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Written evidence submitted by TalkTalk

 

 

Submission to Digital, Culture, Media, and Sport Committee

June 2020

 

Introduction

About TalkTalk

TalkTalk entered the market in 2003: our objective was to ensure that affordable access to these products and services, which had previously been privilege, became a right for all UK customers. Since then, we have continued to drive competition in the sector and advocate for consumers.

 

Today, TalkTalk is the UK’s challenger telecoms company, providing landline, broadband and TV to over 4 million customers. We operate Britain’s biggest unbundled broadband network, covering 96% of the population, supplying services to consumers through the TalkTalk brand and to businesses through TalkTalk Business and by wholesaling to resellers.

 

TalkTalk has traditionally been a retail provider in the UK market, rather than an infrastructure operator. Whilst we own our network, we rely on Openreach to connect it to individual homes and businesses.

 

In 2014 we launched a pilot programme in York to bring full fibre infrastructure to 55,000 premises in the city. In 2018 we created FibreNation, a standalone business within the TalkTalk Group, which expanded its network reach across Yorkshire. In January 2020, CityFibre acquired FibreNation for £200m and we no longer own or operate a full fibre network. We are now a strategic partner of CityFibre and will move our customers onto our networks in the areas where they are the first full fibre operator. We continue to partner with Openreach and hope to come to a similar agreement to use their full fibre services.

 

Overview

We are delighted to submit a response to this timely inquiry. We are at a crucial juncture for the UK’s digital infrastructure. There is significant planned investment, strong industry support and Government focus on rolling-out new full fibre networks to future-proof the UK’s infrastructure. The current pandemic situation has underlined the UK’s reliance on digital infrastructure. The current networks have performed extremely well during the period of lockdown (with Ofcom reporting in its Home Broadband Performance Report that UK broadband speeds largely held up during lockdown  despite rising demand from home working, online lessons and TV streaming.[1]) Nevertheless, the pandemic has demonstrated the reliance of businesses and households on their connections and it is likely that it has accelerated trends in terms of home working, video-based communication and digital learning, as well as wider-scale digitisation of public services including telehealth. Moving to full fibre will give improvements to quality of service, reliability and speeds to support these changes. We are pleased the Government continues to focus and prioritise full fibre roll-out in policy terms.

 

No one company can deliver full fibre connectivity alone. If we are to achieve nationwide coverage, it will be because of competition between providers to roll-out, cooperation where needed to remove barriers, and ultimately because we will have brought customers with us. Customers need to be at the heart of the full fibre ambition if it is to succeed, and therefore we need to ensure that full fibre is rolled-out, priced, marketed and consumed in ways designed to maximise consumer take-up. Enacting these changes will be complex: this is an infrastructure project which will involve every home and business in the country, and much about the roll-out and customer experience is still under consideration by Government, industry, and Ofcom. In our submission, we give TalkTalk’s views on both principles to follow, and some practical steps which are needed, if we are to make effective policy and support nationwide usage of full fibre broadband.

 

Current landscape

The Committee has made important contributions to this debate in the past, notably with the 2016 report, Establishing world-class connectivity throughout the UK, which was influential in Ofcom’s requirement of structural separation of Openreach from BT Group. We are pleased to see the progress since then – with cross-party support for full fibre infrastructure, Government policy to reduce barriers to network roll-out and high levels of private investment.

 

However, we are still at an early stage in the move to full fibre, with coverage just at 12%[2]. In our response, we give our views on the steps needed to secure nationwide coverage and ensure that new networks deliver benefits for consumers and the country.

 

We are also entering a transition phase, as we move away from reliance on copper-networks to new networks. As network build progresses, customers will move over to new networks – some immediately and some later. There are a range of different customer circumstances to consider: some consumers will want to move to new services immediately, but will live in an area where there are no plans to build; while some consumers may live in an area where network build takes place, but where they are unable or unwilling to change their services for a variety of reasons. Policy and regulation need to acknowledge that we are entering a phase where there will be more variation between customer expectations and experiences and need to ensure that all consumers are appropriately protected regardless of their circumstances.

 

This is especially true when it comes to pricing. As we discuss in our response, we are concerned by Ofcom’s proposal to allow higher pricing on current copper products from April 2021. Ofcom’s intention is that higher current prices will support the investment case for new full fibre services. However, increased prices will fall on all current customers of copper-based products regardless of whether they will be able to move to full fibre networks in the near future. Raising the prices simply gives Openreach about £900m higher over the regulatory period (2021-26) compared to the current pricing strategy (which sets prices against Openreach’s costs), while increased prices for leased lines, which are used for business connectivity, would see Openreach make an additional £500m above the level they would be if wholesale prices were based on cost. We think these across the board price increases are unfair as some consumers face higher prices for no additional benefit or service.

 

In addition, it is not clear that it will lead to new FTTP networks. This additional profit is not ring-fenced and Openreach is under no requirement to spend it on full fibre networks. We note the recent research report by WIK for the Broadband Stakeholder Group which acknowledged this potential impact on investment incentives. It found that France took a directly opposite approach than this approach advocated by Ofcom in the Wholesale Fixed Telecoms Market Review, by setting copper prices in line with cost in order to prevent a situation where “the incumbent could benefit from excess profits that could distort investment and competition in [ultrafast broadband], as well as risking retail price increases for copper-based services.”[3] We believe Ofcom needs to reconsider these proposals to ensure that consumers do not face unjustified price rises and that the incentive on Openreach to invest in new networks is not weakened.

 

Openreach

While TalkTalk had argued for full separation of Openreach from BT Group, we accepted the decision that Ofcom made and focused on making the new arrangement work. Since then, we have seen improvements in our day to day relationships with Openreach, both in terms of our working arrangements and our commercial negotiations. We have publicly acknowledged the areas where they have improved – notably regarding culture and in installation of leased lines for businesses – when we published our 2017 assessment of the impact of separation. We have also worked together to increase the percentage of TalkTalk customers using superfast products by volume commitment deals, and we welcome this collaborative relationship.

