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Ofcom CEO’s “Key Test” for Openreach is a Fibre Co-Investment Deal with Rival

Tuesday, October 17th, 2017 (11:36 am) - Score 2,507
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The Chief Executive of the UK telecoms regulator, Sharon White, has told a cross-party committee of MPs that a “key test” of Ofcom’s new regulatory approach to BT will be whether or not Openreach can “do a co-investment deal with another operator” following their “full fibre” broadband consultation.

Earlier this year Ofcom reached a voluntary agreement with BT (here), which among other changes brought about the “legal separation” of Openreach from the telecoms giant and the establishment of a new framework for the next decade of broadband regulation in the United Kingdom (e.g. easier access to Openreach’s existing cable ducts and cheaper FTTC superfast broadband).

Since then Openreach has begun consulting on their aspiration for a wide-scale deployment of “full fibre” (FTTP/H) broadband, possibly to as many as 10 million premises by around 2025, which Vodafone is understood to have taken a strong interest in (here).

Last week the regulator told an inquiry by the Digital, Culture, Media and Sport Committee that a “key test” for Openreach’s new independence would be whether or not they could do such a deal “over the coming months“.

Sharon White, Ofcom’s CEO, said:

“I would also say a key test over the next few months is: does Openreach manage to do a co-investment deal with another operator for some of these very fast services? I think that will be a key success criterion as to whether the new model is working in practice.”

We should point out that Sharon wasn’t specifically referencing residential connectivity here. Sharon later added that Ofcom was “very directly holding Openreach to the fire” and they would further judge the success of their reform by “whether we get the new investment” and “whether we see over time quality of service starting to improve.”

In fairness, Openreach has a good track record when it comes to meeting Ofcom’s Quality of Service targets, although we’re still waiting for something more on the investment front than their existing hybrid-fibre G.fast commitment to 10 million premises by 2020, plus 2 million covered by “full fibre” ultrafast FTTP broadband. Openreach’s industry focused FTTP consultation concluded last month and outcome should come soon-ish.

The committee also spent quite a lot of time discussing the Universal Service Obligation (USO) proposal for a 10Mbps minimum broadband speed, which didn’t produce too many surprises but there was one exchange where we got the impression that Ofcom is perhaps expecting the Government’s Secretary of State and BT to reach a voluntary agreement (as proposed here); as opposed to a mandatory one being imposed on BT with stiffer requirements.

Damian Collins (Chair) – Conservative:

“Are you not concerned that a USO deal might fall foul of just those same problems there whereby a condition that a USO will be an amount of money, which BT say they need to deliver the completion of the network, that money will be recouped through people’s bills, maybe even starting before the rollout itself has started, and that you as the regulator may not have the power to unpick that deal once the Government have agreed to it?”

Sharon White (Ofcom):

“We will see what the nature of the deal is. Our initial estimates suggest—and we do not have absolutely firm numbers—that these are not huge sums of money for the USO in terms of additional prices because the money is spread over the lifetime of the asset, which is about 20 years. In the first instance, we are looking at the first three years of that. We will see. Once the Secretary of State and BT have reached an agreement, we can then take on board only those costs that we deem to be reasonable, so they will be our estimates, not BT’s estimates.”

Sharon also promised that if a voluntary deal is reached then Ofcom would still “examine in detail what BT claims its cost are and what we believe are appropriate costs to be recovered … it will be a robust process.” The regulator was similarly challenged on the question of whether or not handing such a deal to BT would give the operator a “dominant position” and leave “everyone else being squeezed out.”

As we already know, the big problem is that nobody else (excluding KCOM in Hull) has come forward to take on the significant legal and financial responsibility of delivering such a USO, either across the UK or only in specific areas.

Sharon White said:

“It is interesting. The Committee may remember that under the previous Secretary of State we were asked to test the market a couple of years ago precisely on this point to see whether there might be some competition or some choice of providers. At that stage, we were reasonably hopeful because 10 megabits per second would allow you to bring in a mobile operator to do wireless for the last mile.

As it turned out, the only interest from our expressions of interest on behalf of the Government was from BT. Because we are a competition authority and we think competition drives investment and drives better choice and lower prices for consumers, it would have been great to have been in a position where there was another operator interested.

We looked at that process very carefully and the board saw the results of this, and it was only BT that said, ‘We are interested in delivering this for the Government‘”

Finally, the committee also touched on Ofcom’s somewhat divisive 2017 Wholesale Local Access Market Review, which among other things has proposed to reduce the wholesale cost of Openreach’s popular 40Mbps (10Mbps upload) FTTC (VDSL2) broadband tier for consumers (here and here).

