Richard Sliwa

15 June 1999

The Right Honourable Michael Wills MP

Department of Trade and Industry

1 Victoria Street

London SW1V 0ET

Dear Mr Wills,

It was with much dismay that we listened to your response to Mr Steve Webb's speech on the floor of the House of Commons on Wednesday 9 June about ‘regulation of telecommunications and the growth of the Internet’.

It is particularly unfortunate that your reply did not address any of the specific issues Mr Webb raised. You agreed with him on certain truisms about the value of the Internet as a tool for business, education and leisure.

You spoke about mobile telecommunications and its operators’ successes in penetrating the market and making competitive offers. We agree - but there is one fundamental difference, in competition terms, between fixed lines and mobile communications. When the first cellular licences were issued, two operators (now four, with more planned) were competing with each other to provide services across most of the United Kingdom. With fixed lines, the whole country is held to ransom by BT's continuing effective monopoly of the local loop that it inherited from the State on privatisation. The most recent Office of National Statistics figures show that BT owns eighty-four per cent of home users’ fixed lines within the United Kingdom - and that after fifteen years of deregulation! Of calls made from those lines, most are kept with the caller's local dialling area, so BT's stranglehold on the local loop is an insurmountable barrier, with the current regulatory régime, to bringing down that percentage.

Mr Webb raised a concrete example of the unsoundness of the current regulatory regime. LocalTel (which does not operate a network of its own, but buys BT services at wholesale rates and resells those services to home users who transfer their BT lines) has lodged a complaint with OFTEL about BT's handling of transfers. BT was forewarned of the predicted demand for LocalTel lines well before LocalTel’s offer was announced yet failed, and continues to fail, to action transfers in the time period promised. The failings of the regulatory régime instituted by the previous administration mean that, although OFTEL are able to investigate this issue, they are not in a position to resolve it speedily, which results in continuing disruption and worry to LocalTel's prospective customers. This pivotal problem was not addressed in any way during your speech, except for a congratulatory mention of LocalTel's offer.

The ‘LocalTel affair’ highlights a further problem with the regulatory structure: rightly or wrongly, in terms of pricing, OFTEL relies on BT's costs and price offerings as a source for all decisions, those prices forming a benchmark for the rest of the industry. Thus the quantity of operators, as you mentioned with respect to international calls, is not per se any indication of success. BT's prices, both to consumers and to its competitors, are quoted in per-minute increments. This makes competition through innovative tariffing difficult to introduce - many operators would like to offer unmetered tariffs to their end users, but BT's per-minute charges mean that they have to take a commercial risk in making such offers. We believe that BT, as the dominant operator and cash-rich incumbent, should incur commercial risk: startup companies must not. The incremental per-minute costs BT incurs, as anyone in the industry will admit, are negligible; basing the entire telecommunications industry's cost base on such per-minute costs is, we suggest, technically, financially and logically absurd.

You commented that the Government's current plans for reform of all utilities regulation will be addressing these issues, but we suggest that reform is a particularly urgent priority in the telecommunications. As you said during your evidence to the Trade and Industry Select Committee's recent Inquiry into Electronic Commerce, ‘a Web year is three months’ – and every moment the Government fails to take action the United Kingdom falls a little further behind its Transatlantic and Far Eastern competitors.

In his interjection during your speech, Mr Webb asked ‘why are new technologies already deployed in other countries, but not in the UK?’ Your response was another neutral statement that BT and the cable companies will be releasing these ‘soon’ and that ‘competition is the best way forward’. The fact that, in many countries, these technologies have already been available for a considerable time – a few years in some cases – shows that competition is not working. BT and cable operators are milking their customers, building mountains of pennies from metered charges, and have no incentive through competition to roll out new technologies with any speed.

I have experienced these delaying tactics personally. Before it was merged with other existing operators to form Cable and Wireless Communications (CWC) the cable company Videotron UK, a subsidiary of the Canadian cable operator Groupe Vidéotron Limitée, was preparing to launch cable modems in its UK franchise areas in 1997. This launch would have been three months after they were launched in Canada. However, the CWC merger resulted in Videotron’s cable modem rollout plans being shelved: we understand that commercial deployment of cable modems by CWC will not start until April 2000 at the earliest. The fact that NTL, as you mentioned, has recently started to roll out cable modems is less significant than it should be. Because each cable franchise is an apportioned fiefdom, nobody living outside an NTL cable franchise area will be able to take advantage of the NTL offer, so there is no competitive incentive for TeleWest, CWC or any other cable operator to match what NTL is doing.

The ‘market’ has drastically failed the United Kingdom consumer, and it is to the Government and the Regulator that we look for redress. On behalf of our 5,000 individual and over 100 commercial supporters we feel obliged to say that the Government has failed us as well. That some of the technologies we mentioned earlier were partly developed in this country – in particular, Digital Subscriber Loop variants – but have yet to be deployed, while other countries are already reaping the benefits of them, is particularly difficult to swallow.

