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Rory Stewart MP Questions the Higher Cost of UK Rural Broadband

Friday, November 6th, 2015 (1:57 am) - Score 669

The Parliamentary Under-Secretary of State for DEFRA and Conservative MP for Penrith and The Borders (Cumbria), Rory Stewart, has spoken of his concern for the “unjust situation” where people in rural areas can be forced to pay more for a slower broadband ISP package than their urban counterparts.

The Minister, who has a long history of campaigning for rural issues and better Internet connectivity in remote areas, was responding to questions during a House of Commons debate yesterday when Christian Matheson MP (Labour) tabled a concern about the price disparity of rural broadband.

As it stands there is actually a very logical economic and regulatory reason for the difference in cost (see below), although in this instance the question made valid reference to whether or not this should still apply if the infrastructure has been installed with the significant support of significant public or perhaps event community funding (e.g. Broadband Delivery UK).

Christian Matheson:
In the village of Saughall, in my constituency, residents are being told to pay an extra £7 a month in premium to access fast broadband because they live in a rural area. Ofcom is acquiescing in that, but I remind the Minister that there are large amounts of public and European money to develop those networks. Will he please make representations to Ofcom to stop this discrimination, which is increasing the inequality?

Rory Stewart:
I would be very interested to meet the hon. Gentleman and to hear more about this matter. That does seem an unjust situation. I would be interested to know the identity of the provider and why they are charging in that way. It certainly seems an important issue for rural areas in general, so I would be delighted to meet the hon. Gentleman.

So why does rural broadband cost extra? In a normal commercial setting the reality would be that it simply costs more to both deploy and maintain telecoms infrastructure for a small rural community, while a similar expenditure may reach significantly more customers in an urban location.

On top of that BTOpenreach are often the only primary infrastructure provider for such areas, with Virgin Media sticking to dense urban locations and even unbundled (LLU) providers that piggyback off Openreach, such as TalkTalk and Sky Broadband, only extending out to around 90-95% of the United Kingdom.

The above lack of competition and the high cost of infrastructure vs low customer potential both have a negative impact on pricing. Ofcom reflects this through their market definitions, with Market B (89.8% of UK premises) being the cheapest due to strong competition and the remaining Market A (9.5%) being the most expensive due to a lack of primary operators (the other 0.7% reflects KC / KCOM in Hull). Rural areas mostly fall into Market A, alongside a few very problematic urban locations.

In practical terms what this means is that some ISPs will charge you more for living in Market A because you’d be outside of their “low cost area” (Market B). Obviously to those affected this can seem grossly unfair, after all you’ll probably get slower speeds and yet still be required to pay significantly more. It should be said that not all ISPs do this and more expensive providers will often adopt a single shared pricing level for everybody.

But what about if you live in a village where FTTCfibre broadband” connectivity has recently arrived thanks to the support of public or even co-community funding. Take PlusNet for example, their “Unlimited Fibre” (up to 38Mbps) broadband costs £14.99 per month if you take it with a phone service, yet if you happen to live in Market A this rises to £22.49.

Is it still fair to apply the additional charge to everybody in the same way, seemingly regardless of whether or not the area has been upgraded via predominantly commercial or public investment? Sadly there are still some big on-going costs to balance (maintenance, backhaul etc.) where BDUK doesn’t help, but unfortunately there isn’t enough publicly available information about some of these aspects.

Ofcom do at least conduct periodic reviews of the Wholesale Broadband Market and the last one used data from late 2013 / early 2014, which came before BDUK had created much of an impact. Hopefully in a future review the regulator may take a closer look at the impact of state aid use or community contributions upon their market definitions, but it may not have any impact upon the current model.

One good bit of news is that at the next review we fully expect Market A to shrink in size again, which means that more people will be placed into the low cost area (Market B), but a gap is still likely to remain.