 

This said, there are some structural and behavioural issues which we think could be improved in order that there is maximum competition and ultimately consumer fairness, not least to ensure the proper flow of increased BT Group profit from wholesale lines to fibre build by Openreach. The current structure – and way in which it is regulated by Ofcom – does not always ensure this commitment to build.

 

This is most evident in Openreach’s negotiations regarding access to new full fibre services. We are committed to working with Openreach to enable their full fibre investment by signing a similar volume commitment deal regarding their FTTP products. Given the high fixed costs of FTTP and low consumer willingness to pay for higher speeds, Openreach FTTP investment can only be viable with rapid migration and high uptake which, in turn, is only possible with low wholesale prices (in return for volume commitments). This is a standard approach to network upgrades in other countries, as demonstrated by the recent report by the Broadband Stakeholder Group, Moving to a fibre-enabled UK: International experiences on barriers to gigabit adoption.

 

For example, this is the approach we have taken in our agreement with CityFibre, the network operator with ambitions to roll-out to 8 million premises in the coming years. Recognising the importance of having customers on its network, CityFibre’s agreement with TalkTalk is designed to incentivise take-up, with appropriate pricing structures, incentives for fast migration over a two-year period, and a commitment to collaborate on product design. We made this agreement in January 2020 and – despite the recent disruption – we have already established a close working relationship and are planning to start trialling its FTTP product in later this year.

 

We hope that Openreach takes a collaborative approach to support high take-up and that we can come to swift agreement. We consider this to be a key test of Openreach’s ability to act independently of BT Group and prioritise the needs of its customers, as we would expect from a network operator. Government, Parliament, and industry is united in wanting to see swift progress on FTTP roll-out and the quick adoption by consumers, and all partners – including Openreach – need to collaborate to reach this shared objective.

 

 

1) How realistic is the Government’s ambition of nationwide gigabit-capable broadband by 2025, and what measures (regulatory, financial, technical, other) will be needed to achieve it?

 

It is too early to say whether the goal 2025 will be achieved. It is clearly a challenging ambition: rolling out new networks is a labour-intensive project requiring considerable construction resource and upfront investment– the NIC estimates that it is a £33.4 billion project over a 30 year period.[4] We have seen some positive trends in the sector recently: TalkTalk sold its fibre-building business, FibreNation, to CityFibre to consolidate regional build efforts and become an anchor tenant on the network, and there has also been investment in firms such as WightFibre and toob. These moves show the dynamism in the market, and clear Government support for gigabit-capable networks has been an important factor underpinning some of these moves. However, the civil engineering challenge is the greatest barrier to achieving the 2025 target due to the high cost to roll-out and the physical challenge of connecting harder to reach areas and, in particular, the challenges regarding build in rural areas may act as drag on achieving nationwide coverage.

 

However, there are certain conditions which must be present if we are to achieve a 2025 target, even if we do not know if they will be sufficient in and of themselves. Achieving the right conditions to reach a 2025 target will require considerable collaboration between government, industry, and regulators; in particular, TalkTalk considers that it will be important to focus on the issues outlined below. Prioritising these objectives will create the conditions for nationwide coverage and ensure that have a clear plan in place by 2025 to reach100% coverage, even if the network build has not yet completed.

 

Consumer take-up

TalkTalk is concerned that too often discussions about digital infrastructure happen in a vacuum, focusing on building networks rather than taking account of the real needs and experience of British consumers. This approach is a mistake as it misunderstands the digital infrastructure market. Commercial construction of new networks will only happen where infrastructure investors see returns on investment, and that will only come from wholesale deals with ISPs to move customers onto new networks. This means that rolling out new networks is not just a construction challenge, but a commercial one. Only by engaging with ISPs will new networks succeed in delivering the required returns for initial build stages, and therefore support investor willingness to finance a truly national network. This means that networks will only be viable when full fibre broadband is a mass market consumer product and priced in a way to encourage high take-up.

 

One example of this type of arrangement was TalkTalk’s completing of a wholesale access agreement with CityFibre in March 2020. The commercial terms provided by this agreement will see TalkTalk offer services over the CityFibre network in those areas where it is the first operator to build a network. In signing a commercial agreement with TalkTalk, CityFibre was able to increase its roll-out target from 5 to 8 million[5], while enabling us to provide our customers with a world-class service at a reasonable price. The TalkTalk/ CityFibre deal shows how ISPs and network operators can work together to encourage take-up – by coming to an acceptable price, making volume commitments over a period of time, and collaborating on product sets to meet our customers’ needs.

 

Underpinned by competitive wholesale agreements, ISPs need to encourage customers to take new services. This will require consideration of different approaches to marketing and pricing. However, based on current research and trends, we can expect the following conditions need to be met:

 

 

We saw this with our UFO trial in York. We priced our Fibre-to-the-Premises (FTTP) service at the same rate as the standard copper broadband price to incentivise take-up, and we saw network penetration of 20% within the first two years and with the first phase securing 34% within five years.

 

 

Our experience in York is again helpful. Internal market research in 2018 indicated that the increased reliability of full fibre services compared to copper products is as important as speed in advertising and explaining the advantages of new networks. While we found less awareness of the reliability benefit in the initial stages, it was found to be persuasive with consumers when considering taking a new service. On the other hand, we found minimal knowledge about the difference 900Mbps speed will make when compared with consumers’ current broadband experience.

 

We think that CPs will lead on communication with customers on the migration as they hold the contractual relationship. However, we wish to explore the potential for agreeing a public awareness strategy, including establishing common messaging on the benefits of full fibre. The strategy will need to take account of the fact that at present FTTP is only available at 12% of UK premises so there could be merit in a regional approach. We would like to explore the potential for a more coordinated cross-industry communications approach with Ofcom and Government.

 

Notably, research we conducted on the move to voice over IP (VOIP) indicated that consumers place value on communications from external bodies such as Ofcom and Government, rather than CPs. Communications from CPs are often seen to be sales messages. Lessons can also be learnt from Digital Switchover, which showed the value of a straight-forward, no nonsense call-to-action letting consumers know what they needed to do and when. We discuss this issue later in our response.