Like yourself and the Government we look forward to the result of OFTEL’s current consultation into ‘Access to Higher Bandwidth and Unbundling the Local Loop’, but you inadvertently suggested what the result may be by using the phrase ‘renting BT's copper wires’. The wires should be taken out of BT's hands altogether!

Even so, there are technological limits to access to high-bandwidth services based on copper wires, and people living outside urban areas will not be able to take advantage of these services for some time, if ever. Thus it is vital that the current minimal levels covered by universal service obligations should be as ‘Internet-friendly’ as possible. The Government and the Regulator must take action on this.

You stated without qualification or reserve that cost of access does not affect takeup of these technologies, and specifically, "there's nothing to suggest, particularly where businesses are concerned, that [the cost of access] is a significant barrier to takeup". That statement, bluntly, astonished others as well as us. You and those briefing you seem to have forgotten the recent Inquiry referred to above as the evidence therein directly contradicts that assertion.

We quote a few of the written submissions to the Inquiry, those being by no means the only references to the issue:

The main sticking point is the potential increase in phone bills. (Appendix 19, page 249)

Appropriate regulatory and incentive frameworks should be introduced and driven by HMG to provide a catalyst for the provision of low cost, high-speed (2Mb+) services to homes and business. (Appendix 22, page 255, paragraph 3.5)

a further serious obstacle to the use of Internet is the unit dial up cost of doing business electronically. (Appendix 47, page 324, paragraph 4.2.4)

There is a direct correlation between telco prices and Internet take-up. (Page 75, paragraph 5.i)

After 15 years of competition this is just not acceptable to the consumer. (Appendix 13, page 238)

And from oral evidence:

For businesses, of course, especially for the smaller businesses, the cost of telecoms is an important issue. (Question 37, page 24)

The issue of the cost of leased lines, particularly outside London, particularly for high capacity use and business use, as opposed to private consumer use, does remain an issue. (Question 71, page 33)

[...] cost is the one thing that keeps coming up time and time again. (Question 77, pages 39-40)

There is a fear factor about cost and it is something that we do recognise. Businessmen look at all the information and when they have got their £1,000 worth of kit they look at how much more it is going to cost to get it and it does take a considerable amount of time to learn the skills. (Question 91, page 42)

[...] the potential for flat tariffing, which we think is a very important aspect because the consumer wishes to know how much they are in for when they log on. (Question 163, page 73)

There is also your own statement in response to question 585 on page 212 that "Clearly it is an issue".

We suggest that, before you make such self-contradictory statements on the floor of the House again, the Government actions the Internet Service Providers' Association's Supplementary Memorandum published at Appendix 38. The recommendations in Paragraph 2 (pages 292-293) must be acted upon as a matter of extreme urgency:

Together with those industry representatives, we suggest that not just OFTEL but the Government is being complacent about the issues raised.

Apart from what business thinks, Mr Webb quoted a recent AOL user survey that went without comment from you during the debate. We co-operated with AOL during the preparation of their survey, and note that 11,000 responses were gathered in four days at the beginning of June. The survey was not forced on AOL subscribers in any way.

Comparing telecommunications tariffs, as the OECD does, on the basis of ‘baskets’ is misleading in this context. Consumers do not make baskets of calls; three out of four of all calls made are local and this is the primary area that OFTEL, the Government and the industry should address. A further problem that Mr Webb highlighted is the 5 pence minimum call charge levied by BT (and at similar rates by its competitors) which makes dialup connections for the purpose of collecting email (such connections, in most cases, taking no longer than a minute or so) extraordinarily expensive. To use Tim Berners-Lee’s phrase, this is a prime example of "new technology operating in the mode of the old". Thirty years ago, a connection charge was warranted as most costs went into manual switching, and the maintenance thereof, at the exchange. BT's current infrastructure, as it is right to boast, is second to none and is not merely fully automatic but fully digital as well. There is no justification for maintaining minimum call charges, so they must be abolished. BT and its competitors will not readily take this step, so it is for the Government through the regulator to enforce it. As you said, the market will not provide in all cases and the issue of minimum call charges is one in which the role of the regulator, as protector of social interests as opposed to those of the industry, is of primary importance.

We look forward to hearing your views on the above, and more importantly, statements of what the Government will do about the issues raised. Although the Government plan to have "100% of schools online by 2002 and 95% of them by ISDN lines by 2002" is, on the face of it, laudable, it demonstrates how far out of touch the Government is with the phenomenal advances in communications technology over the past few years. ISDN is old technology and has been for some time: 2002, as you said yourself, is a long way in the future in Internet terms.

We suggest that, if it really wants to make the UK "the e-commerce hub of the world", the Government must act for the greatest good of the greatest number. Services used by people are what previous legislation has failed to consider, and the interests of the United Kingdom as a whole must override the sectional interests of the telecommunications industry.

Yours sincerely,

Richard Sliwa

Secretary, Campaign for Unmetered Telecommunications

Copies:

Mr Steve Webb MP

Mr Richard Allan MP

Mr Derek Wyatt MP

Mr Martin O’Neill MP, Chairman, Trade and Industry Select Committee

(CUT press release)