of premises reached by full fibre stands at just 4%.
The Government’s goals require a huge investment in infrastructure – estimated at around £30 billion. To help ensure that this happens at pace across the whole country, DCMS policy is to promote competition among different networks, intervening only in commercially unviable areas (probably the c. 10% of premises in more distant rural areas).
A problem is that the investment case for alternative full fibre networks is challenging. Earnings from traditional services are at best static – consumers demand more for the same price. While BT is rolling out fibre at pace, and smaller operators such as Gigaclear CityFibre are also investing, other bigger projects are stalling. A mooted £1.5 billion investment by TalkTalk, for example, that would have connected over 3 million homes and business in ‘mid-sized’ towns and cities, has been pared back.
The Government has therefore tasked OFCOM with overcoming the barriers to deploying fibre networks and to create stable and long-term regulation that incentivises competitive network investment nationwide, with no areas left behind.
The main barrier to entry for new ‘full-fibre’ access network providers is the cost of the civil engineering work, especially the ducts and poles, which can represent about 80% of capital costs. Openreach (BT) owns most of these assets. In one market only – full-fibre based broadband – regulations require Openreach to give access to this infrastructure. But in all other markets, such as high-capacity leased lines, Openreach has a near-monopoly, or so-called Significant Market Power (SMP), making it difficult for other business or residential network operators to compete.
OFCOM wants to make it easier for operators other than BT to access both these ducts and poles and the conduits offered by other utilities, such as sewers. At the same time, it wants to assure itself that they will be offered on fair pricing terms and with an agreed quality of service. It also wants to incentivise Openreach to invest by providing the opportunity of higher returns on risky investments. OFCOM is seeking views on the appropriateness of its proposed remedies to overcome Openreach’s SMP in different parts of the country, and this is the focus of the PIMR.
By contrast, the sister consultation, BCMR, concerns the competition for leased lines – the high-speed, high-quality, point-to-point data connections used for connecting offices, mobile base stations, and broadband access networks, regarded as the backbone of the UK’s digital infrastructure.
With the aim of identifying where a single player exercises Significant Market Power that could act against competition and consumer interests, the regulator separates the market into two. It treats access services, which connect BT exchanges to end-user premises, as distinct from connections between BT exchanges, labelled as ‘inter-exchange connectivity’.
OFCOM’s preliminary finding is that effective competition in access services today is limited to central London and that BT has Significant Market Power in the rest of the UK (except Hull). In relation to inter-exchange connectivity, the regulator’s provisional conclusion is that BT has Significant Market Power at 5,000 (out of 5,600) of its local exchanges, where it faces competition from fewer than two competitors.
To help increase competition, OFCOM is putting forward in its consultations a variety of proposals in different parts of the country and markets, depending on the number of competitors it identifies for BT or Openreach.
These are a mixture of controls on price, quality of service, access to conduits for fibre and, in some cases, the imposition of a requirement on BT/Openreach to supply ‘dark fibre’ (leased unlit fibre, to which providers can attach equipment of their own choosing at either end to ‘light’ it).
The specifics of these regulatory changes can make an enormous difference to the future prosperity and sustainability of different network and telecoms providers.
OFCOM’s decisions could affect very differently those operators, such as game providers, for whom latency (the data refresh rate) is critical compared with those, such as broadcasters, whose priority is for higher bandwidths. Similarly, the balance between cost and speed in certain parts of the country that result from OFCOM’s rulings could have a significant impact on the viability and profitability of both business and consumer service providers.
How OFCOM sets its quality of service requirements will be critical. And the contractual terms it sets for Openreach will impact on the wholesale input costs that service providers will face over the next 15 years or more. The roll out speed for fibre in different parts of the country, and to different sectors of the economy will also be affected.
OFCOM recognises that, as new networks are built following greater duct and pole access, the cost of the wholesale inputs to downstream service providers may change; it could even lead to over-capacity and under-utilised networks, with economic consequences.
Even the starting premise that the UK needs 1 gigabyte full fibre to premises by 2033 is open to challenge. Some claim that superfast broadband over copper is sufficient for residential needs, and there’s no need to dig up more lawns or put an extra box in the family hallway. The CEO of Three, Dave Dyson, went further and recently argued that the needs of most people could be met with 5G alone.
If you want to have a say in the future economics of your business, get on board before it’s too late.
UPDATE: On 11 January 2019, OFCOM extended the time for responding to their PIMR consultation to 1 February 2019.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.
07 January 2019
by Stuart Murray