Leave a Comment
21 Responses
  1. Avatar Steve Jones says:

    As far as BDUK funded BT infrastructure is concerned, there is difference in the wholesale cost for the GEA/FTTP and GEA/FTTC products. However, what BDUK doesn’t fund is any increased ISP backhaul costs to reach their own interconnect points. In the case of BT the backhaul costs across the whole country (provided by BTW) are aggregated and there’s a single retail price (and yes, those backhaul costs are taken into account when Ofcom does its “margin squeeze” tests – BTR pay the same for BTW backhaul as any other company). LLU ISPs tend to charge differently,

    The article is less than clear on what is and is not funded by BDUK in this regard. BDUK does not fund the ongoing costs of backhaul which are incurred by ISPs. It provides gap funding for the infrastructure which covers the difference between the costs (capital and operational) and expected revenue.

    1. Avatar Steve Jones says:

      nb.

      This particular sentence is misleading :-

      “Unfortunately there isn’t enough publicly available information about BT’s network maintenance / upkeep costs, alongside practical examples for different areas, in order for us to draw a firm conclusion.”

      It implies the price differences are, at least partly, down to differences in BT maintenance/upkeep costs (details which, but the way, Ofcom do have access too although they are clearly commercially sensitive). However, this does not affect the GEA product prices and it’s only partly true in the sense of backhaul prices from BTW (which are Ofcom regulated on a cost-orientated basis).

    2. Mark Jackson Mark Jackson says:

      As I said above, most of the detail about such costing is not made available to us mere mortals and so we cannot accurately judge what kind of overall impact the use of state aid might have in respect to the market definitions (maybe none at all).

      It would be nice to see some actual detailed figures from practical examples, but that’s usually classed as commercially sensitive data.

    3. Avatar Gadget says:

      Doesn’t the question boil down to who is charging the extra – Openreach or the ISP? I don’t believe there are any differences in Openreach charges but clearly as has been said any ISP (that wants to stay in business) has to take into account backhaul and access charges and decide a pricing policy that keeps them afloat.

    4. Avatar Steve Jones says:

      @Gadget

      Quite, despite what the article implies BT Openreach pricing is identical. Ofcom do not, for instance, allow BT to charge more for (longer) rural lines than short urban ones. It might be logical to do so, but it that’s not the pricing regime that Ofcom impose. It’s the same for the GEA products, so why the article implies differences in BT maintenance costs are a factor I do not know.

  2. Avatar Steve Jones says:

    Yes, but the point is that it’s the cost of renting the backhaul that is the issue. There’s a public price list for those products. Unless somehow BT were compelled to provide that backhaul for free, then ISP costs would vary by location.

    The point, again, is that BDUK does not fund ongoing backhaul costs for ISPs. Short of Ofcom forcing all ISPs to charge the same whatever their underlying costs (which would probably just result in ISPs withdrawing from expensive areas) then what could be done? I’d also repeat, BDUK funding is a total irrelevance to this as the backhaul cost issue equally affects ADSL products (aside from any increased capacity issues).

    So what is the suggestion? That BTW should not charge for backhaul?

    1. Avatar NGA for all says:

      Ofcom in their last WBA market review did highlight the uniform nature of bandwidth costs given the relatively small size of the UK. There were looking at the cost of a Megabit per second per month as one of the underlying inputs to a boadband service. It made encouraging reading.

      BDUK funding of BT rural aggregation nodes and handover points should reduce the associated ECC’s for OLO’s and help extend the reach of managed data contracts. Those differentials should disappear as the roll outs continue.

      The promotion of these assets (aggregation nodes) should also help mobile coverage while adding to the clawback.

      There also clauses in the BDUK contracts which permits backhaul products to be requested from these areas. To my knowledge these clauses are yet to be exercised.

    2. Avatar Gadget says:

      @NGA I agree that moving nodes into remote areas is encouraging, and here comes the but …….

      Any operator still has to connect to the node to make a workable service, so it may be great to have a aggregation point/handover point in the countryside reducing ECCs for customer connection, but the flip-side is it increases the OLOs cost of getting to a node from their network.