 

Competition

TalkTalk has long championed competition in the telecoms sector. We have been encouraged by developments in the sector, in particular the emergence of large-scale alternative providers such as CityFibre, Hyperoptic and Gigaclear. These firms have not just driven new network deployment but have also spurred Openreach to refocus its business on full fibre roll-out. Less than two years ago, Openreach still planned to prioritise further minor upgrades to its copper network (through G.fast rollout) and had limited full fibre investment plans, aiming to connect just 1 million homes.[8] The environment for full fibre has become more favourable as a result of these developments: the Government switch to focus on full fibre; Ofcom’s decision to legally separate Openreach and BT, and to require Openreach to open up its ducts and poles to competitors; and initiatives such as the Digital Infrastructure Investment Fund (DIIF) designed to support alternative investment.  Emerging competition has spurred network roll-out: Openreach has now pivoted to a full fibre future, with a target of passing 4.5million homes by March 2021 and 20 million by the mid-late 2020s[9], while CityFibre now competes with Openreach at a national level with plans to pass 8 million premises.

 

This is good news for both ISPs and consumers, who benefit from more ambitious roll-out plans and increased choice, rather than relying on one monopoly infrastructure provider. Regulators and government must continue to encourage and support infrastructure competition in this next phase, including ensuring that the rural subsidy hardwires competition into the framework, and that regulation does not unfairly favour one provider over another at either the wholesale or retail level.

 

Infrastructure competition and retail competition go hand in hand. As discussed above, infrastructure competition can only be maintained if there are ISPs with transferrable scale customer bases which enable return on investment for network operators. This is particularly true in the UK where the leading ISP (BT Consumer) has a market share of 34.4%[10] and is unlikely to ever retail on another network due to its vertical integration with Openreach, reducing the number of potential customers on alternative networks. The Virgin Media retail base is also vertically integrated with its DOCSIS network, and so this base is also unavailable to potential entrants to the infrastructure network. Retail competition to challenge BT Consumer, both to get choice to consumers and to support altnet growth, will be an important feature of the market and needs to be reflected in regulatory and government objectives and policy, notably in policy decisions on price regulation. We discuss this in our answer to Question 4.

 

Rural areas

Any national roll-out plan needs to recognise that commercial roll-out in some rural areas is highly unlikely as the high cost of network roll-out is prohibitively expensive for commercial builders. Ofcom research found that the capital expenditure needed to construct FTTP for the first c.20 million UK premises is under £500 per premises but that from this point it quickly increases to £2,500 per premises.[11] For this reason, we support the Government’s plan for a rural subsidy programme, targeted at the “final 20%” of the country. We discuss our views on this programme in our answer to Question 3.

 

Technical challenges

FTTP networks are based on proven technologies. Roll-out to date has enabled network operators to gain good experience of rolling-out fibre and connecting different types of properties. Access to Openreach’s ducts and poles has supported additional roll-out by altnets, and continued improvement of the product will be required to ensure it can be used at pace and at scale.

 

Rolling out broadband in rural areas presents technical challenges due to the distance between premises and potentially difficult terrain. It may be that fixed wireless access (FWA) has a role to play in connecting the “final drop” from a fibre connection to a household. We support the use of fixed wireless access where appropriate; however, our expectation is that this technology will only help the most rural households and does not remove the need for an extensive fibre network in rural areas.

 

It is also important to consider the technical challenge of connecting individual premises and the customer experience. Full fibre connections will require a new line into the home, which will require an engineer visit to install new in-home apparatus. New routers will also be required in many cases to support higher speed services. New systems need to be designed to connect premises to new equipment, and increased network competition introduces additional complexity into the customer journey – for example, customers switching from one ISP to another maybe switching from one network to another, which may require new in-house connections and thus engineer visits. These challenges are in no way insurmountable; however, they will take both time and investment from CPs to get right. All efforts should be made to reduce these costs as much as possible to incentivise swift migration, and CPs and infrastructure providers must reach mutually acceptable terms to drive migrations.

 

 

2) What are the challenges to the roll-out of 5G and gigabit-capable networks? To what extent do existing legislative, regulatory and spending plans address them?

 

As discussed above, we face both engineering challenges in rolling out new networks and a customer challenge of moving customers onto new networks. We consider some of the challenges below, alongside current proposed plans to address these points.

 

Construction barriers

There are well-documented barriers to network build plans, such as the need for wayleaves to access certain premises and land, and streetworks requirements which can limit the scale and speed of civil engineering. These have been researched in publications such as the Broadband Stakeholder Group’s 2017 report, Lowering Barriers to Telecoms Infrastructure Deployment.[12] Recent Government policy has focused on tackling these barriers, with a new dedicated team of officials focusing on this work, leading to the Telecommunications Infrastructure Bill and forthcoming legislation.  The legislation amends building regulations to guarantee that all new homes have the right infrastructure to support gigabit broadband and require housing developers to work with network operators to install internet speeds of over 1,000Mbps in new-build homes. We support these measures and welcome Government leadership on this issue. As they are new pieces of legislation, we recommend keeping them under review to assess their impact and consider whether further changes are needed.

 

We note that many network operators are concerned that problems still exist at a local level due to different local rules on street works and road works. We would encourage central and local Government to work together to ensure consistency in approach.

 

As noted above, the continued improvement of the Passive Infrastructure Access (PIA) product, and Ofcom’s scrutiny of its development, is necessary to support the use of Openreach’s ducts and poles by altnets at pace and at scale.

 

Skills

Building new networks will require a high volume of construction skills at a variety of levels- from digging and trenching to network planning. Many network operators have expressed concerns about the availability of skills within the UK and called for continued ability to recruit overseas labour as required. TalkTalk has no reliance on overseas workers to maintain our network or run our core operations. However, we support industry calls to have flexibility when it comes to recruitment.

 

We also see the current COVID-19 situation as a chance to promote employment in fibre roll-out and build a skills base in the UK. We hope that Government can combine the twin objectives of increasing employment opportunities and rolling out new full fibre networks through innovative policy with targeted interventions where needed. We discuss this in our answer to Question 6.

