- Email: [email protected]
The case against competing infrastructures
Tekcommunications Policy, Vol. 19, No. 4, pp. 285-298,1995 Copyright @ 1995 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0308.5961/95 $10.00 + 0.00
The case against competing infrastructures
J M Harper
The EU Council of Ministers is considering proposals to liberalize telecommunications infrastructure. This article shows that there is no evidence that infrastructure competition in the UK has contributed to Improvement in BT’s performance. The author argues that the public wants and deserves choice of services and prices at all levels of telecommunications now. It should not have to wait 10 or 20 years while competitors to the old monopolies laboriously construct networks and wrestle with funding problems. Mr Harper is Senior Partner with the Lullington Group, 11 Lullington Close, Seaford, East Sussex, BN25 AIH, UK (Tel: +44 1323 898316; fax: +44 1323 490944). Mr Harper was the last public sector Managing Director of ET’s inland operations. This paper is based on a presentation to the NETEPS workshop on ‘Competition and telecoms infrastructure in peripheral regions and small economies’, Dublin, 16 September 1994.
‘Europe and the Information Society European Commission, Brussels (May 1994) The term ‘broadband’ is used to refer to public switched broadband service, which would provide voice, data, vision and virtual reality communications. 3Third Repoti of Trade and Industry Committee, session 1993-94 HC . 285-L
HMSO, London (July 1994) para 108; Creating the Superhighways of the Future: Developing Broadband Communications in the UK Cm 2734, HMSO. London
(November 1994)
The Bangemann Report recommends member states of the EU to accelerate liberalization by ‘opening up to competition infrastructures and services still in the monopoly area’.’ The issue of infrastructure liberalization is currently being actively debated within the Council of Ministers on the basis of a Green Paper produced by the Commission. I wish to challenge the opening up of competition in infrastructure. It is axiomatic that competition provides the best framework for telecommunications services. In the UK it has been successful for customer premises equipment and for specialized value-added network services (VANS). The question I wish to raise concerns the best way to organize physical plant and industry structure to facilitate the flow of service competition. The
UK
position
UK policy currently allows any entrant who wishes to replicate telecommunications infrastructure to do so. BT currentlv has a number of such competitors. In long distance it competes with Mercury, which began operations in 1982, and with a number of new entrants licensed following the full opening of the market in 1990. Its principal local competitors are a number of combined telecommunications and cable TV companies who now hold 125 franchises, each of about 100 000 potential customers. Plant has been constructed in over 70 franchise areas. The biggest single interests now involved are the US regional Bell operating companies (RBOCs) Nynex and US West. They took their stakes following the virtual collapse of the original native cable operators in 1988. These companies’ investment is protected by two overlapping regulatory bans which exclude the BT group (not subsidiaries) from providing or conveying entertainment television. BT says that the effect of this is to exclude it from broadband also.2 It has pressed for a long time for the bans to be lifted. The UK Parliamentary Select Committee on Trade and Industry proposed a compromise on these bans which the government did not accept.3 The Committee received written evidence on the question of competing infrastructures but did not discuss it in hearings. It recom285
The case against competing infrastructures: J M Harper
mended that ‘the Government and OFIEL examine the possibility of encouraging PTOs and cable companies to cooperate in providing broadband infrastructures in areas where there is no likelihood of cable television franchises being awarded by the end of 1995’. In reply Oftel has indicated that it regards cooperation as a matter for the competitors.4 Were they to come forward with proposals Oftel would welcome this. The Select Committee goes on to say: While we agree with many of the general following, we have three general criticisms.
principles
the Government
is
Government policy is too concerned with competition and infrastructure in existing services and needs to be refocused on broadband services. There appears to be little sense of urgency, as shown by its attitude to the restrictions on PTOs. There is lack of a clear sense of vision and excitement about what broadband communications could do for the UK and its people; in short there is a lack of the type of leadership being shown in the US.’
Elsewhere I have shown that the UK was falling seriously behind the USA in the exploitation of broadband, as measured in terms of concrete trials and pilot projects.6 The UK government has repudiated these criticisms,7 but they are fully justified by the facts. Bangemann correctly expressed concern about the inadequate character of the response of Europe as a whole to broadband. Not only has the political lead given in the USA been more positive but the application developments and the commercial trials and pilots announced in the USA are far more ambitious than anything in the UK or in Europe. And it is only now, following these criticisms, that the UK government has given any positive lead.
Position in European countries Many European countries are in transition from monopoly to competition. Several are apprehensive that the Commission will require former PTTs to be disqualified from CATV and to divest themselves of CATV networks, in the interest of infrastructure competition. BT’s experience indicates that this will seriously discourage them from public broadband. The former PTTs are the principal national repositories of telecommunications know-how and resources. To exclude them from broadband is not desirable. This is an important issue for the future.
BT’s performance to date
4Response to Trade and lndust!y Committee Report on Optical Fibre Networks Ottel, London (November 1994) para 31 50p tit Ref 3, paras 132-133 ‘Harper, J M ‘Riding tandem on the UK super-highway’ Financial Times 12 August 1994 ‘Creating the Superhighways of the Future, op tit Ref 3
286
The received view is that infrastructure competition in the UK has brought about a significant improvement in BT’s performance. It is true that BT’s internal organization has been repeatedly changed, and BT has adopted a policy of procuring the best equipment available on the world market, both in response to the threat of competition. There has been some rebalancing of BT’s tariffs as between long distance and local. But otherwise it is impossible to isolate the effects of competition from those of other important developments. These include privatization, the separation out of regulation, the creation of Oftel, the growth of consumerism, the rise in public expectations for public services generally, the separation of posts from telecommunications,
The case against competing infrastructures: .J M Harper
Figure 1. Real changes in BT prices.
and the general reform of UK industrial relations by the Thatcher government. One can only study the combined effects on performance overall and try to make deductions. Figure 1 plots real changes in the overall BT price envelope.* The upward swings in 1975/76 and in 198OM occurred as prices were adjusted to absorb the effects of violent national wage inflation, in the absence of any constraint similar to the present price cap. Otherwise the ‘1 am indebted to Mr J J Wheatley, former aggregate improvement before and after competition is similar. Figure 2 BT Chief Economist and now a consultant, for the numeric data for Figures 1 and 2. plots current account labour productivity.’ As one would expect from The remaining data were taken from PO recent announcements about staff reductions, there is a marked gain and BT Annual Reports and Accounts, after 1992. But labour is only one component of total operating cost, from BT Telecommunications Statistics 7983 in respect of the period before privawhich is what matters. BT’s operating cost per line (Figure 3) does not tization and from the annual Blue Books of show anywhere near such a marked reduction since 1992, no doubt the UK Central Statistical Office. The deviation downwards in 1980181 because much of the work previously done by BT staff is now being was due to a once-for-all change in the done by contractors. There was actually a rise after competition, which statistical base arising from a transfer of staff from capital to current account. It has has only now been brought back down to the level attained in 1980. Figure 4 plots local and national (trunk) calls failing because of network no significance for the argument. Per cent change in revenue per head of staff at constant BT prices
Figure 2. Change in labour productivity - staff employed on current account (per cent change in revenue per head of staff at constant BT prices).