    3. Avatar NGA for all says:

      @Gadget – I am expecting BDUK to have added c22,000 cabinets for phase 1, (added to the 50,000 BT did commercially – not including the doubles now appearing) the bandwidth to these is shared, 1Gbps fibre to the handover point for each cabinet. How many new handover points is not clear, but I would estimate 400 which might be a little large, that number might be needed at the end of the project.
      Is you concern the POSI to Handover Point costs? Are these not covered in the managed bandwidth contracts?
      We need an updated OR count of network elements which used to be popular!
      An ISP perspective on this matter would be good to read.
      Unfortnately the 50k plus 22k leaves much to be done in PCP count terms, but I estimate most of the costs of 22k BDUK will have to be paid back – detailed paper on that if you care to comment.

    4. Avatar Gadget says:

      @NGA here’s a scenario (may or maynot be the case in the real world but just for understanding)
      Before BDUK – suppose Bassenthwaite in the Lake District has an exchange that is being enabled as port of the BDUK scheme. You could create a new handover at Bassenthwaite for CPs or you could make the handover at Penrith. If you make it Bassenthwaite any CP who wants to sell there has to provide their own backhaul back to an existing handover where they have a presence (in this case suppose it is Penrith), but that will cost every CP who wants to sell service their own money to get backhaul to Bassenthwaite – flipside is you handover at Penrith, CPs are happy its just an internal Cablelink at Penrith, but someone has to pay for and run the Bassenthwaite to Penrith section.

    5. Avatar NGA for all says:

      @Gadget 1) Given the public funding paid for these assets they should be mapped (condition of state aid) so the c6 HO points in Cumbria are visible.
      The NAO reference paying BT core costs as part of the build – so the capacity has been paid for in the £25k total average cost before BT capital contribution.
      It is unlikely BT retail costs have risen so any increase in enabling or extending the managed bandwidth arrangement should be covered. It would be an interesting question to pose the Value for Money team at BDUK. At a minimium you expect the other ISP to receive an equivalent benefit in being able to access these publicly funded assets as achieved by BT Retail. Perhaps BDUK can get some more efficiencies.
      Include that question when poviding peer review on the paper at the bottom of this url. http://www.conservative-technology.org/#!publications–meeting-reports/c1ziz The paper is available to all parties. Comments from BT folk are particularly welcome.

    6. Avatar Steve Jones says:

      @NGA

      But all the ISPs do have equivalent access at the same cost. BTR have to pay (BTW) for backhaul just like any other ISP. You seem to have trouble with the principle of “gap funding”. It covers the difference between the costs over the contract period and the expected revenue. BDUK are not paying 100% of all the costs involved. The cover the shortfall (and if take-up is better than expected and/or actual expenditure is less that “gap funding” is reduced, most notably by the clawback and review mechanisms).

      Note that BT are not allowed to make a return on the “grant money”. It doesn’t count as BT capex (which is why BT capex is reported net of grant). Of course, this changes if/when “clawback” kicks in and BT repay any grant money.

  3. Avatar MikeW says:

    I thought the key difference between markets, after they’ve been adjudged to be “competitive” or “not competitive” by Ofcom, is that Ofcom forced BT to charge a higher wholesale cost for “not competitive” locations.

    The whole point, by Ofcom-logic, is that this creates something of a competitive gap to attract an LLU operator into the exchange, as they can still undercut BT but make a profit. It gives them a warm feeling over the “sunk costs” of rolling into an exchange.

    So, the higher charges are deliberate, in order to foster LLU-style competition in the exchange at some nebulous point in the future.

    You have to assume that this logic fails at some point, for exchanges that the LLU companies are never going to entertain. For those places, the prices are kept high (by the regulator) for no obvious reason.

    At least this was true back in the days of markets 1, 2 and 3. There are still price controls in the new market A, but I haven’t analysed them in detail.

    (Note: Ofcom also puts controls in place to ensure BT doesn’t take advantage of its monopoly, and just increases prices)

    ————————————————————–
    As an aside, all ISP’s are charged this higher wholesale cost. Most ISPs suck it up, and spread the extra cost across all their subscribers … which obviously requires the 90% of customers in “competitive” areas to pay slightly more than necessary.

    Plusnet have chosen to work things the other way: they reduce the charges for the 90% to the level that pays for their own wholesale charges, and simply pass on the extra wholesale charge to the 10%.