 

Risk of overbuild

The prospect of overbuild – two different FTTP network operators rolling-out in the same area – can hinder gigabit roll-out by deterring investment. The Government’s Future Telecoms Infrastructure Review explained the “hold-up” problem whereby an area cannot sustain two competing gigabit networks, but may not benefit from any investment as potential new investors worry about being overbuilt by the incumbent, but the incumbent does not feel any competitive pressure and therefore does not invest in a new network.

 

While we support network competition across the country in principle, we recognise that current economics make it unlikely that we will see multiple FTTP networks in many areas of the country. In this circumstance, our view is that the rollout of FTTP in an area already served by another FTTP wholesale provider would prove detrimental to the goal of full fibre rollout nationally and would not be the most efficient use of collective resources. TalkTalk hopes FTTP builders will prioritise build to premises which are currently unserved with FTTP, rather than seeking to overbuild areas where FTTP build plans are already advanced. We welcome steps taken by some, including Openreach and CityFibre, to publish a medium-term look ahead at their build plans. Government and Ofcom should provide an assessment of the likelihood of overbuild and, if required, set out a strategy for preventing it from occurring.

 

Migration and switch-off

In our answer to Question 1 we discussed the crucial role consumer take-up will play in enabling network roll-out. Central to achieving high levels of take-up will be ensuring a smooth process to migrate customers from the current copper network to new networks, including switching from an Openreach owned network to new altnet-operated networks. This process will largely be a commercial arrangement between CPs and network operators, with the pace and scale of switching depending on the progress of network roll out, the underpinning commercial terms and operational capabilities.

 

However, our view is that Government and Ofcom have roles to play in setting the framework for migration, especially as overall success depends on moving all customers on to the new networks, from bandwidth-hungry early adopters through to voice-only customers, who are likely to be more resistant to the migration.  We note the FTIR’s conclusion that Ofcom “will have an important oversight role in ensuring industry readiness for switchover” and that it must “protect the interests of consumers in the migration from copper to fibre.”[13] Ofcom should be clear about how it intends to protect customer interests by setting out the principles which should underpin any switchover process. Some elements of this work have already taken place (such as the requirement for an entry level FTTP product as required by the WFTMR) but Ofcom should bring this work together in a clear framework. For example, we would like to see established principles around consumer experience of migration, or clear conditions to be met before the copper network can be retired. We discuss these issues below.

 

Migration is the term we use to refer to moving our customers from copper networks to new FTTP networks. TalkTalk has 4.2 million customers and an ambition to migrate every line onto FTTP networks as quickly as possible. This is a considerable undertaking, requiring extensive systems development and new customer journeys, including new in-house wiring and equipment to connect homes and businesses to new networks. As discussed above, supportive commercial terms – such as waiving installation charges for a fixed period – will be essential to incentivise migration.

 

We would welcome wider industry discussion about the limits of voluntary migration and the size of the “long tail” of customers who will not voluntarily choose to migrate onto new FTTP services. While we expect high consumer take-up for new services, there are likely to be a proportion of customers who have limited bandwidth demands and therefore will not voluntarily migrate – for example, older customers who have limited need for high bandwidth products. These groups of customers are likely the almost 50% of customers who have not upgraded to superfast products to date. Even the entry-level FTTP product (which will be priced in line with a similar FTTC product) could represent a significant price increase for these groups compared to the price they pay for a copper line. We make several recommendations regarding this group:

 

 

By assessing the likely FTTP take-up that will be achieved by the market absent any additional intervention, policymakers will be able to review options for achieving 100% FTTP take-up and full copper withdrawal.  assist industry in its commercial and operational plans, for example helping to identify groups with additional needs when facing switch-off or ways to communicate with the wider public.

 

Consumer protection during the transition

Ofcom’s current proposals on regulation of the fixed telecoms market for the period 2021-2026 would see Openreach no longer regulated on the basis of cost, with the ability to increase prices in line with inflation. Ofcom has justified this move as a way to reinforce investment incentives for full fibre builders, to ensure that a lower regulated FTTC price does not discourage consumers from moving to full fibre services (which will not be regulated).

 

UK price regulation mechanisms are based on Openreach having significant market power in the fixed telecoms market. Once alternative FTTP networks emerge, the basis for SMP regulation is weakened in competitive parts of the UK, as consumer choice is established. We support this objective and accept that price regulation will not be required when competition between three or more networks is established in an area.

 

However, nationwide coverage and take-up will not be achieved overnight. The move to full fibre connections will be a process which will take up to a decade as networks are rolled out, consumers choose to move onto new services and homes are connected. Competition will take time to become established as network build happens and consumers begin to move to new services. This will happen at a different pace across different areas in the country but – based on current build plans – it is likely that many consumers will have no option but to continue to use the current Openreach network until at least the middle of the decade, as FTTP services will not be available to them

 

Ofcom’s current proposals would see these customers – who cannot benefit from a competitive market – paying higher prices over a prolonged period with no guarantee when or if they will be able to access FTTP networks. There is no link between higher prices in an area and certainty that full fibre networks will be rolled out there. For example, if an area such as Rochdale was deemed to be suitable for full fibre investment, customers would pay higher prices for their superfast connection from 2021 onwards, even though a new network may not be built in Rochdale until almost a decade later.

 

We are particularly concerned about the impact of this approach on the business sector where the increases can be sharp depending on the connection into the premise. For example, the price of ethernet line is proposed to increase by several hundreds of pounds per year, which will see businesses – many of which will be SMEs – facing higher bills as we seek to recover from a recession.

 

Such an approach fails to adequately protect consumers against price rises and gives Openreach an unnecessary profit increase which is not reflective of any additional investment or improvements to its copper network. We have proposed a number of different approaches to Ofcom, including a  more dynamic approach to price setting which would see price regulation fall away when new networks passed thresholds, but unfortunately Ofcom has declined to consider these alternative approaches in detail and has maintained its focus on copper price rises.