-15 P
/ , I I I / I I / I I I I, 1970
1975
I I I I / I II
1980
1985
1 I
I,
I
I
1990
287
The case against competing infrastructures: J M Harper 450
250200150-
10050-
Figure 3. Operating cost per connection (f sterling at 1990 prices).
o
I
I I 1975
I
I
I
I I 1980
I
I
I
I
1985
!
1 I
I
!
1990
I
I
I
I
deficiencies. The consistent improvement over the whole period is due to improved management disciplines and the modernization programme begun in 1973. Figures for the fault service are set out in the Appendix. Performance is similar over the whole period. In the key future area of broadband loop technology, BT is planning to use full fibre-to-the-home. Its CATV competitors are expected to upgrade their existing coaxial cables with the hybrid fibre/coaxial RF technology. But these rival developments owe little to infrastructure competition in Britain. The BT fibre development programme goes back well before competition, and its momentum continued unaffected by the failure of the native cable TV competitors. The hybrid was developed for the US cable industry. The Post Office (PO), which administered UK telecommunications before the separation of BT, achieved a great deal in the 197Os, but when I left in 1983 there was a lot still to get right. To its credit the privatized BT has successfully tackled most of this. It has carried on the
42-
1970
Figure 4. Percentage due to the network.
288
of calls failing
1980
1975 +
Local
-+
1985 National
1990
The case against competing infrastructures: J M Harper
trends it inherited and service is now better than ever before. Figures l-4 bring out how much BT performance has been affected by fluctuations in the general UK economy; but there is no evidence of any positive change traceable to competition as such.
Local competition Local network infrastructure competition poses complex issues. Circumstances vary between countries. In the UK the BT distribution network is nearly complete across the country. BT has duct up practically all streets and roads, and a mixture of overhead and underground drops into the vast majority of premises. Cable TV plant, on the other hand, existed only in a few localities in 1984; and what there was was unsuitable for modern multichannel TV service. Apart from the bans on BT, the principal issue in the UK from 1984 onwards has been the great cost of creating a second distribution network to carry cable TV and telephony. In the USA there are extensive existing networks for the distribution of both telephony, using copper, and multichannel cable TV, using coaxial cable. Cable TV is profitable. Principal issues concern entry by CATV into telecommunications and vice versa, and upgrading cable TV plant to carry telecommunications and broadband, and telephone plant to carry TV programmes. In some European countries the former PTT has complete or partially complete networks for both telephone and cable TV distribution, and each has its own duct network. Their situation is similar to that in the USA. In others the situation is similar to that in the UK. Germany is unusual in that the former East Germany is being completely recabled with modern fibre distribution, while in the West Deutsche Telekom owns both a conventional copper telephone distribution network and an extensive coaxial cable network for cable TV. In a number of other countries, including members of the former Eastern bloc, penetration is very low and modern telecommunications are starting almost from scratch. The RBOCs had their own reasons for setting up in the UK, concerned at that time more with cable TV than with telecommunications and with gaining experience to use later in their home markets. They have been more successful than they expected in winning telecommunications customers from BT; they estimate the telephony take-up rate is about 20%. “’ Cable TV take-up is currently 26%) whereas in the USA it is 70%. There are signs of an increased rate of cessations, as customers won by low pricing give up as prices are raised to long-term levels. The operators have nevertheless been encouraged enough to make investments of over f2 billion so far, and they plan to make a total investment of $6 billion. But six years after they started they are still only serving customers equivalent to about 2.5% of those of BT. At the present rate it will take them many years to reach a serious market share around, say, 30%. Moreover the most promising franchises are naturally being cabled first. “Third Report of Trade and Industry Committee, Session 1993-94, op tit Ref 3, Table 3
Practical considerations In the early 1980s there were what were seen as important
practical
289
The case against competing infrastructures: J M Harper
reasons for encouraging infrastructure competition. The idea was that it made it possible for the service given by competing operators like Mercury to be independent of that of the original operators like BT. This was an important advantage in situations of breakdown or industrial action by staff. But the argument was never watertight. In practice competing networks are always interdependent. The Mercury network cannot provide full service unless it can interwork with the BT network, for instance. The industrial relations argument was already losing force even as it was being made. Networks today really will function for months with no more attention than can be given by a small number of engineering managers working without supporting staff. The breakdown argument may seem more telling. Experience has shown that large modern software-controlled networks are vulnerable to catastrophic breakdowns. If such a breakdown occurs on an ex-P’IT network there are obvious advantages in having other networks that remain unaffected. But once again the competing networks can only give partial service in such situations. And in any case the consequences to customers and the loss of operator revenue due to major breakdowns are so serious that the problem of network vulnerability to breakdown will undoubtedly be cracked anyway by the operators acting in their own bailiwicks. The arguments for diversity obviously go up with distance. Landline communications between, say, London and Tokyo are more vulnerable than those between London and Croydon. From the security of service point of view there is a practically unanswerable case for duplication of facilities for transoceanic and transcontinental telecommunications. But diversity arguments are not enough in themselves to justify alternative inland infrastructures in countries like the UK or smaller.
Assessment of UK experience The UK’s experience is that long-distance infrastructure competition has been slow to bite. Mercury, the first and largest competitor, has only a single-figure percentage market share. It is faltering commercially and shedding staff. The main thrust of competition has been on price, conducted by cutting into profit margins. The cost and quality of long-distance service had been improving steadily for many decades under monopoly. There is no evidence that competition has added any new impetus towards efficiency. Local telecommunications are an unpromising area for competition on their own. In the early 1980s the UK government hoped that if local telecommunications were coupled with cable TV its finances would be supported by TV revenues. But, as we see 10 years later, the business prospects of competing local telecommunications remain uncertain. That is why the entertainment bans remain on BT. A good deal depends on the future relative success of cable TV, satellite and conventional off-air broadcasting. Satellite has many more users than cable at present, and off-air has of course a very well established position in the UK indeed. There are indications that the large coverage of satellites has greater appeal to advertisers than the tightly targeted coverage offered by CATV. Digital satellite broadcasting can offer a similar number of channels as cable systems, and it is likely to prove a challenging competitor. While the bans on BT remain in force, the cable operators enjoy what
290
The case against competing infrastructures: J M Harper
Figure
5. PO/BT net growth in lines.
IIIIInli,m,i,,I,,,,,I,,i,I,,,,i,,,iIi,,IIIIIIIIIIIImrrlII,,I,,,,,
25
30
35
40
45
50
55
60
65
70
75
80
85
90
are really unregulated monopoly operations. This will pose serious problems in its own right if it persists. The operators may have to be brought under regulation. If they upgrade their facilities to broadband, as they have said they will,” and if they do this before BT begins to install broadband plant, this will further strengthen their positions. If it becomes apparent that broadband has real potential to earn large revenue in its own right, the situation may change. Particularly in business districts, BT could conclude that it is justified in investing in broadband plant regardless of the bans. Where this happens or if the bans are lifted, BT could regain the upper hand. Otherwise it could simply opt out of local service. The regulatory regime is getting into increasing difficulty with the commercial and engineering problems of interconnecting competing networks, with no way out in sight. To sum up, the UK is further down the road of infrastructure competition than any other major country. UK experience has been that it is slow to get moving, with consequent serious delays to service competition. It is difficult to detect any positive effects on BT’s performance. Some of its other consequences are active sources of difficulty. The business prospects of the present competitors are uncertain. Moreover the UK has largely lost its traditional position alongside the USA as a world leader in the application of developments in network technology.