Some ISPs, such as TalkTalk and Sky Broadband, welcome this change (cheaper packages etc.), while infrastructure builders (Virgin Media, Gigaclear etc.) are perhaps rightly concerned that by making FTTC so cheap Ofcom are running the risk of discouraging investment in new or alternative / faster networks (i.e. there’s less reason to spend more on an ultrafast FTTP, Cable or G.fast service). Ofcom say it’s difficult to get the balance right.

Ian C. Lucas (Labour):

“But the fibre investors are not very happy with your wholesale local access review. You have had a letter, haven’t you, from—”

Sharon White:

“I get lots of letters all the time.”

Ian C. Lucas (Labour):

“Well, they say that your proposals will stall fibre infrastructure investment, and it is signed by lots of chief executives.”

Sharon White:

“Lots of people, and I should show you the other letters—”

Ian C. Lucas (Labour):

“Well, okay, some companies you might have heard of: Openreach, Virgin Media, Gigaclear, techUK. What is your response to that?”

Sharon White:

“It is worth giving a little bit of background. The particular decision to take it as a proposal at this stage is how much money we allow BT to charge its wholesale customers for superfast broadband. We are balancing keeping enough money in the system to incentivise investment without, to be frank, screwing the consumer.

We are taking an approach that we took with superfast broadband, which is we want to allow BT the incentive to invest in these really fast networks, the 100 Megabits per second, the stuff that we are lagging behind, but on standard superfast broadband we reckon that BT has more than recouped its investment to the degree that if we did not impose what we call a charge control, ie some cap, BT would make excess profits of another billion pounds. Consumers would be worse off by about another £26.

We are trying to balance, as always, how we ensure there is enough ability to flex your pricing, because it is risky for these very fast networks, without essentially ripping off the consumer. Those who depend on the BT network obviously like the low prices. Those who are building new networks would like us to put even more money in the system. We are weighing all those letters from a range of chief executives and lots of other comments over the next few months.”

Dame Patricia Hodgson (Ofcom Chair):

“Sharon has had letters from other operators, like Sky Broadband and TalkTalk, who say, “You are absolutely right to address the cost for the consumer of superfast” because what we need to do is to build demand, which then translates through to demand for a faster fibre connection. It is a difficult balance, isn’t it?”

On the whole Sharon White concluded by saying that she felt as if the “early signs” of Openreach’s progress on implementing all of the regulator’s required changes are “reasonably positive“.

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Mark Jackson

By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he is also the founder of ISPreview since 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.

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39 Responses
  1. Steve Jones

    So in Sharon White’s view a key test is whether OR can do a co-investment deal with a rival. What does she mean? A rival to Openreach or, more generally, a rival (by which I assume she means competitor) to BT in general. Those are two rather different things.

    We also have little idea as to see under what terms any such co-investment would be regulated. Currently OR have to provide equal access to all customers of all its wholesale products. Would OR still be required to wholesale access to any installed infrastructure, or would the co-investor be able to have privileged access?

    I can imagine, possibly, a few niche areas where this might be done – say the off business park, but it would surely raise major issues if it was for mass-market products.

    • NGA for all

      If by some miracle a city wide PIA deal was struck, it would likely need to freeze copper gain investment. Is Ofcom willing to freeze VULA based competition to support a PIA partnership? I cannot see it.

      Perhaps some rural PIA coupled with some non compete clauses might materialise.

      Competition has its limits.

    • GNewton

      Why would any company want to co-invest in Openreach? Openreach is not really an independent company, it’s wholly owned by BT. Openreach doesn’t even own the network.

    • MikeW

      Who says they would be investing in Openreach?

      As opposed to investing in an FTTP network? Or investing in a partnership?

    • Steve Jones

      @GNewton

      I’ve no idea where you have been getting the idea that this is anything to do with an equity stake in OpenReach. This has come up before and is, and always was, about some sort of joint investment between OpenReach and another company. It raises all sorts of regulatory and commercial issues which, to date, Ofcom have not been challenged on.

  2. MikeW

    Interesting to see Sharon describe her agency as a competition authority. When they get given a problem, the only answer they have is more competition. Forced, of course, with low prices.

    No wonder she gets defensive as soon as the topic of 40/10 controls vs FTTP investment comes up. She doesn’t represent a future-investment authority, and doesn’t it show?

    Openreach doing a deal is also a key test for Ofcom. Imagine if such a deal almost came about, but for Ofcom regulation on Openreach to get in the way.

    • NGA for all

      Indeed, freeze VULA copper gain investment and competition to accommodate a PIA partnership with no wholesale obligation! I cannot see it.