 

Our view is that these price rises are unjustified and will unfairly fall on those consumers who are not able to receive better services. Ofcom has not conducted any assessment of how price rises may fall on different groups. We consider this analysis to be an important part of any price regulation in line with its statutory role to promote customer interests, particularly given the current economic climate and likelihood of a recession which will damage consumer confidence. Ofcom should produce an impact assessment of its new price proposals to understand their impact in terms of demography and geography.

 

We also consider there is a risk that Ofcom’s proposals to enable Openreach to increase its profits on the current copper network will have precisely the opposite effect on Openreach behaviour than Ofcom intends. By permitting Ofcom to sweat its legacy asset and earn excessive profits with no conditions on build requirements or restrictions on how the profits can be used, it reduces the incentive on Openreach to invest in new networks, and increases the risk that the additional profit will be siphoned off by BT Group into other areas such as sports rights, dividends or pension repayments.

 

Rural areas

As discussed above, the Government is correct to identify a challenge to connect rural areas and to provide £5bn of public funding to subsidise rural connections. We discuss our views on this approach in our answer to Question 3.

 

3) What needs to happen to ensure the Government’s ‘outside in’ approach successfully addresses the digital divide while also delivering value for money?

 

The Government is correct to focus subsidy in those areas where commercial build will not occur. We are no longer a network builder and therefore do not have direct comments to make on the Government’s subsidy scheme and the steps taken by BDUK to date. However, we make three points about how the rural fund should operate:

 

 

One particularly negative consequence of the lack of transparency was the stubborn persistence of not-spots within the build areas. BT’s confidentiality requirements prevented publication of details about areas outside the build plan, preventing alternative providers from developing plans for other projects to reach the 10% of premises not covered by BT. This both inhibited altnet growth by blocking their ability to contract with local authorities and led to a digital divide opening in rural communities. Any new scheme must learn from this previous experience to prevent network builders from cherry-picking the easier to connect areas while not-spots are left behind. 

 

We also note that the European Electronic Communication Code includes a mechanism to require companies to disclose build plans on a confidential basis to identify those areas with no current build plans to help to design a rural scheme. We support this process and think it should be used to prevent accidental or predatory overbuild in rural areas.

 

 

 

We also note that many current not-spots are in non-rural areas, including some city centres (where the cost to build can be prohibitively expensive) and new housing developments. We would like to see DCMS confirm how a new scheme could address these types of not-spots and confirm whether they will be eligible for funding and, if not, what other in-fill opportunities might be available in these circumstances.

 

Interaction with Ofcom market review process

Government has published its plans for a £5bn rural subsidy scheme and is currently designing the scheme. Alongside this, Ofcom has published its Wholesale Fixed Telecoms Market Review (WFTMR) with a proposal to introduce geographic pricing for regulated Openreach products, and to raise wholesale prices in the 30% of the market which it believes will not receive commercial investment to support Openreach’s plans to build new FTTP networks in these areas. We discuss our concerns with this analysis and approach below; however, we also remain unsure as to how this proposal will interact with a Government subsidy scheme. As currently described, it could see consumers pay higher prices in areas where Openreach will never roll-out a new network, or on the flip side could see Openreach receive a double subsidy from both the Government and from its increased regulated prices. Government and Ofcom should publicly explain how these schemes will interact and make amendments where needed to prevent overlap.

 

We have strong concerns about Ofcom’s proposals for rural areas (Category 3 areas as defined in the WFTMR). Ofcom is proposing a new and untested “regional asset based” approach to regulation. This aims to incentivise Openreach to invest in FTTP in Area 3 by inflating current copper pricing with this geographic area (30% of the country) to subsidise the FTTP investment losses. We are concerned that such an approach is unfair as it will see the most rural areas pay higher prices and will likely see those in the most rural areas most impacted as they will pay the higher price for longer, without the ability to access any new services. Similarly, customers who are less incentivised to switch – likely the older or more vulnerable – will pay higher prices for longer, entrenching existing inequalities.

 

We also consider this approach to be anti-competitive: Ofcom’s approach will provide Openreach a subsidy equivalent to around £400 per home passed. This subsidy – which is not connected to any build targets or requirements – will make it extremely difficult if not impossible for alternative investors to compete. This elimination of competition will undermine the Government’s £5bn subsidy scheme which depends on competition to deliver value for money; it will also miss entrench Openreach’s dominance and prevent rural consumers benefitting from the competition which has served their urban neighbours well.

 

Support for take-up

Similarly, to roll-out in commercial areas, take-up of new services needs to be promoted. This is even more important considering that network operators will receive public funds to roll-out in these areas, and therefore these monies need to deliver public benefit. The Government should consider how projects such as voucher schemes or incentives to digitise operations could incentivise take-up in rural areas.

 

4) What does take-up of broadband and mobile services indicate about consumer and business attitudes to digital connectivity? What needs to be learnt from this for the roll-out of, and switchover to, gigabit-capable networks?

 

It is essential that the strategy for full fibre networks learns from previous digital infrastructure projects, both in this country and overseas. Both the superfast roll-out in the UK and the experience of other countries in rolling out new networks emphasise the need for consumer demand to support new networks.

 

As we discussed in our answer to Question 1, consumer take-up underpins network roll-out by offering payback on investment in new networks. It is only users on the network that enable them to offer public benefit in exchange for private and public investment. Take-up is essential if we are to deliver on expected productivity gains from digitisation. It is also a question of fairness – new networks need to be available to all to ensure that the benefits of faster connectivity are available to all.

 

Openreach’s superfast roll-out saw take-up lag behind availability for many years. Even now, take-up stands at just 51% while availability is at 95%.[18] There is agreement across industry that this outcome should not be replicated with the FTTP roll-out, and there are several lessons to learn from this experience.

 

 

 

Government can also play a role in encouraging consumer engagement with and understanding of new products, for example helping with consumer engagement and education campaigns to provide a trusted source of information. The Broadband Stakeholder Group made several recommendations about how Government could encourage take-up, including supporting businesses to use new digital ways of working and extending connection voucher schemes.[19] As discussed in our answers to earlier questions, Government should consider how it can best support adoption of new technologies in the same way that it has tackled barriers to build.