The future of the industry
” /bid para 60
The profitability and growth of telecommunications over the last 20 years have been due primarily to the telephone service. But telephony is fated to decline and it is doing so (Figure 5). International telephone service, the biggest single profit earner, shows a marked reduction (Figure 6). If the industry is to avoid stagnation and continue to satisfy investors it needs large-scale new services. The big carriers have turned to international business services, but this market is limited and competition is fierce. Information highways are the only serious candidate for the future. But they will need huge amounts of new capital f15 billion for BT alone. The industry faces its toughest ever financing challenge. 291
The case against competing infrastructures: J M Harper 30
25
I
10 5
Figure 6. PO/BT international calls (per cent growth in year).
0
To attract and justify investment on this scale one must be able convincingly to predict future profitability. The industry is shedding labour, but most of the available savings in operating cost are needed to hold down present tariffs while maintaining dividends. Infrastructure competition is adding a new layer of costs through loss of economies of scale and increases in idle capacity. Competition is depressing longdistance prices and profits. Local telecommunications are traditionally unprofitable, and competition must fragment what profits there are among companies. Profits could be retrieved by raising local prices, but this would be a most peculiar result for competition. And as has been demonstrated in the UK, where a selective price cap has been applied to rentals, local prices will always be severely constrained by political pressures whether the operator is privatized or not. Taken together, these effects must substantially depress the future overall profitability of the industry. Information highways could bail it out, but they require investment and investment requires profitability. The industry is caught in a vicious circle. Infrastructure competition is the very last thing it needs.
The limitations of present thinking There is no law of nature which says that competition is the right answer for everything. History alone should make us wary. The Wealth of Nations is treated as gospel. The British canals of the early 19th century were the first coordinated communications network in that country since the Romans. But when Adam Smith wrote his treatise even the canal network was in its infancy. He knew nothing of the problems of modern utility networks. The 19th century rediscovered the hard way through the early days of the railways the importance of ordered infrastructures. The later Victorians and the Edwardians did not hesitate to apply the lessons they had learnt from this experience to telegraphs and the telephone. The history of telecommunications up to the first world war is of increasing concentration of services on monopoly operators. This was almost certainly an essential precondition for the development of telecommunications as a universal service. It is highly improbable that competing private operators would have created 292
The case against competing infrastructures: J M Harper
the countrywide networks we take for granted today, or would have updated them to their present level of technology. This applies especially to those sectors of the network which serve the main population of residential users, which are notorious for being under-utilized. Identical issues arise for broadband. The history of telecommunications is also one of creation and exploitation of economies of scale. The first links between distant cities used copper conductors which provided a single speech channel per pair. They were followed by successive generations of electronics, each directed to getting more and more channels out of a single cable medium. Modern SDH transmission systems using optical-fibre cables have standard capacities up to 2.4 Gbps, or 37 500 speech channels on a single optical fibre. Capacities and economies of scale are set to go higher still. The same is true - if not more so - of switching. Enormous concentrations of traffic are possible on single ATM switches. Single switches are being designed with a potential total throughput of 60 GHz, enough for nearly a million simultaneous voice connections or the whole traffic of cities as big as London and New York. The same basic logic applies to the fibre distribution rings which may be expected to replace copper customer distribution out to the kerb. The technology is moving relentlessly in the direction of ever-increasing potential economies of scale. The potential seriousness of the loss due to replication of plant is increasing in a corresponding way. Huge sums are involved in the construction and renewal of modern telecommunications networks. Over the past 25 years the PO and BT have between them invested the equivalent at 1994 prices of well over f60 billion, or over &lo00 per customer, to create the present BT network. Such a scale of investment per customer is at least one order greater than anything found or financed by companies in general business. Replication of plant adds even more expense and a new risk in respect of market share. The higher the investment and the risk, the more cautious privatized companies are obliged to be. The spread of new facilities is bound to be slowed up. The market is seen at its best as a mechanism for optimizing the use of resources and for stimulating advances in design and technology in consumer products like cars and detergents, or in services like life insurance and travel. Product life cycles are short. Product designers gain a short-term edge by what are often quite small advances in design which are worked out in secret until they are ready to be put on the market. Such advances are then leapfrogged by competitors developing similar advances with similar tactics; and so on. Telecommunications networks are in a quite different category. Product life cycles run into decades. Even with the rapid advances in technology and manufacturing technique of recent years it has taken 30 years for electronic switching really to pervade the UK network and even now there are still electromechanical enclaves. Partly for this reason the tactical secrecy taken for granted in most markets does not apply in telecommunications networks. Secrets always leak over time. Secrecy is foreign to the tradition of the industry and would almost certainly be counterproductive if enforced. Telecommunications has made its huge strides through a deeply rooted tradition of international pooling of knowledge. Experience has shown over and over again that telecommunications engineers produce the biggest advances if they are allowed to share thinking across company boundaries. There is no room
293
The case against competing infrastructures: J M Harper
for secretive short-term shock tactics. Again in the car or detergent markets the end-consumer has direct acquaintance with the product and through his or her purchasing behaviour directly influences its characteristics. The end-consumer of telecommunications does not have such acquaintance with or influence on exchanges or transmission systems. Yet, despite all this, policy as we have it at present views physical plant as though telecommunications were no different from the general run of industrial activity. Indeed competitors are being actively encouraged to create their own plant by measures which hold back the former PTTs, like the entertainment ban on BT. This is clearly misjudged.
The business interests of competitors To sum up the argument so far, there is a very strong case for reunification of plant in the UK in the interests of first-hand competition for services. It follows that the rest of Europe should not pursue policies of infrastructure competition. In the UK the question arises how reunification is to be brought about. Companies who have created competing facilities cannot be made to give them up by compulsion. The point to be emphasized is that the arguments above demonstrate that it would be in the competitors’ business interest for the network to be reunified. They have to be convinced of this and of the need to take steps themselves accordingly. New entrants wishing to create their own facilities have to be persuaded by similar arguments that this would be against their own interest. It is not surprising that the local competitors to BT and the great majority of the long-distance competitors have decided to create their own facilities. The only alternative so far has been to use BT facilities. No one wants to be at the mercy of a big competitor. The possibility of their using facilities owned by anyone other than themselves or BT was not considered when UK policy was formulated. If a country’s network is to be kept unified or reunified it must be owned by some body other than the ex-monopoly. This necessarily raises the question of the structure of the industry.
