The bill looms for Broadband Britain
Two years ago BT agreed to separate the millions of phone lines in the nation's skirting boards from the rest of its business to create a standalone company that would deal equally with any operator that wanted to get into the digital home of the future.
Since then Openreach, as that new business became known, has handed over control of more than 3m of the UK's near 30m phone lines to rivals such as Carphone Warehouse's TalkTalk and Tiscali, so they can provide services from home telephony and broadband internet access to TV. A further 5m BT lines are being rented by rivals, using BT's wholesale product, for broadband services. As a result, the UK residential telephony market is fast becoming one of the most competitive in the world.
But the set-up may soon change again since Ofcom is preparing a fundamental rethink of the UK broadband market. The regulator is asking the entire industry what is needed to prepare the country for the digital future as media move online. In this new world, broadband speeds must increase. Will the UK need to dump the copper lines that have connected households for generations? Will the industry have to enter a new era of infrastructure investment? If it does, who will pay for it?
Tomorrow's launch of a wide-ranging Ofcom consultation on so-called "next generation access networks" follows comments last week from Stephen Timms, minister for competitiveness and formerly in charge of e-commerce, that the UK faces a "new challenge".
"Other countries are starting to invest in new, fibre-based infrastructure, delivering considerably higher bandwidth than is available in the UK today," he said in his first major speech in his new role. "It is essential that the UK undertakes timely deployment of technology - we can't lag behind."
Countries such as Korea, Japan, the US and Germany are spending billions building networks based on fibre-optic technology that can deliver broadband speeds far faster than anything possible on the UK's copper wires.
Mr Timms raised the question of whether the government needs to inject funds, but the figures involved are unlikely to please the Treasury. Privately BT reckons that putting fibre into the roadside cabinets that dot Britain's streets and act as the first gatekeeper to the nation's telephone connections could cost anything up to £10bn. Actually getting it into people's homes would cost at least the same again.
In the days before the regulator forced through the separation of BT's local access network from the rest of the business, any discussion about the future would have pitched the former state-owned monopoly against everyone else. But Openreach's chief executive, Steve Robertson, believes times have changed since his business was created and when it comes to deciding where to invest, the whole industry must be involved.
Though some in the telecoms market are adamant that the connection between BT and its network is still too close, others such as Carphone Warehouse see Openreach as more of a partner than a competitor. It is a partnership that is becoming increasingly important. As companies offer more and more services over broadband, so the connection itself - as maintained by Openreach - becomes ever more important. Local loop unbundling - the process by which Openreach helps competitors take control of BT's lines - has been a big success. This means that if a person's broadband connection fails, not only do they lose their access to the internet, but their TV or video-on-demand service disappears and increasingly their home phone dies.
The appearance of this new inter-connected market means it is time the industry stopped using Ofcom as a referee in disputes over particular issues and started to work together to decide where it wants this market to go in the long term, Mr Robertson believes.
"If we judge ourselves by historical standards we can make a convincing case to say we are probably delivering better than we have ever delivered," he says. "However, if we judge ourselves on the standards that we are going to have to deliver to support this new market, now is probably the time to be saying we need to rip up the rulebook.
"I think there was a time when it was BT and everybody else, but the new world we are creating is much more complicated than that. There are lots of substantial players who have a stake in this market now. We have to collaborate."
The discussion about next-generation access networks is an obvious candidate for testing out this new approach. In countries such as Germany, the regulator has secured the incumbent operator's return on its investment in new networks by letting it retain any customer it connects. Openreach has no desire to go down this route and, as Mr Robertson puts it, "take the whole value chain". He wants to invest in next-generation technologies but make that platform available to all comers. He already plans to do so for new homes.
The real problem, however, is what to do about upgrading the residential broadband network. The economics simply do not work unless BT Retail and rivals such as Sky, Tiscali and TalkTalk agree to make use of the new technology and pay for it. In essence, "the decision about whether to put fibre in is not just a BT decision", he says. "Our model says we do not take the whole value chain, we do make it available to everybody else and that means the financial case is even more demanding."
The regulator is already examining the undertakings that BT signed up to when it formed Openreach, making sure that the company has met the promises it made during the telecoms strategic review. Those promises prevented the regulator forcibly splitting the network from the rest of the business.
But John Pluthero, head of Cable & Wireless Europe, Asia and US, is in no doubt that Openreach is far from perfect. "The telecoms strategic review was all about relinquishing powers in return for specific measurable undertakings from BT," he said. "Given the number of times BT has breached its undertakings, why would anyone believe that anything has changed?"
Openreach has broken its promises more than a dozen times over the past two years although BT maintains that these breaches were not serious and mostly procedural. But there are certainly still some major issues with the company. In its most recent report, the telecoms adjudicator said Openreach was still too slow in dealing with some of the faults reported by its customers.
Ever since it was created there have been questions about whether Openreach should remain part of BT. Its creation has arguably helped create a vibrant and competitive broadband market in the UK, but with Ofcom asking what the industry should look like, it remains to be seen whether Openreach will get to blow out its next set of birthday candles.
Explainer: Next generation
The rapid rise in broadband usage across the UK has fuelled a boom in online content. From high-specification newspaper websites and music download sites to video content, the market is expanding. But to access all this digital content, internet users need ever-faster connections. This year the government's independent adviser, the Broadband Stakeholder Group, warned that by 2012 British internet connections will need to be about 10 times the speed they are now. The average UK broadband household gets somewhere between two megabits a second - 50 times faster than dial-up - and eight megabits. BT's copper wires are able to get up to 24 megabits a second in some cases and the company plans a nationwide 24 megabits service next year. But in cities such as Hong Kong and Seoul, 100 megabit connections are common. The question to be posed by Ofcom tomorrow is whether the network must be junked in favour of new fixed-line technologies such as fibre-optic cables or augmented by technologies such as high-speed wireless broadband.
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