 

It will be appropriate for Government and Ofcom to assess collectively with industry whether any further steps are necessary to maximise voluntary migration to full fibre, and to ensure 100% migration in the medium to long-term. To inform policy development we believe it will be necessary for Government and Ofcom to undertake an assessment of the likely take-up of full fibre by customers over time and the impact on the pace of full fibre roll-out and copper retirement plans. This will enable consideration of whether any further interventions will be required to achieve the objective of 100% full fibre roll-out and take-up. Possible interventions could range from information campaigns to coordinating copper switch-off by area.

 

In terms of commercial ways to incentivise migration, we welcome Ofcom’s requirement that there must be an entry-level FTTP product which is price pegged to the equivalent FTTC product, with the price difference reflecting ISPs’ lower cost to serve FTTP customers. We would expect a similar approach from other network operators. This would simplify the customer message and potentially avoid a need to change customers’ contracts. It would also ease the transition to fibre, particularly for customers who will not utilise the higher bandwidth offered by FTTP.

 

 

5) What will be the impact on individuals and communities whose broadband and mobile connectivity fails to keep pace with the rest of the country over the next 10 years? What is the link with other DCMS policy concerns, such as changing patterns in the consumption of digital media?

 

We are at the beginning of a new era in digital connectivity which will offer immediate service improvements and future-proof our infrastructure, but which will require careful management to maximise benefits. The Committee is correct to ask this question around the risk of digital exclusion if we see two tiers of broadband emerge. The answer touches on many of the points made in our answers to earlier questions, but it right to consider the issue separately to illustrate the risks.

 

As we said in our answer to Question 2, we are now in a period of transition which will continue for many years, as commercial full fibre services become available to more consumers but not to all. This will be a gradual process which needs to be reflected in policy, regulatory and commercial actions.

 

Superfast connections offer a decent quality service, especially as more customers move onto higher speed products (80/20 and above), which will meet bandwidth needs for the average household into the middle of this decade. However, there will be disadvantages for some groups if they are not able to access full fibre connections in the short-term. For example, a small business may be slower to digitise operations if FTTP is not available in its area, while a competitor may have been able to do so earlier and therefore stand to make productivity gains first, gaining market share from its rival.

 

Full fibre services are more reliable than other services, due to the impact of poor weather or environmental changes on copper wires. Therefore, those households which remain on the current copper network will be more susceptible to faults. This problem will be compounded by Ofcom’s proposals in the Wholesale Fixed Telecoms Market Review not to increase Openreach’s Quality of Service requirements on the copper network over the period 2021-2026. Such an approach will see no improvement to quality and services for those customers who will remain on the copper network throughout this period, further entrenching the digital divide between those with fibre and those left behind. What is more, it incentivises Openreach to reduce quality on its legacy network as much as possible, to focus on new full fibre networks. This represents a risk to consumer experience for those who remain on the copper network. We would like to work with Openreach on an improved product set, offering higher bandwidth options, for premises not served by FTTP to support customers and avoid exacerbating the digital divide.

 

Pricing

Those who remain on the current copper network will face price rises from April 2021, as Ofcom permits Openreach to raise prices by inflation, rather than basing its price caps on Openreach's cost to serve customers. This has been justified as a way to ensure that low FTTC pricing does not act as a barrier to the roll-out of new FTTP prices by putting a ceiling on prices which new services can charge, and thereby hinder the roll-out of networks and the growth of competition.

 

However, this fails to recognise the conditionality of many of Ofcom’s assumptions. Network roll-out will not be immediate in all these areas and new networks will take time to be built and become available to customers. We do not yet know how quickly customers will migrate onto new services and the pace will be determined be a range of different factors, which we have discussed in earlier answers.

 

Despite this uncertainty, Ofcom’s proposals will see increased prices apply to all customers on price regulated products, regardless of whether there is any prospect of new full fibre services being available to them during the five year market review period and regardless of the wider economic climate. In these circumstances, consumers are boosting Openreach’s profits but seeing nothing in return for higher prices. This proposal would lead to consumers’ broadband bills being about £900m higher over the charge control period  compared to cost-based prices, while increased prices for leased lines, which are used for business connectivity, would see Openreach make an additional £500m above the level they would be if wholesale prices were based on cost. These price increases come at a time of significant economic uncertainty for businesses.

 

We believe this is unfair: while it is right that price regulation changes when competition is established, it should not be amended when it is only a hypothetical outcome. Moreover, it risks disincentivising FTTP investment: if Openreach can make increased profits by sweating its legacy assets with no increased spend, then it is incentivised to keep as many customers as possible on this legacy network.  Ofcom should reconsider this approach so that price regulation is relaxed when local market conditions show that competition exists within that locality, and not before. If not, then it should look to set ‘commitment mechanisms’ on Openreach, such as ring-fencing to require increased profit from higher prices to be spent on rolling out new full fire networks.

 

We have also discussed our concerns about Ofcom’s approach to pricing in rural areas, which would see 30% of the country pay a price premium to encourage Openreach to roll-out networks to rural areas, but with no formal requirement to do so. We think this approach will entrench the rural – urban divide when it comes to digital infrastructure, and will further inequalities – with poorer communities in some rural areas paying higher prices to fund roll-out outside their own area despite having no guarantee they will see improved services.

 

Link to other DCMS policy concerns

Nationwide full fibre coverage will be a key enabler for new ways of consuming digital media. For example, recent years have seen a substantial shift towards video on demand (VoD): an Ampere study for Ofcom in 2019 found that between 2017 and 2019 each category of VoD increased its share of consumers’ daily viewing habits while traditional broadcast’s share declined by more than 10% to 40%.[20] Over this same period, the average broadband speed in the UK increased from 46.2mbps in 2017 to 64.0mbps in 2019.[21] As more content is delivered over the internet, particularly at higher definitions, broadband connections will need to meet increased bandwidth demands. Ensuring that the full fibre roll-out does not lead to geographic regions being left behind is essential if we are not to entrench a digital and media divide; this is also true of stopping a price barrier emerging which would create unequal access to full fibre services and the associated benefits they will bring in terms of media consumption.