The structure of national telecommunications Recent developments in telecommunications policy in the UK and Europe have been heavily influenced by concern about general competitiveness compared with the USA and particularly the countries of the Pacific Rim. There has been very specific concern about high longdistance leased-line and international tariffs. These matters are important, but they are primarily to do with specialized communications for business at international and, so far as Europe is concerned, crossUnion distances. Given the arguments of diversity referred to above and the present tariff situation, there is a powerful case for competition by replication of infrastructure at these distances. All the signs are that once competition in this format is introduced tariffs come down to acceptable levels. This is a relatively short-term issue, sensibly dealt with at Commission level. The really weighty issues for the future which make it necessary to re-examine industry structure revolve around broadband for the general populations within member countries. Their existing circumstances in telecommunications and their legislative and administrative cultures are
294
The case against competing infrastructures: J M Harper
so
diverse that structure has to be addressed as a national matter by each country for itself. Continuing with the UK as the example, in the early 1980s the telecommunications functions of the PO were transferred wholesale to BT. It has to provide the network and the complete range of services to everyone, countrywide. This pattern dates back to nationalization in 1910, when there were at most half a million ‘subscribers’, the only services concerned were telephones and telegraphs and the telephone was a luxury. There are now 40 times as many subscribing customers; telecommunications is part of life for 54 million people; and its services and facilities have ramified out of all recognition. The task had outgrown the unified structure well before privatization, without our realizing it. In recent years, as BT has approached its present size, radical changes in internal organization have become more frequent. The way the search for the right formula has had to be stepped up prompts the question whether from its own point of view BT may not be past the point where it is possible to devise a satisfactory organization at all within the present all-embracing structure, even for conventional telecommunications. Competition adds a layer of difficulty of its own. Examples which seriously trouble the UK regime are the difficulties of interconnection and of arranging fair competition in services and customer apparatus, when BT is at once the dominant provider of network facilities and a competitor in the retailing of services and apparatus. The advances now in prospect in technology and services are going to add further complications. In the case of interconnection, at least, there is no obvious way out. Things will get more and more difficult. All these arguments apply or will apply before too long in most European countries. Many countries are probably going to wish to keep one operator big enough to hold its own on the stage of world business communications. But most of the ex-P’ITs are now or soon will be big enough for there to be a number of permutations by which their functions might be divided which would still enable this requirement to be met. The case for each EU country radically to re-examine its operating structure at national level is unanswerable. There is an alternative structural model already working in practice in the UK. Mercury’s service to the bulk of its customers is provided over BT or cable TV company network plant. In other words, the retail (service) functions are provided by one company and the wholesale (network) functions by another. A similar distinction between retail and wholesale (network) functions has been made in UK cellular radio since the outset. The idea of such a distinction is increasingly becoming recognized in other contexts. Elsewhere I have made a thorough examination of the structural issue under modern conditions, taking account of this and of prospects for broadband. I summarized the conclusions as follows: (i)
The advantages of competition as a stimulus to efficency and low prices in activities carried out directly for consumers are beyond dispute. (ii) Over the next decade or so the boundary of the high-tech network will move out to within half a kilometre or less of customer premises. (iii) Since this high-tech network is inherently of lower labour intensity
The case against competing infrastructures: J M Harper
than traditional plant, the effect will be to shift the centre of gravity of labour costs and problems even more clearly towards the periphery than it has been in the past. (iv) In terms therefore of technology and of management a new natural boundary is already forming between network operations and the activities carried out at first hand for customers. The only way satisfactorily to resolve the problem of fair competi(v) tion is to arrange that all competing companies are of roughly the same order of size; that none of them has special advantages like that of being, or being associated with, a dominant network operator; and that (with some possible exceptions) there are at least two companies in competition for every part of direct consumer business in each part of the country. (vi) A future structure based on (i)-(v) would have important advantages over the present UK structure. It would promote the rapid development of true competition for consumer business and would greatly reduce the present strains in the regime. l2 Mututis mutandis these conclusions hold good for practically all European countries besides the UK. The ideal structure for them would therefore be one in which:
(4
a series of competing unregulated companies of roughly similar size retail the inland services; @I the inland network, including distribution plant, is run by a separate single regulated operator whose role is to provide network facilities on a fair basis to the retailers; the retail role of this network operator is confined to international services both at home and overseas.
cc>
“Harper, J M A 27.9 Century Structure for UK T&communications Cbmmunications Educational Services, London (1991) Ch
11 ‘3Harper op tit Ref 6
296
The classic objection will be that (b) would recreate monopoly and inefficency. To counter this and to provide a sensible mechanism of transition I have proposed a new formula.13 Using the UK as an example, BT and the main competitors should be steered by national government voluntarily to form a nationwide broadband network company which they would jointly own in equal shares. National government itself should take a stake of, say, 20% in the company to enable it to argue for consumers’ interest and as a guarantee of fair play. BT’s contribution would include its existing duct network - a key resource. The company would have a professional Board made up exclusively of its owners’ representatives, including at least one government director. To ensure efficency its managing director and its top executives would be appointed by the owners on regularly renewable contracts, with stringent performance-related pay requirements. The Board would control expansion of broadband across the country, in step with progress in marketing. The existing BT narrowband structure would gradually wither away; the recently constructed cable TV networks would be absorbed into the new company as they were upgraded to broadband. Profits would be determined by a return on assets requirement not to be fallen below or exceeded, set to correspond to the upper quartile of returns being earned by blue chip companies generally and ratified by the regulator. Profits would be reinvested or distributed bv agreement between the owners. Initial investment and later invest- - requirements not met from profits would be found by the owners ment or from the market. Anyone who wished to provide broadband services to the public,
The case against competing infrastructures: J M Harper
including of course BT and the present cable TV operators, would be entitled to use the new network, paying standard charges to the new company. These charges would again be ratified by the regulator. There would be free, fair and unregulated competition for provision of all services over the network. A similar formula should be introduced in continental countries from the outset. Service competition would be greatly facilitated and advanced. The investment expenditure and the risks of the individual operators would be greatly reduced. The new network company should find it very much easier to raise capital for network innovation, including broadband. The technical and commercial problems of interconnecting competing networks would be eliminated.
Conclusion The linking of competition in services to competition in infrastructure is wrong. Experience on both sides of the Atlantic is the same. Because competing infrastructures are immensely expensive and take a decade or more to create on any real scale, competition in services is unacceptably delayed. The public wants and deserves choice of services and prices at all levels of telecommunications now. It should not have to wait 10 or 20 years while competitors to the old monopolies laboriously construct networks and wrestle with funding problems. Overall my view is therefore as follows: ?? Facilities-based
competition is correct for international carrier telecommunications and for long-haul telecommunications over continental distances in the USA and Europe and in countries the size of Russia and China. ?? However, the correct course for inland telecommunications in countries the size of the UK, France and Germany and in smaller countries is to retain or to return to single unified networks, controlled by unified operators owned by the main service providers concerned with a minority stake owned by national government, and subject to regulation. ?? In all cases service provision should be totally separated from carrier operations and freed completely for unregulated competition.
Appendix Table 1. PO/BT fault clearance
Fault service statistics Table 1 sets out detailed BT performance in the time taken to clear customer faults. It becomes undesirable to push performance above about 92% of faults cleared by the end of the next working day, because costs rise sharply. On the other hand, experience was that public complaints began to rise sharply when the figure dropped below 85%. The range 8.5-92% was regarded as acceptable by the PO. Service was and still is
performance.
Percentage By end of next working day 1981 \Co;petio”
cleared Within two working days
80.0 begins here.)
1983 1984
79.6 85.1 85.7
(Privationin October 7984.) 1985 1986 1987 March Sept 1988 March Sept 1989 March Sept 1990 March Sept
89.9 87.1
80.8 86.3 77.5 91.4
73.9 86.5 so.2 91.6 94.6 96.2 90.1 97.8
297
The case against competing infrastructures: J M Harper Table 2. BT’s fault clearance targets met for business and residential lines, 1991-93.