    What this means, is that Plusnet are slightly more competitive in competitive exchanges, and should be totally uncompetitive in the 10% rural exchanges. I’m not sure why anyone chooses them in those locations.
    ————————————————————–

    But the MP’s make a really good point here…

    Where BDUK pays money to get FTTx services into an exchange, they are effectively creating a state-condoned and -aided monopoly of SFBB. BDUK only got involved because zero operators were willing to roll out infrastructure beforehand. Afterwards, you can be doubly sure that there will be no-one will rollout FTTx infrastructure.

    You’d further guess that the presence of FTTx hardware will make it even more uneconomic to bother with LLU hardware.

    It therefore does indeed seem unfair if Market-A pricing ends up applying to FTTC services.

    Perhaps, though, the Ofcom-logic still applies: They would still rather set higher prices in order to get TalkTalk to install backhaul into the exchange, at a minimum. At least that would create competition at the wholesale level.

    Of course, the place where TT would have to provide backhaul from is the head-end exchange, not the PCP’s exchange. It would be even more unfair if the Market-A pricing happened, based on the exchange the PCP was connected to, while TT or Sky were already providing backhaul competition at the head-end exchange.

    A story worth following…

    1. Avatar Steve Jones says:

      But Ofcom Market A/B definitions don’t actually define what ISPs have to charge at retail. If an ISP wanted to it could charge a different rate for every exchange in the country. Ofcom rely on competition to keep retail costs down and the Market A/B designation is more about BT wholesale costs and incentivising LLU operators.

      As far as I’m aware the only company where retail broadband prices are regulated is BT Retail and that’s only insofar as it can’t impose a “margin squeeze”.

    2. Avatar NGA for all says:

      The move from LLU to SLU reduced the probability of infrastucture based competition, although it could be done on a port by port basis.

      You do povide a good reason for ISPs to check what BDUK has paid for in terms of the ‘core costs’ and what BT Retail has contributed to enabling bandwidth to a new cabinet. They can check that the gap funding principle is being applied properly.

    3. Avatar Gadget says:

      Mike, regarding your last point – even if the broadband handover is at an OLO enabled exchange the OLO will need to use SMPF not MPF at the remote, which is their commercial/strategic decision.

  4. Avatar Steve Jones says:

    @NGA

    BT Retail has nothing to do with paying directly for the infrastructure. What BT Retail buy is the GEA/FTTC products from OR and backhaul components from BTW. They do not contribute any capital.

    What BTR do provide is an “anchor” customer giving some confidence that a retail product will be marketed and sold.

    1. Avatar NGA for all says:

      @Steve that is more than understood, it is a reconciliation of the incremental backhaul component costs paid to BTW by BT Retail with the incremental costs of ‘core’ and other costs that BDUK have been paying in subsidies should be checked to answer MikeW query more fully.
      To September 2014 this was £33.1m in subsidies (NAO II page Fig 4 page17 also look under para 3.8), or c£5.6k per installed cabinet to that date (26% of the phase 1 cabinets) this should fall I assume as more cabinets are added to the spine and handover point. I had not realised this was so high. That £5.6k paid by BDUK for each cabinet should benefit all ISPs equally. Would welcome your critique on doc referenced earlier.

    2. Avatar NGA for all says:

      @Steve, we could state it another way, if BT R are paying BTW for FTTC enablement then this revenue should be used to reduce the subsidy paid by BDUK.

    3. Avatar Steve Jones says:

      @NGA

      It will reduce the subsidy through the mechanism of clawback should the take-up exceed the threshold (usually considered to be 20%). Bear in mind the gap funding is to Openreach and has nothing to do with any ISP. It matters not a jot whether it’s revenue from BTR or any other ISP. Once that threshold is reached the cabinet just requires less gap funding.

    4. Avatar NGA for all says:

      @Steve, the clawback includes revenue from other revenue streams using the subsidised infrastucture. If private cicuits revenues are subsequently sold using the refreshed duct, fibres to the aggregation, then that is counted.
      This specific piece is interesting as it permits these ‘core’ cost allocations to be examined in more detail.

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