 

A digital divide could also exacerbate other inequalities – for example, the COVID pandemic has encouraged the advance of telehealth. Patchy internet provision could see some groups miss out on telehealth opportunities such as at home monitoring or video consultations. Similarly, the digitisation of public services – from tax renewals to Universal Credit applications – is reliant on citizens being able to access sufficient broadband to meet the needs. Failure to achieve nationwide roll-out could penalise certain groups.

 

6) How effectively do the different stakeholders (UK and devolved governments, local authorities, Ofcom, industry) work together in both the mobile and broadband sectors? How might these relationships be improved to support gigabit-capable roll-out?

 

Full fibre roll-out cannot be achieved by one company or organisation alone – it will take the whole industry working together, along with governments and Ofcom, to deliver this project. We start from a shared objective: to roll-out new networks and move customers onto those networks as quickly as possible. This shared objective has been important in bringing co-operation and collaborative working over the past two years.

 

In particular, we welcome the leadership shown by DCMS: the publication of the Future Telecommunications Infrastructure Review was an important milestone in setting out clear policy direction and focusing the work of the Department. While external events, including Brexit negotiations and now COVID-19, have delayed elements of the strategy (such as the legislation on new builds and wayleave reform), it has been a useful framework for companies to engage with. The original intention was that there would be annual progress reports, but these have not been published, while a full review of the strategy’s impact is due next year (2021). This review should be brought forward to consider the changes since July 2018, notably the Government’s new ambitions for 2025 nationwide coverage, Ofcom’s proposals in the Wholesale Fixed Telecoms Access Review, and the impact of COVID-19 on the sector. It should also update on rural subsidy plans and how the Government’s £5bn scheme will interact with Ofcom’s regulatory proposals.

 

We believe that the FTIR framework now needs to evolve to consider issues around consumer take-up and adoption. As noted earlier, we would welcome the opportunity to review with Ofcom, Government and industry whether the right governance is in place to:

 

We think all parties should consider the appropriate representation for consumers, and for businesses, when reviewing these governance arrangements. Options could include Which? the Federation of Small Businesses and the CBI.

 

Risk of overlap

The Committee rightly notes that there are multiple organisations which share the objective of nationwide gigabit capable broadband. Responsibility for delivering on this commitment is shared and at times different organisations’ activities can overlap with those of others. For example, while telecommunications is a reserved matter for the UK Government, the practical delivery of superfast broadband roll-out projects is led by local bodies in England (predominantly local authorities) and the devolved Administrations, and devolved Administrations have set their own superfast broadband targets. The Scottish Government’s R100 programme is to cover the 5% of the country not covered by the original Digital Scotland (DSSB) project with Openreach which aimed to bring speeds of above 30mbps to all homes by 2021. This will now overlap with the Government’s proposals for a £5bn fund for the rural full fibre programme. As we have noted earlier, the Government’s rural subsidy scheme also seems to overlap with Ofcom’s proposals in the WFTMR for the most rural 30%, which would see higher regulated Openreach prices funding rural FTTP roll-out. This is one example of how confusion exists about specific roles and functions, which could impede policy progress, or see some areas left behind.

 

There would be merit in clearly setting out the roles and responsibilities of different organisations within this space to ensure policies and actions are in alignment. The National Infrastructure Commission could play a co-ordination role due to its national remit and its independence from central Government. This oversight function could also take on additional responsibilities, such as collating roll-out data from network operators and tracking progress towards the 2025 target.

 

Ofcom

The Communications Act 2003 defines Ofcom’s principal duty as to “further the interests of citizens in relation to communications matters and to further the interests of consumers in relevant markets, where appropriate by promoting competition.[22] Since TalkTalk was founded in 2003, we have worked constructively with Ofcom on numerous market reviews and industry consultations. We have always had a high degree of confidence in its approach to evidence-gathering and policy-setting.

 

However, we have been disappointed in Ofcom’s approach to the Access Review process. Ofcom started from the assumption that higher regulated prices will lead to increased full fibre investment and throughout its consultation process has sought evidence to reaffirm that assumption, rather than collecting evidence and using that to guide its regulatory approach. We do not believe Ofcom’s final statement demonstrates that it has considered consumers’ interests; rather, it has instead been led by the demands of institutional investors for increased profits. We have detailed our specific concerns about its proposals above, and we believe this is reflective of a close-minded approach to evidence. We propose that Ofcom undertakes a thorough review of the different incentives for Openreach and altnets to invest in FTTP and analyses the costs and benefits of different regulatory options, to ensure that it is sufficiently protecting the interests of consumers.

 

In February 2020 the Secretary of State announced he is minded to appoint Ofcom as the online harms regulator.[23] We agree that Ofcom is suited to this role as it has experience in content regulation, experience in regulating online companies and good experience in policy-making, and have supported it taking on this role. However, we are concerned that extending Ofcom’s remit to incorporate these new responsibilities could stretch Ofcom’s operation and lead to a loss of focus on its current priorities and broader organisational incoherence. The risk here is not insurmountable but needs to be considered as the legislation to designate a regulator is presented to Parliament. Ofcom must publish details of how it plans to take on the new role without losing focus on or shifting focus away from the telecoms sector.

 

 

7) What is the impact of COVID-19 on the roll-out of full-fibre and 5G infrastructure in both the short and medium-to-long term, including any differences in different parts of the UK.

 

Immediate impact

In the immediate weeks of the pandemic response, there was some disruption to construction due to the need to socially distance and uncertainty in the rules across different local authorities. As TalkTalk is no longer a network builder, we have no specific feedback to share with the Committee. However, we were impressed by DCMS’s engagement with the sector to include the sector within the list of key workers, and to provide information and guidance on how to operate safely. The Department also engaged with local authorities to ensure the guidance was properly understood and intervened on specific issues. We were pleased to see that network construction did not greatly reduce during this period and, anecdotally, we are aware that some local authorities saw it as a chance to increase construction to take advantage of reduced traffic to target those areas for construction, so as to reduce future disruption. This was a sensible and pragmatic response which we commend.