1991 March Sept 1992 March Sept 1993 March Sept
298
Business
Residential
86.3 07.2 87.9 83.0 03.2 66.3
81.5 85.9 85.8 81.7 76.4 80.2
affected from time to time by periods of exceptionally bad weather, and this can affect results. The basis of the statistics has varied, but a sufficient series is available to give an idea what actually went on. Priority had always been given to business fault clearance. In 1991 the basis of the published figures was
changed to reflect this, as illustrated in Table 2. The target for business line clearance was now five working hours, and for residential lines nine working hours. By and large performance is remarkably uniform over the whole period, with no visible link with pressure from competition.
The case against competing infrastructures
J M Harper
The EU Council of Ministers is considering proposals to liberalize telecommunications infrastructure. This article shows that there is no evidence that infrastructure competition in the UK has contributed to Improvement in BT’s performance. The author argues that the public wants and deserves choice of services and prices at all levels of telecommunications now. It should not have to wait 10 or 20 years while competitors to the old monopolies laboriously construct networks and wrestle with funding problems. Mr Harper is Senior Partner with the Lullington Group, 11 Lullington Close, Seaford, East Sussex, BN25 AIH, UK (Tel: +44 1323 898316; fax: +44 1323 490944). Mr Harper was the last public sector Managing Director of ET’s inland operations. This paper is based on a presentation to the NETEPS workshop on ‘Competition and telecoms infrastructure in peripheral regions and small economies’, Dublin, 16 September 1994.
‘Europe and the Information Society European Commission, Brussels (May 1994) The term ‘broadband’ is used to refer to public switched broadband service, which would provide voice, data, vision and virtual reality communications. 3Third Repoti of Trade and Industry Committee, session 1993-94 HC . 285-L
HMSO, London (July 1994) para 108; Creating the Superhighways of the Future: Developing Broadband Communications in the UK Cm 2734, HMSO. London
(November 1994)
The Bangemann Report recommends member states of the EU to accelerate liberalization by ‘opening up to competition infrastructures and services still in the monopoly area’.’ The issue of infrastructure liberalization is currently being actively debated within the Council of Ministers on the basis of a Green Paper produced by the Commission. I wish to challenge the opening up of competition in infrastructure. It is axiomatic that competition provides the best framework for telecommunications services. In the UK it has been successful for customer premises equipment and for specialized value-added network services (VANS). The question I wish to raise concerns the best way to organize physical plant and industry structure to facilitate the flow of service competition. The
UK
position
UK policy currently allows any entrant who wishes to replicate telecommunications infrastructure to do so. BT currentlv has a number of such competitors. In long distance it competes with Mercury, which began operations in 1982, and with a number of new entrants licensed following the full opening of the market in 1990. Its principal local competitors are a number of combined telecommunications and cable TV companies who now hold 125 franchises, each of about 100 000 potential customers. Plant has been constructed in over 70 franchise areas. The biggest single interests now involved are the US regional Bell operating companies (RBOCs) Nynex and US West. They took their stakes following the virtual collapse of the original native cable operators in 1988. These companies’ investment is protected by two overlapping regulatory bans which exclude the BT group (not subsidiaries) from providing or conveying entertainment television. BT says that the effect of this is to exclude it from broadband also.2 It has pressed for a long time for the bans to be lifted. The UK Parliamentary Select Committee on Trade and Industry proposed a compromise on these bans which the government did not accept.3 The Committee received written evidence on the question of competing infrastructures but did not discuss it in hearings. It recom285
The case against competing infrastructures: J M Harper
mended that ‘the Government and OFIEL examine the possibility of encouraging PTOs and cable companies to cooperate in providing broadband infrastructures in areas where there is no likelihood of cable television franchises being awarded by the end of 1995’. In reply Oftel has indicated that it regards cooperation as a matter for the competitors.4 Were they to come forward with proposals Oftel would welcome this. The Select Committee goes on to say: While we agree with many of the general following, we have three general criticisms.
principles
the Government
is
Government policy is too concerned with competition and infrastructure in existing services and needs to be refocused on broadband services. There appears to be little sense of urgency, as shown by its attitude to the restrictions on PTOs. There is lack of a clear sense of vision and excitement about what broadband communications could do for the UK and its people; in short there is a lack of the type of leadership being shown in the US.’
Elsewhere I have shown that the UK was falling seriously behind the USA in the exploitation of broadband, as measured in terms of concrete trials and pilot projects.6 The UK government has repudiated these criticisms,7 but they are fully justified by the facts. Bangemann correctly expressed concern about the inadequate character of the response of Europe as a whole to broadband. Not only has the political lead given in the USA been more positive but the application developments and the commercial trials and pilots announced in the USA are far more ambitious than anything in the UK or in Europe. And it is only now, following these criticisms, that the UK government has given any positive lead.
Position in European countries Many European countries are in transition from monopoly to competition. Several are apprehensive that the Commission will require former PTTs to be disqualified from CATV and to divest themselves of CATV networks, in the interest of infrastructure competition. BT’s experience indicates that this will seriously discourage them from public broadband. The former PTTs are the principal national repositories of telecommunications know-how and resources. To exclude them from broadband is not desirable. This is an important issue for the future.
BT’s performance to date
4Response to Trade and lndust!y Committee Report on Optical Fibre Networks Ottel, London (November 1994) para 31 50p tit Ref 3, paras 132-133 ‘Harper, J M ‘Riding tandem on the UK super-highway’ Financial Times 12 August 1994 ‘Creating the Superhighways of the Future, op tit Ref 3
286
The received view is that infrastructure competition in the UK has brought about a significant improvement in BT’s performance. It is true that BT’s internal organization has been repeatedly changed, and BT has adopted a policy of procuring the best equipment available on the world market, both in response to the threat of competition. There has been some rebalancing of BT’s tariffs as between long distance and local. But otherwise it is impossible to isolate the effects of competition from those of other important developments. These include privatization, the separation out of regulation, the creation of Oftel, the growth of consumerism, the rise in public expectations for public services generally, the separation of posts from telecommunications,
The case against competing infrastructures: .J M Harper
Figure 1. Real changes in BT prices.
and the general reform of UK industrial relations by the Thatcher government. One can only study the combined effects on performance overall and try to make deductions. Figure 1 plots real changes in the overall BT price envelope.* The upward swings in 1975/76 and in 198OM occurred as prices were adjusted to absorb the effects of violent national wage inflation, in the absence of any constraint similar to the present price cap. Otherwise the ‘1 am indebted to Mr J J Wheatley, former aggregate improvement before and after competition is similar. Figure 2 BT Chief Economist and now a consultant, for the numeric data for Figures 1 and 2. plots current account labour productivity.’ As one would expect from The remaining data were taken from PO recent announcements about staff reductions, there is a marked gain and BT Annual Reports and Accounts, after 1992. But labour is only one component of total operating cost, from BT Telecommunications Statistics 7983 in respect of the period before privawhich is what matters. BT’s operating cost per line (Figure 3) does not tization and from the annual Blue Books of show anywhere near such a marked reduction since 1992, no doubt the UK Central Statistical Office. The deviation downwards in 1980181 because much of the work previously done by BT staff is now being was due to a once-for-all change in the done by contractors. There was actually a rise after competition, which statistical base arising from a transfer of staff from capital to current account. It has has only now been brought back down to the level attained in 1980. Figure 4 plots local and national (trunk) calls failing because of network no significance for the argument. Per cent change in revenue per head of staff at constant BT prices
Figure 2. Change in labour productivity - staff employed on current account (per cent change in revenue per head of staff at constant BT prices).