    • MikeW

      What do you mean by copper gain?

    • Oh no.. don’t start it.

    • Steve Jones

      @MikeW

      I can only assume @NGA means any broadband technology that includes any copper element. For all intents and purposes that means VDSL2 and G.FAST, although he may be including ADSL and even voice services too.

      In any event, it’s still unclear what sort of scheme Sharon White has in mind.

      The idea that (say) a company like Vodafone would come along and pump in a few billions alongside some money from OpenReach on some joint investment raises a huge number of issues.

      Investment via PIA+ is another thing. It might be that she’s expecting some finre white knight to come along with their own network and then OR come along and perform the required passive infrastructure uplift at their own expense. A bit of a one sided deal, as (from what I read of the WLA consultancy), Ofcom expect such investment to be recovered across the network as a whole, not for specific projects. That is entirely differently to the OR VDSL investments where the projects have been required to recover capex spent on passive infrastructure uplifts too.

    • MikeW

      Not meant as awkward question…

      I’ve not heard the term used before, ever, and can’t make a sensible guess beyond Steve’s. But why not call it “hybrid copper” as seems more common?

      I have heard of the term “pair gain” which applied to technologies like DACS, whose job was to get 2 voice lines out of 1 pair. Or more, in older analogue days.

      What DSL does is kinda analogous to the concept of pair gain systems … Hundreds of separate voice channels, but each with a modem on it.

      So I wondered how @NGA had come by this term.

    • MikeW

      @Steve
      I agree – I find it hard to see the mechanism of a partnership that will satisfy a third party, satisfy Openreach, not dissatisfy BT … yet get past Ofcom’s claws.

      Wholesale access, national cost aggregation and national pricing must be huge issues. As is Ofcom’s current attempt to impose price controls onto newly-invested networks early in their lifecycle.

    • Steve Jones

      @MikeW

      I too only associated copper gain with straight analogue amplification. VDSL & G.FAST do, of course, have amplification along with a whole lot of DSP magic to make the modulation/demodulation work. But I think we have to leave this as a foible of NGA as I can’t find any reference to it.

      A search on the Internet for “copper gain kit” reveals only postings by NGA for all on this site and VFM on TBB who we can reasonably assume is the same person (not that I think it’s hidden).

    • GNewton

      The term “copper gain technology” is frequently used by Ofcom to describe e.g. VDSL2 or G.Fast solutions over existing copper wires, as correctly understood by Steve Jones. See for example https://www.ofcom.org.uk/__data/assets/pdf_file/0025/106864/ICBAN.pdf , a quick Google search will probably reveal some more documents on this.

    • Steve Jones

      I see that’s not Ofcom using the terminology, but ICBAN. I also find “copper gain technology” used by one Mike Kiely who, correct me if I’m wrong, is most probably known on this forum as NGA for all.

      https://www.linkedin.com/pulse/why-government-needs-reject-bts-offer-400-600m-investment-mike-kiely

      ICBAN has also consulted with Mike Kiely

      http://www.icban.com/Home/News/ICBAN-Consults-on-High-Speed-Internet-Issues

      I would suggest that this is not a general telecoms term but one coined by Mike Kiely.

    • MikeW

      Well found.

      However, that document seems to be a response to Ofcom, rather than usage by Ofcom themselves. It is written for “Irish Central Border Area Network Ltd.” (ICBAN seems to be a network of NI councils, rather than a comms network).

      If I google for `ofcom “copper gain”` I only find one other “ofcom” document, which also appears to be a response, and comes from “Bit Commons,” which I think is @NGA/@VFM anyway.

      The same search finds plenty of articles using the term on this website … all by @NGA. The end of the first page of results gives an article on Linked-In by Mike Kielty … which is @The Bit Commons.

      Mike/NGA/VFM (I agree with @Steve) seems to be the only person using this term.

      It doesn’t appear to be a technical term used by industry, so is it pejorative instead?

    • MikeW

      Snap (aside from my bogus “t” in Mike’s name)

    • Steve Jones

      @MikeW

      The first sentence response stated it wasn’t OFCOM, but an ICBAN response to an OFCOM review.

      So, it is indeed a self-adopted term, not an industry or ITU one. It does not, in itself, matter. However, I see that Mike Kiely puts forwards the questionable notion that it is “copper gain technology” that has created the caps in coverage. This is, of course, utter nonsense insofar as a full fibre approach would, with the available funds and resources, have left vastly larger gaps in coverage. Find another £15bn and the workforce to match, then it might have been different, but that was never the real world.

