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Written evidence submitted by Sky
Broadband and the road to 5G
Sky’s response to the DCMS Select Committee Inquiry
Widescale roll-out and adoption of gigabit-capable broadband and 5G services will be a key driver of the UK’s future economic growth and competitiveness. Given the significant upfront costs of rolling out full fibre networks, large retailers like Sky will be critical to ensuring there is high take-up by consumers and, as a result, that these infrastructure investments are successful. The subscriber scale that these retailers can guarantee through long-term deals with network builders will help de-risk fibre investments and thus accelerate the roll-out of gigabit broadband.
Our ‘investment’ is to use our marketing and customer service expertise to promote strongly these enhanced broadband services at compelling prices to our customers to ensure that there are high levels of adoption. With relatively low average willingness to pay for more speed amongst consumers, the role we play will be pivotal.
In these circumstances, both retailers and network operators require the long-term certainty that can be attained through commercial deals:
i) retailers require long term certainty of supply from network operators on economic terms in order to commit the necessary resources to ‘get behind’ fibre; and
ii) network operators require long term certainty of demand from retailers so that they can confidently roll out their networks at scale and pace.
The economic impact of COVID is likely to amplify further this need for long-term certainty as network builders could face more challenges funding their network roll outs and consumers may be even less willing to pay more for these services.
Therefore, a balanced regulatory framework is needed to support this commercial roll-out. If network and retail competition is facilitated within an environment where transformative long-term commercial deals can be struck, the strong levels of investment and innovation needed to deliver a fast-paced, industry-led roll-out can be achieved.
Where commercial roll out is unviable, the Government’s ‘outside in’ approach is sensible. Commercial partnerships between network operators and retailers will help to minimise the areas in which Government funding is required to secure roll- out, thus keeping the costs of this scheme down. By focussing these funds initially towards those areas that are most obviously unviable commercially, there is less risk that public funding is wasted and inhibits commercial roll out.
The Government has an important role to play in creating a supportive policy environment by addressing concerns over supply-side barriers to roll-out and providing funding for difficult to serve areas.
Sky welcomes the opportunity to respond to the Committee’s call for evidence on
broadband and 5G.
The subject of this inquiry is highly relevant to Sky. We are the UK’s second largest broadband retailer, and we occupy a particularly important place in the market as the largest potential wholesale purchaser, given that we do not operate our own last mile infrastructure. We are also one of the UK’s fastest growing mobile operators, having launched Sky Mobile as an MVNO venture three years ago.
Sky’s priority is to bring the best services to our customers as quickly as possible, in ways that are attractive to them. Given this, we strongly support the accelerated roll-out of gigabit broadband. We already offer ultrafast services and are keen to offer FTTP services in the near future. We also launched 5G in January of this year in 20 cities and towns across the UK, including London, Edinburgh, Belfast and Leeds, with plans to roll out to around 50 UK destinations during 2020.
The Committee’s inquiry is a timely one. Policymakers still have an opportunity to create the right conditions to allow industry to optimise the level of private investment and drive gigabit broadband roll-out at the fastest pace possible. Challenges remain – including the advent of COVID-19 – but a balanced regulatory environment which allows for transformative commercial deals to be agreed network operators and retailers can still enable widespread roll-out of gigabit broadband at speed.
In the following sections we address each of the Committee’s questions in the call for evidence.
Sky is broadly supportive of the fact that the Government has set a target date. The date serves as an acknowledgement of how important gigabit-capable infrastructure is in the context of a modern economy and provides the impetus for Government, regulators and other stakeholders to work collaboratively with industry in order to deliver.
However, there are a series of challenges which industry and policymakers alike face in delivering on this target, and which will need to be addressed in order to ensure widespread roll-out of gigabit broadband as swiftly as possible.
In the context of COVID-19, telecoms infrastructure is playing a pivotal role in keeping people connected, informed and safe. Providers are rightly focused on serving customers and maintaining their own workforces to the best of their abilities. Given the regularity with which restrictions are shifting and new challenges are emerging, telecoms providers are devoting significant resources simply to ensure the UK continues to maintain its existing high quality and reliable telecoms services. This could have a consequential impact on the level of network roll-out that is achieved this year.
In addition to this, the potential economic impact of COVID-19 means that network operators may find themselves with reduced investment power following the pandemic and consumers are less willing or able to spend more to move to these new networks. These unprecedented pressures on providers and consumers make the 2025 target a significantly greater challenge than it was when Government set out its ambitions last year.
However, there are still a range of steps that policymakers can take to give industry the best possible platform in order to achieve a swift roll-out.
Discussions on digital infrastructure policy to date have largely focused on the role network operators will play. This is understandable given that the direct investment decisions of these providers have an obvious impact on the UK’s connectivity. But policymakers should also be mindful of the crucial roles that retail providers and their customers will play in delivering a gigabit future.
Sky is the second largest provider of fixed line communications in the UK. We do not own an access network and are not currently investing directly in access infrastructure. But we can play an important part in creating the right environment for gigabit broadband deployment via our customers and our expertise in customer service and management, marketing and sales. These factors are often overlooked, but ultimately help drive customer volumes, which are of fundamental importance to any investment case for full fibre.
In particular, large retailers, such as Sky, can play a pivotal role in realising the Government’s ambitions by entering into long-term transformative commercial deals with network builders. Retailers can help unlock investment from network operators by providing certainty of demand, thus guaranteeing build and accelerating the roll-out and take-up of gigabit broadband. This certainty of demand could also help to accelerate the migration away from older networks, allowing the copper dividend to be realised at the earliest possibility – again strengthening the overall investment case.