-15 P
/ , I I I / I I / I I I I, 1970
1975
I I I I / I II
1980
1985
1 I
I,
I
I
1990
287
The case against competing infrastructures: J M Harper 450
250200150-
10050-
Figure 3. Operating cost per connection (f sterling at 1990 prices).
o
I
I I 1975
I
I
I
I I 1980
I
I
I
I
1985
!
1 I
I
!
1990
I
I
I
I
deficiencies. The consistent improvement over the whole period is due to improved management disciplines and the modernization programme begun in 1973. Figures for the fault service are set out in the Appendix. Performance is similar over the whole period. In the key future area of broadband loop technology, BT is planning to use full fibre-to-the-home. Its CATV competitors are expected to upgrade their existing coaxial cables with the hybrid fibre/coaxial RF technology. But these rival developments owe little to infrastructure competition in Britain. The BT fibre development programme goes back well before competition, and its momentum continued unaffected by the failure of the native cable TV competitors. The hybrid was developed for the US cable industry. The Post Office (PO), which administered UK telecommunications before the separation of BT, achieved a great deal in the 197Os, but when I left in 1983 there was a lot still to get right. To its credit the privatized BT has successfully tackled most of this. It has carried on the
42-
1970
Figure 4. Percentage due to the network.
288
of calls failing
1980
1975 +
Local
-+
1985 National
1990
The case against competing infrastructures: J M Harper
trends it inherited and service is now better than ever before. Figures l-4 bring out how much BT performance has been affected by fluctuations in the general UK economy; but there is no evidence of any positive change traceable to competition as such.
Local competition Local network infrastructure competition poses complex issues. Circumstances vary between countries. In the UK the BT distribution network is nearly complete across the country. BT has duct up practically all streets and roads, and a mixture of overhead and underground drops into the vast majority of premises. Cable TV plant, on the other hand, existed only in a few localities in 1984; and what there was was unsuitable for modern multichannel TV service. Apart from the bans on BT, the principal issue in the UK from 1984 onwards has been the great cost of creating a second distribution network to carry cable TV and telephony. In the USA there are extensive existing networks for the distribution of both telephony, using copper, and multichannel cable TV, using coaxial cable. Cable TV is profitable. Principal issues concern entry by CATV into telecommunications and vice versa, and upgrading cable TV plant to carry telecommunications and broadband, and telephone plant to carry TV programmes. In some European countries the former PTT has complete or partially complete networks for both telephone and cable TV distribution, and each has its own duct network. Their situation is similar to that in the USA. In others the situation is similar to that in the UK. Germany is unusual in that the former East Germany is being completely recabled with modern fibre distribution, while in the West Deutsche Telekom owns both a conventional copper telephone distribution network and an extensive coaxial cable network for cable TV. In a number of other countries, including members of the former Eastern bloc, penetration is very low and modern telecommunications are starting almost from scratch. The RBOCs had their own reasons for setting up in the UK, concerned at that time more with cable TV than with telecommunications and with gaining experience to use later in their home markets. They have been more successful than they expected in winning telecommunications customers from BT; they estimate the telephony take-up rate is about 20%. “’ Cable TV take-up is currently 26%) whereas in the USA it is 70%. There are signs of an increased rate of cessations, as customers won by low pricing give up as prices are raised to long-term levels. The operators have nevertheless been encouraged enough to make investments of over f2 billion so far, and they plan to make a total investment of $6 billion. But six years after they started they are still only serving customers equivalent to about 2.5% of those of BT. At the present rate it will take them many years to reach a serious market share around, say, 30%. Moreover the most promising franchises are naturally being cabled first. “Third Report of Trade and Industry Committee, Session 1993-94, op tit Ref 3, Table 3
Practical considerations In the early 1980s there were what were seen as important
practical
289
The case against competing infrastructures: J M Harper
reasons for encouraging infrastructure competition. The idea was that it made it possible for the service given by competing operators like Mercury to be independent of that of the original operators like BT. This was an important advantage in situations of breakdown or industrial action by staff. But the argument was never watertight. In practice competing networks are always interdependent. The Mercury network cannot provide full service unless it can interwork with the BT network, for instance. The industrial relations argument was already losing force even as it was being made. Networks today really will function for months with no more attention than can be given by a small number of engineering managers working without supporting staff. The breakdown argument may seem more telling. Experience has shown that large modern software-controlled networks are vulnerable to catastrophic breakdowns. If such a breakdown occurs on an ex-P’IT network there are obvious advantages in having other networks that remain unaffected. But once again the competing networks can only give partial service in such situations. And in any case the consequences to customers and the loss of operator revenue due to major breakdowns are so serious that the problem of network vulnerability to breakdown will undoubtedly be cracked anyway by the operators acting in their own bailiwicks. The arguments for diversity obviously go up with distance. Landline communications between, say, London and Tokyo are more vulnerable than those between London and Croydon. From the security of service point of view there is a practically unanswerable case for duplication of facilities for transoceanic and transcontinental telecommunications. But diversity arguments are not enough in themselves to justify alternative inland infrastructures in countries like the UK or smaller.
Assessment of UK experience The UK’s experience is that long-distance infrastructure competition has been slow to bite. Mercury, the first and largest competitor, has only a single-figure percentage market share. It is faltering commercially and shedding staff. The main thrust of competition has been on price, conducted by cutting into profit margins. The cost and quality of long-distance service had been improving steadily for many decades under monopoly. There is no evidence that competition has added any new impetus towards efficiency. Local telecommunications are an unpromising area for competition on their own. In the early 1980s the UK government hoped that if local telecommunications were coupled with cable TV its finances would be supported by TV revenues. But, as we see 10 years later, the business prospects of competing local telecommunications remain uncertain. That is why the entertainment bans remain on BT. A good deal depends on the future relative success of cable TV, satellite and conventional off-air broadcasting. Satellite has many more users than cable at present, and off-air has of course a very well established position in the UK indeed. There are indications that the large coverage of satellites has greater appeal to advertisers than the tightly targeted coverage offered by CATV. Digital satellite broadcasting can offer a similar number of channels as cable systems, and it is likely to prove a challenging competitor. While the bans on BT remain in force, the cable operators enjoy what
290
The case against competing infrastructures: J M Harper
Figure
5. PO/BT net growth in lines.
IIIIInli,m,i,,I,,,,,I,,i,I,,,,i,,,iIi,,IIIIIIIIIIIImrrlII,,I,,,,,
25
30
35
40
45
50
55
60
65
70
75
80
85
90
are really unregulated monopoly operations. This will pose serious problems in its own right if it persists. The operators may have to be brought under regulation. If they upgrade their facilities to broadband, as they have said they will,” and if they do this before BT begins to install broadband plant, this will further strengthen their positions. If it becomes apparent that broadband has real potential to earn large revenue in its own right, the situation may change. Particularly in business districts, BT could conclude that it is justified in investing in broadband plant regardless of the bans. Where this happens or if the bans are lifted, BT could regain the upper hand. Otherwise it could simply opt out of local service. The regulatory regime is getting into increasing difficulty with the commercial and engineering problems of interconnecting competing networks, with no way out in sight. To sum up, the UK is further down the road of infrastructure competition than any other major country. UK experience has been that it is slow to get moving, with consequent serious delays to service competition. It is difficult to detect any positive effects on BT’s performance. Some of its other consequences are active sources of difficulty. The business prospects of the present competitors are uncertain. Moreover the UK has largely lost its traditional position alongside the USA as a world leader in the application of developments in network technology.