    • MikeW

      @steve
      (Note my “well found” reply was to @gnewton; your reply wasn’t there at the time)

      The idea of a coverage area is a bit weird…

      If starting from scratch, wireless is a 2D tech covering areas quickly, while cable is a 1D linear tech, only running down a street that the civil boys cover metre by metre. A slow hard slog.

      But if you’ve already covered streets in an area with copper (twisted pair or coax), then hybrid solutions become quick area-filling ones instead of hard-slog linear ones.

      Mike’s right that choosing a distance-limited hybrid (like VDSL2 or G.Fast, but not DOCSIS) leaves gaps in that area-filling strategy that need to be dealt with. But you’re right that the correct perception is that this is the first step in filling coverage, as opposed to leaving coverage out.

      The trick, though, is figuring out how best to cover the parts that aren’t yet covered … a task that we shouldn’t stop. Infill with more area-filling tech, or a resort to the linear slog?

      It is most certainly a balancing act. One not helped by Ofcom’s fingers on the scales.

    • NGA for all

      MikeW – I am not sure I invented it, but ‘copper gain’ technologies is nothing more than trying to differentiate full fibre from fibre to something including exchange based ADSL. Copper gain tech is great but the distance limitations need to be acknowledged.

    • Steve Jones

      @MikeW

      I got my wires slightly crossed. Parallel responses, not helped by the limited nesting depth of comments.

      In any event, there is definitely technology required to fill the gaps, but FTTC didn’t create those gaps. What it did was fill in some of the gaping ones. We are gradually seeing fill-in with some FTTP but, at least with the fibre being run out further due to FTTC, it has a starting point. At least with the OR network that is – inevitably FTTC will have introduced some fragmentation which makes it even more difficult for competing networks to be commercially justified.

    • MikeW

      @Steve
      The ultimate infill is use of umbrella wireless. It would be designed to catch all those gaps – which necessarily causes it to overlap the covered areas too.

      The umbrella might cover large areas (and overlap), but it would only be dimensioned to cope with service to the gaps.

      Originally, I envisaged FWA (and North Yorkshire might go that way), but since BT took on EE and EE won ESN, I would have thought an LTE-based umbrella was best. Or (like Germany) a hybrid DSL+LTE product.

      @NGA
      Thanks for the reply.

      So the best way to understand it is any hybrid copper+fibre system that includes distance limitations.

    • NGA for all

      Mike W Yes, I think we need to improve on Ofcoms use of terminology like Standard, Superfast and Ultrafast which have the disadvantage of encouraging policy defined by the limits of particular mix of fibre and copper while failing to adopt ‘throughput’ as opposed to ‘speed’.
      The only advantage of splitting Openreach in the manner proposed was the opportunity to remove ‘Superfast’ when repainting the vans.

  3. adslmax Real

    Get rid of Sharon White, Ofcom’s CEO for the better of us all. She is clueless and useless.

  4. Anon

    Sharon White continuing to wage her war on Openreach, this woman is like a dog with a bone, never acknowledging the massive improvements that have been made only ever arguing not enough is being done. By no means is Openreach perfect but how many of the other large operators (Sky, Talk Talk etc.) are making use of the DPA Openreach allows to build their own networks? But of course this is still Openreach and BT’s fault somehow.

  5. FibreFred

    Oh dear, so as a measure she is using something that isn’t wholly controllable by Openreach.

    Can anyone spot a flaw in that logic?

  6. MikeW

    On a separate topic, Sharon is being disingenuous about what she is willing to incentive, ” the stuff we are lagging behind.”

    Here, she tells the committee that they’ll incentives “the really fast networks, the 100 Mbps” but in reality, they are trying to incentivise FTTP as a technology.

    • Gadget

      Just suppose Openreach did do a deal with, say, Vodafone to deploy fibre where they thought it was viable, and that ended up virtually duplicating the coverage of the HFC and RFoG network of Virgin Media.
      According to Ofcom’s statement that would be bringing competition into the market, so would be a success on two criteria (deal and competition), and yet many would say a failure for the rest.
      I wonder if that is what Ofcom had in mind, or is it that they want someone to sort out the pareto gap regardless of what it might cost in terms of commercial viability?

    • MikeW

      I’ve been trying to picture this kind of scenario.

      Does this result in a fibre network owned by, say, Vodafone, that uses PIA of BT’s ducts, but is otherwise planned, installed and maintained by Openreach.

      Wouldn’t that (almost) mirror the existing network, where ownership is retained by BT Group. Openreach plan, install and maintain the network. There is just no PIA component because BT own the duct.

      Is the value here that, instead of Vodafone having to go through a whole rigmarole to find out where PIA is available, they just leave it all to Openreach?