 

We are also aware that many network operators, both fixed and mobile, faced harassment and even in some cases violence as they undertook essential engineering work, due to conspiracy theories regarding alleged links between 5G and the pandemic. This was entirely regrettable; there is no scientific basis for such claims and no engineer should face this type of abuse while carrying out their work. We are not aware that these incidents have led to any significant change to network build plans, but it is essential that government, Ofcom and Parliament continue to tackle this misinformation. While the current pandemic situation escalated their prominence, such theories were in circulation prior to this period and, unfortunately, are likely to continue throughout the whole period of network build. It is essential that there is unity in response of challenging these falsehoods and condemning those who peddle them.

 

Longer-term impact

The recession caused by Covid-19 is likely to have significant impacts on the sector – lower incomes and business activity will reduce demand and willingness to pay for premium services which, combined with reduced capital availability, is likely to slow investment. It is important that Ofcom properly assesses the implications of this for regulation, especially how it could impact the Wholesale Fixed Telecoms Access Review’s assumptions about consumer behaviour and market developments.

 

Wider economy

The current pandemic situation has demonstrated the central role of digital infrastructure to the UK economy. Broadband has enabled businesses to move operations online and redesign their operations, employees to work from home, and families to stay connected through an unprecedented time. Many of the societal shifts over the past three months are likely to be retained at least in part, for example the move to increased home working and reliance on video conferencing software, and the increase in online shopping. It is essential that digital infrastructure can keep up with such shifts and they strengthen the case for full fibre networks.

 

Digital infrastructure can also support economic recovery from the likely ongoing recession. The UK saw a drop in GDP of 20.4% in April and unfortunately unemployment will likely increase as Government support is withdrawn. The digital economy presents an opportunity for growth and employment opportunities: in the short-term, there are several thousands of jobs available in construction and network operation which will be needed to support full fibre roll-out and network operators are announcing plans for job creation.[24] We support these efforts as they help support both economic recovery and full fibre roll-out. Government should support these efforts where it can, for example by linking companies to local employment services to help with recruitment or providing financial support if a particular skills need is difficult to fill. 

 

Looking to the longer-term, digital businesses and ways of working will be important growth areas for the UK economy. Investment in digital infrastructure has historically proven effective at driving growth in the wake of economic problems. Following the 2008 crash, economic recovery was supported by above average growth from the digital sector and in 2018 the pace of growth for technology, internet, media and creative businesses outperformed the economy overall by more than three times, with DCMS research showing that Gross Value Added from the digital sector increased by 30.4% in real terms since 2010, with the telecoms sector contributing £36.6bn, an increase of 35.4% in real terms over the same time period. [25]

 

In 2020, we believe that digital-led growth could play a similar role. CEBR research for Openreach in 2019 found that tech-led economy (termed “flat white economy”) could grow from £240 billion in 2019 to £430 billion in 2025, rising from 12.2% of GVA to 17.8%. Conservatively this could generate 1.2 million new jobs in the sector and around double that number in total once knock on effects are considered. CEBR suggested that these 1.2 million jobs could easily be outside of London, which again links to the Government’s objectives to “level-up” the economy and create opportunity outside of the South East.[26]

 

 


[1] Ofcom, Home Broadband Performance Report, May 2020

[2] Ofcom, Connected Nations: Spring 2020 update (May 2020) (p1)

[3] BSG/WIK, Moving to a fibre-enabled UK: International experiences on barriers to gigabit adoption (June 2020) (p60)

[4] Prism and Tactis, A Cost Analysis of the UK’s Digital Communications Infrastructure options 2017- 2050 (2017) p12

[5] CityFibre, “CityFibre completes its acquisition of FibreNation increasing its rollout plans to pass up to 8 million premises (March 2020)

[6] WIK/BSG, Moving to a fibre-enabled UK: International experiences on barriers to gigabit adoption, (June 2020) p6

[7] Define/ASA, Broadband Fibre Qualitative Research Final Report (November 2017)

[8]FT.com, “BT switches from copper upgrades to full-fibre broadband” (August 2018)

[9] ISP Review, “BT Invest £12bn on FTTP Broadband for 20 Million UK Premises” (May 2020)

[10] Ofcom, Telecommunications Market Data Update Q1 2019, (July 2019)

[11] Ofcom, Promoting competition and investment in fibre networks – Initial consultation on the approach to modelling the costs of a fibre network (June 2019)

[12] Broadband Stakeholder Group/ Analysys Mason, Tackling Barriers to Telecoms Infrastructure Deployment: Issues and Recommendations (May 2017)

[13] Department for Digital, Culture, Media and Sport, Future Telecoms Infrastructure Review (July 2018) p9

[14] Ofcom, Driving digital switchover: a report to the Secretary of State (2004)

[15] Public Accounts Committee, The rural broadband programme  (2014) p3

[16] Digital, Culture, Media and Sport Committee, Establishing World Class Digital Infrastructure (2016) p11

[17] Ofcom Connected Nations, Spring 2020 update (May 2020)

[18] Source: BT KPIs, Q4 2020. Openreach FTTx services pass 28.42m premises, and 14.41m premises have taken superfast or ultrafast services from Openreach.

[19] WIK/BSG, Moving to a fibre-enabled UK: International experiences on barriers to gigabit adoption (June 2020)

[20] Ampere, The UK VoD market: current status and future developments, p3

[21] Ofcom, UK Home broadband performance, (May 2020) p20:

[22] Communications Act (2003), Part 1, Schedule 3 (1)

[23] Department for Digital, Culture, Media and Sport, “Government minded to appoint Ofcom as online harms regulator” (February 2020)

[24] FT.com, “CityFibre to create 11,000 jobs in full-fibre network push, 11th June 2020

[25] Department for Digital, Culture, Media and Sport, DCMS Sectors Economic Estimates 2018 (provisional): Gross Value Added (February 2020)

[26] CEBR, “Using digital to revive the UK – full fibre broadband and the growth of the digital economy could create an additional 1.2 million skilled jobs by 2025” (June 2020)