The future of the industry
” /bid para 60
The profitability and growth of telecommunications over the last 20 years have been due primarily to the telephone service. But telephony is fated to decline and it is doing so (Figure 5). International telephone service, the biggest single profit earner, shows a marked reduction (Figure 6). If the industry is to avoid stagnation and continue to satisfy investors it needs large-scale new services. The big carriers have turned to international business services, but this market is limited and competition is fierce. Information highways are the only serious candidate for the future. But they will need huge amounts of new capital f15 billion for BT alone. The industry faces its toughest ever financing challenge. 291
The case against competing infrastructures: J M Harper 30
25
I
10 5
Figure 6. PO/BT international calls (per cent growth in year).
0
To attract and justify investment on this scale one must be able convincingly to predict future profitability. The industry is shedding labour, but most of the available savings in operating cost are needed to hold down present tariffs while maintaining dividends. Infrastructure competition is adding a new layer of costs through loss of economies of scale and increases in idle capacity. Competition is depressing longdistance prices and profits. Local telecommunications are traditionally unprofitable, and competition must fragment what profits there are among companies. Profits could be retrieved by raising local prices, but this would be a most peculiar result for competition. And as has been demonstrated in the UK, where a selective price cap has been applied to rentals, local prices will always be severely constrained by political pressures whether the operator is privatized or not. Taken together, these effects must substantially depress the future overall profitability of the industry. Information highways could bail it out, but they require investment and investment requires profitability. The industry is caught in a vicious circle. Infrastructure competition is the very last thing it needs.
The limitations of present thinking There is no law of nature which says that competition is the right answer for everything. History alone should make us wary. The Wealth of Nations is treated as gospel. The British canals of the early 19th century were the first coordinated communications network in that country since the Romans. But when Adam Smith wrote his treatise even the canal network was in its infancy. He knew nothing of the problems of modern utility networks. The 19th century rediscovered the hard way through the early days of the railways the importance of ordered infrastructures. The later Victorians and the Edwardians did not hesitate to apply the lessons they had learnt from this experience to telegraphs and the telephone. The history of telecommunications up to the first world war is of increasing concentration of services on monopoly operators. This was almost certainly an essential precondition for the development of telecommunications as a universal service. It is highly improbable that competing private operators would have created 292
The case against competing infrastructures: J M Harper
the countrywide networks we take for granted today, or would have updated them to their present level of technology. This applies especially to those sectors of the network which serve the main population of residential users, which are notorious for being under-utilized. Identical issues arise for broadband. The history of telecommunications is also one of creation and exploitation of economies of scale. The first links between distant cities used copper conductors which provided a single speech channel per pair. They were followed by successive generations of electronics, each directed to getting more and more channels out of a single cable medium. Modern SDH transmission systems using optical-fibre cables have standard capacities up to 2.4 Gbps, or 37 500 speech channels on a single optical fibre. Capacities and economies of scale are set to go higher still. The same is true - if not more so - of switching. Enormous concentrations of traffic are possible on single ATM switches. Single switches are being designed with a potential total throughput of 60 GHz, enough for nearly a million simultaneous voice connections or the whole traffic of cities as big as London and New York. The same basic logic applies to the fibre distribution rings which may be expected to replace copper customer distribution out to the kerb. The technology is moving relentlessly in the direction of ever-increasing potential economies of scale. The potential seriousness of the loss due to replication of plant is increasing in a corresponding way. Huge sums are involved in the construction and renewal of modern telecommunications networks. Over the past 25 years the PO and BT have between them invested the equivalent at 1994 prices of well over f60 billion, or over &lo00 per customer, to create the present BT network. Such a scale of investment per customer is at least one order greater than anything found or financed by companies in general business. Replication of plant adds even more expense and a new risk in respect of market share. The higher the investment and the risk, the more cautious privatized companies are obliged to be. The spread of new facilities is bound to be slowed up. The market is seen at its best as a mechanism for optimizing the use of resources and for stimulating advances in design and technology in consumer products like cars and detergents, or in services like life insurance and travel. Product life cycles are short. Product designers gain a short-term edge by what are often quite small advances in design which are worked out in secret until they are ready to be put on the market. Such advances are then leapfrogged by competitors developing similar advances with similar tactics; and so on. Telecommunications networks are in a quite different category. Product life cycles run into decades. Even with the rapid advances in technology and manufacturing technique of recent years it has taken 30 years for electronic switching really to pervade the UK network and even now there are still electromechanical enclaves. Partly for this reason the tactical secrecy taken for granted in most markets does not apply in telecommunications networks. Secrets always leak over time. Secrecy is foreign to the tradition of the industry and would almost certainly be counterproductive if enforced. Telecommunications has made its huge strides through a deeply rooted tradition of international pooling of knowledge. Experience has shown over and over again that telecommunications engineers produce the biggest advances if they are allowed to share thinking across company boundaries. There is no room
293
The case against competing infrastructures: J M Harper
for secretive short-term shock tactics. Again in the car or detergent markets the end-consumer has direct acquaintance with the product and through his or her purchasing behaviour directly influences its characteristics. The end-consumer of telecommunications does not have such acquaintance with or influence on exchanges or transmission systems. Yet, despite all this, policy as we have it at present views physical plant as though telecommunications were no different from the general run of industrial activity. Indeed competitors are being actively encouraged to create their own plant by measures which hold back the former PTTs, like the entertainment ban on BT. This is clearly misjudged.
The business interests of competitors To sum up the argument so far, there is a very strong case for reunification of plant in the UK in the interests of first-hand competition for services. It follows that the rest of Europe should not pursue policies of infrastructure competition. In the UK the question arises how reunification is to be brought about. Companies who have created competing facilities cannot be made to give them up by compulsion. The point to be emphasized is that the arguments above demonstrate that it would be in the competitors’ business interest for the network to be reunified. They have to be convinced of this and of the need to take steps themselves accordingly. New entrants wishing to create their own facilities have to be persuaded by similar arguments that this would be against their own interest. It is not surprising that the local competitors to BT and the great majority of the long-distance competitors have decided to create their own facilities. The only alternative so far has been to use BT facilities. No one wants to be at the mercy of a big competitor. The possibility of their using facilities owned by anyone other than themselves or BT was not considered when UK policy was formulated. If a country’s network is to be kept unified or reunified it must be owned by some body other than the ex-monopoly. This necessarily raises the question of the structure of the industry.