Commercially negotiated offers can deliver what regulation cannot – namely contractually enforceable commitments to build at scale and pace to the majority of the country. Such deals will be fundamental in delivering the rapid roll-out envisaged by the Government. The Government itself has recognised this, using its Strategic Statement of Priorities (2019) to emphasise to Ofcom that these sorts of deals should be enabled – “it is important that firms are able to agree appropriate commercial deals that share the risks and gains from network deployment to support investment… Government expects Ofcom to play a role in facilitating such arrangements where appropriate”.
A balanced regulatory environment will also be vital in providing the long-term certainty and the right conditions for investment needed to enable the swift roll- out of gigabit-capable broadband.
Government and Ofcom have made a series of policy and regulatory decisions in the past two years, starting with the DCMS Fixed Telecoms Infrastructure Review and continuing through to Ofcom’s current work on the Wholesale Fixed Telecoms Market Review. While there is still detail to be settled on this, the general direction of travel – favouring retail and network competition to drive investment and good consumer outcomes in the UK – is welcome.
In particular, Sky agrees that network operators should have a ‘fair bet’ for any risky
new networks they invest in.
However, certain key regulatory elements to support competition and protect customers must be retained, such as charge controls on anchor products where BT still has significant market power.
If competition is facilitated and an environment is fostered where transformative commercial deals can be struck, there should be strong levels of private investment; however, support is needed from the Government in tackling supply-side barriers.
There is unanimous agreement across industry that the following issues must be addressed in order to ensure the swift roll-out of gigabit broadband:
i) reforms to wayleaves to make it easier to access existing and new build properties, in both urban and rural areas, to install fibre;
ii) a holistic approach to streetworks reform;
iii) a diverse supply chain which facilitates innovation and competition as well as ensuring resilience;
iv) a long-term reduction in tax on fibre infrastructure, taking into account the fact that the business rates holiday for new fibre broadband is due to expire in 2022; and
v) investment in engineering skills and the provision of labour and the addition of telecoms workers to the shortage occupations list under the new points- based immigration system.
There will always be areas that will be more difficult to serve in a commercially viable manner and where public funding is appropriate. At the same time, there are clear risks to any Government scheme to support private investment, in particular that it results in the taxpayer funding investment that companies would have themselves undertaken. Sky therefore supports the Government’s ‘outside in’ approach, which focuses public investment on those areas which are most obviously not commercially viable, moving gradually towards the boundary with commercially viable areas. This is a sensible and pragmatic approach.
However, industry await further detail about how the plan will function in practice and clarity is needed about the remit of the ‘outside in’ approach and the areas which will be targeted.
The Government should work with industry to ensure the programme is designed in such a way that the £5bn funding is used efficiently, to deliver successfully the final 20% of coverage, whilst enabling industry to deploy at pace in areas where subsidy is not required. It will also be important for a fair and transparent tendering mechanism to be established for operators who wish to be involved in delivering this section of roll-out. The programme should be finalised swiftly so that bids from network operators can be submitted as soon as possible in order to enable rapid deployment.
By optimising the level of commercial roll-out, potentially to the level of 80% by 2025, the areas in which state funding is required would be minimised and Government targets will have the best chance of being met.
The importance of digital connectivity has been clearly illustrated by the recent COVID-19 pandemic, which has seen people across the country more reliant than ever on broadband and mobile services.
However, while it is clear that faster and more reliable digital connectivity will be necessary to underpin the economy and to support the evolving needs of society, we do not expect this need to translate into significant increases in average willingness to pay more for gigabit-capable broadband among customers.
Our experience with the transition from ADSL to superfast broadband suggests that, notwithstanding improvements to quality, consumer adoption only moved from a low to high level when wholesale prices dropped sufficiently such that operators were incentivised to market the product heavily and the price was more in line with lower speed products.
As such, widescale organic take-up of gigabit-capable broadband products should not be assumed. evidence suggests that in order to drive broadband customers onto new full fibre networks, pricing at both the wholesale and retail level will be of paramount importance. Network operators should therefore seek to set wholesale charges at a level that allows and incentivises retailers to replicate existing broadband propositions, in order to drive the greatest amount of take up. It will also be necessary to minimise the pricing gap between standard broadband and higher speed products, in order to encourage upsell and upgrades.
The financial impact COVID-19 will have on many people may also need to be taken into consideration. If large numbers of consumers are left financially worse off by the pandemic, there may be a reduced appetite to pay more for gigabit-capable broadband.
While a ‘digital divide’ in terms of availability may continue to persist in the UK, the fact that according to Ofcom’s Connected Nations Report (2019) , 96% percent of the UK has access to superfast speeds (at least 30Mbs) suggests that digital exclusion may be a more significant policy issue than a differential geographical roll- out of gigabit-capable broadband. The Broadband Stakeholder Group’s (BSG) Digital Exclusion Research Report (2019) considered reasons for non-internet use and, of those interviewed, 22% stated that they did not know how to use the internet and 18% stated that they either did not have an internet connection or did not have an internet-enabled device. These digitally excluded people are likely to miss out on many important opportunities and resources available to regular internet users.
Local authorities should be encouraged to have a consistent level of engagement with industry, this could be facilitated through the nomination of a single point of contact within each local authority with responsibility for broadband.
Government leadership is needed with a clear steer given on its approach and priorities. This should involve greater coordination and cooperation between relevant Government departments and alignment with relevant delivery bodies, local authorities and, where possible, devolved administrations.
 Sky owns and operates an extensive backbone telecoms network.