  7. Bill

    I think OFCOM is barking up the wrong tree.

    An idea for OFCOM (please read!)

    Establish a metric to measure the number properties whose speeds have been upgraded although they already receive decent speeds vs those who have been upgraded who do not currently receive decent speeds. Perhaps the decent speed number could be 24 or 30Mbps and the metric could be calculated each quarter.

    Then there would be more visibility of the fast-getting-faster phenomenon. If you couple that with a requirement to meet a certain ratio then you have a recipe for encouraging investment in areas that currently suffer.

    Maybe the ratio could be 25% / 75% i.e. 75% of properties to be upgraded should currently be receiving below-threshold speeds.

    Then OFCOM should stop interfering with BT through silly schemes like this and simply hold them to account on meeting the criteria.

    • Chris P

      @Bill,

      are you suggesting that slow lines must be upgraded before any already fast lines can be upgraded?

      Sounds great on paper but is absolutely completely impractical.

      those lines that are already fast, are by definition much much easier and cheaper to upgrade than the already slow lines. The whole global supply chain is focused on making the already cheap to support fast lines go even faster for less as that is where the growth is and therefore the demand & therefore the profit. This is why government intervention is needed to incentivize commercial companies to supply expensive hard to reach slow lines where it would not be commercially viable to do so normally. Note the lack of the big 4 ISP’s, other than BT, going out and upgrading slow lines despite the current incentives.

      The worst part here is that OFCOM are hell bent on reducing the charges OR can charge which at the same time reduces the potential profits would be competitors could make for providing similar services to OR, hence is a barrier to entry for them (who would lend them money when the regulator is constantly chopping the prices they could charge paying customers down to near cost?).

    • Bill

      I think OR shouldn’t stop upgrading all fast lines, but the aim should be to prioritise the slower lines, hence the need for a ratio.

      I agree with what you say and I also dislike OFCOM reducing OR’s charges too much.

      But they have to do something, because BT have really been asking for it with their totally sub-standard investment relative to the profit they make. So it is a shame – I would much prefer a stronger more responsible BT but … pigs may fly.

      So if they implemented a version of the plan I outlined it could help improve things for many people.

    • TheFacts

      In many areas Gigaclear etc. are installing, how does that fit in with your scheme?

    • MikeW

      @Bill
      Isn’t the problem with this scheme that the source of finance is different?

      The “fast-getting-faster” portion are getting faster because it is cheap and easy to provide that service, and normal market systems provide.

      Meanwhile the “slow-going-nowhere” portion are going slower because no company wants to bother investing. Government needs to spend money on this portion. At least, it needs to spend money on market failure while it heavily promotes market success elsewhere (which is what Ofcom does)..

      The former means that companies need to spend as soon as they identify an opportunity. The trick, as ever, is to get the government to identify market failure before it happens, and pay for a solution before anyone suffers from it.

  8. Bill

    @MikeW
    You are referring to normal market systems which do not exist here. BT is a regulated entity so is already required to cough up more than it would choose.

    So the aim is to find some way to get BT to cough up more and to expand the network properly – which is what the country needs, but is not one of BT’s choices.

    I don’t agree with cutting BT’s wholesale rates, I see it more as a punishment from OFCOM. Rather they should force investment, for example through this ratio.

    • Gadget

      well if you assume Pareto for both rural/urban and the associated costs, and that you could manage to absorb a combined rural/urban average commercial cost only double what is achieved in urban areas then you end up with a ratio of around 14 urban to 1 rural or approx 7% as your ratio.

    • MikeW

      @BillW
      Good luck at “getting BT to cough up more” when Ofcom’s aim is to prevent BT acquiring the “more” in the first place.

      If the country needs the industry to invest “more”, it needs to both allow “more” to be earned from the services and force it to exit the company as capex rather than dividends. In the absence of that, the government themselves need to supply the capex. And if you want it in a timely manner (your percentage requirement demands this), then the government needs to stop wasting time on consultations desperately praying that someone else, anyone else, will get involved in a USO project.

      Note that I wasn’t referring to “normal” market systems. It was a comment targeted at the broken market that Ofcom has bequeathed us.

  9. Bill

    @MikeW

    “force it to exit the company as capex rather than dividends”

    Is that what is really happening? If so that is news to me. To paraphrase – you are saying BT is forced to return profits as dividends rather than investing?

    It sounds highly unlikely to me.

    • MikeW

      No, I’m not saying anything about what BT does at all.

      Re-read the sentence … You’ll see it as a future-investment conditional, based on changes that are just one option.

      To get more money invested cant just make it appear out of thin air. We need a whole cashflow mapped out.

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