The structure of national telecommunications Recent developments in telecommunications policy in the UK and Europe have been heavily influenced by concern about general competitiveness compared with the USA and particularly the countries of the Pacific Rim. There has been very specific concern about high longdistance leased-line and international tariffs. These matters are important, but they are primarily to do with specialized communications for business at international and, so far as Europe is concerned, crossUnion distances. Given the arguments of diversity referred to above and the present tariff situation, there is a powerful case for competition by replication of infrastructure at these distances. All the signs are that once competition in this format is introduced tariffs come down to acceptable levels. This is a relatively short-term issue, sensibly dealt with at Commission level. The really weighty issues for the future which make it necessary to re-examine industry structure revolve around broadband for the general populations within member countries. Their existing circumstances in telecommunications and their legislative and administrative cultures are
294
The case against competing infrastructures: J M Harper
so
diverse that structure has to be addressed as a national matter by each country for itself. Continuing with the UK as the example, in the early 1980s the telecommunications functions of the PO were transferred wholesale to BT. It has to provide the network and the complete range of services to everyone, countrywide. This pattern dates back to nationalization in 1910, when there were at most half a million ‘subscribers’, the only services concerned were telephones and telegraphs and the telephone was a luxury. There are now 40 times as many subscribing customers; telecommunications is part of life for 54 million people; and its services and facilities have ramified out of all recognition. The task had outgrown the unified structure well before privatization, without our realizing it. In recent years, as BT has approached its present size, radical changes in internal organization have become more frequent. The way the search for the right formula has had to be stepped up prompts the question whether from its own point of view BT may not be past the point where it is possible to devise a satisfactory organization at all within the present all-embracing structure, even for conventional telecommunications. Competition adds a layer of difficulty of its own. Examples which seriously trouble the UK regime are the difficulties of interconnection and of arranging fair competition in services and customer apparatus, when BT is at once the dominant provider of network facilities and a competitor in the retailing of services and apparatus. The advances now in prospect in technology and services are going to add further complications. In the case of interconnection, at least, there is no obvious way out. Things will get more and more difficult. All these arguments apply or will apply before too long in most European countries. Many countries are probably going to wish to keep one operator big enough to hold its own on the stage of world business communications. But most of the ex-P’ITs are now or soon will be big enough for there to be a number of permutations by which their functions might be divided which would still enable this requirement to be met. The case for each EU country radically to re-examine its operating structure at national level is unanswerable. There is an alternative structural model already working in practice in the UK. Mercury’s service to the bulk of its customers is provided over BT or cable TV company network plant. In other words, the retail (service) functions are provided by one company and the wholesale (network) functions by another. A similar distinction between retail and wholesale (network) functions has been made in UK cellular radio since the outset. The idea of such a distinction is increasingly becoming recognized in other contexts. Elsewhere I have made a thorough examination of the structural issue under modern conditions, taking account of this and of prospects for broadband. I summarized the conclusions as follows: (i)
The advantages of competition as a stimulus to efficency and low prices in activities carried out directly for consumers are beyond dispute. (ii) Over the next decade or so the boundary of the high-tech network will move out to within half a kilometre or less of customer premises. (iii) Since this high-tech network is inherently of lower labour intensity
The case against competing infrastructures: J M Harper
than traditional plant, the effect will be to shift the centre of gravity of labour costs and problems even more clearly towards the periphery than it has been in the past. (iv) In terms therefore of technology and of management a new natural boundary is already forming between network operations and the activities carried out at first hand for customers. The only way satisfactorily to resolve the problem of fair competi(v) tion is to arrange that all competing companies are of roughly the same order of size; that none of them has special advantages like that of being, or being associated with, a dominant network operator; and that (with some possible exceptions) there are at least two companies in competition for every part of direct consumer business in each part of the country. (vi) A future structure based on (i)-(v) would have important advantages over the present UK structure. It would promote the rapid development of true competition for consumer business and would greatly reduce the present strains in the regime. l2 Mututis mutandis these conclusions hold good for practically all European countries besides the UK. The ideal structure for them would therefore be one in which:
(4
a series of competing unregulated companies of roughly similar size retail the inland services; @I the inland network, including distribution plant, is run by a separate single regulated operator whose role is to provide network facilities on a fair basis to the retailers; the retail role of this network operator is confined to international services both at home and overseas.
cc>
“Harper, J M A 27.9 Century Structure for UK T&communications Cbmmunications Educational Services, London (1991) Ch
11 ‘3Harper op tit Ref 6
296
The classic objection will be that (b) would recreate monopoly and inefficency. To counter this and to provide a sensible mechanism of transition I have proposed a new formula.13 Using the UK as an example, BT and the main competitors should be steered by national government voluntarily to form a nationwide broadband network company which they would jointly own in equal shares. National government itself should take a stake of, say, 20% in the company to enable it to argue for consumers’ interest and as a guarantee of fair play. BT’s contribution would include its existing duct network - a key resource. The company would have a professional Board made up exclusively of its owners’ representatives, including at least one government director. To ensure efficency its managing director and its top executives would be appointed by the owners on regularly renewable contracts, with stringent performance-related pay requirements. The Board would control expansion of broadband across the country, in step with progress in marketing. The existing BT narrowband structure would gradually wither away; the recently constructed cable TV networks would be absorbed into the new company as they were upgraded to broadband. Profits would be determined by a return on assets requirement not to be fallen below or exceeded, set to correspond to the upper quartile of returns being earned by blue chip companies generally and ratified by the regulator. Profits would be reinvested or distributed bv agreement between the owners. Initial investment and later invest- - requirements not met from profits would be found by the owners ment or from the market. Anyone who wished to provide broadband services to the public,
The case against competing infrastructures: J M Harper
including of course BT and the present cable TV operators, would be entitled to use the new network, paying standard charges to the new company. These charges would again be ratified by the regulator. There would be free, fair and unregulated competition for provision of all services over the network. A similar formula should be introduced in continental countries from the outset. Service competition would be greatly facilitated and advanced. The investment expenditure and the risks of the individual operators would be greatly reduced. The new network company should find it very much easier to raise capital for network innovation, including broadband. The technical and commercial problems of interconnecting competing networks would be eliminated.
Conclusion The linking of competition in services to competition in infrastructure is wrong. Experience on both sides of the Atlantic is the same. Because competing infrastructures are immensely expensive and take a decade or more to create on any real scale, competition in services is unacceptably delayed. The public wants and deserves choice of services and prices at all levels of telecommunications now. It should not have to wait 10 or 20 years while competitors to the old monopolies laboriously construct networks and wrestle with funding problems. Overall my view is therefore as follows: ?? Facilities-based
competition is correct for international carrier telecommunications and for long-haul telecommunications over continental distances in the USA and Europe and in countries the size of Russia and China. ?? However, the correct course for inland telecommunications in countries the size of the UK, France and Germany and in smaller countries is to retain or to return to single unified networks, controlled by unified operators owned by the main service providers concerned with a minority stake owned by national government, and subject to regulation. ?? In all cases service provision should be totally separated from carrier operations and freed completely for unregulated competition.
Appendix Table 1. PO/BT fault clearance
Fault service statistics Table 1 sets out detailed BT performance in the time taken to clear customer faults. It becomes undesirable to push performance above about 92% of faults cleared by the end of the next working day, because costs rise sharply. On the other hand, experience was that public complaints began to rise sharply when the figure dropped below 85%. The range 8.5-92% was regarded as acceptable by the PO. Service was and still is
performance.
Percentage By end of next working day 1981 \Co;petio”
cleared Within two working days
80.0 begins here.)
1983 1984
79.6 85.1 85.7
(Privationin October 7984.) 1985 1986 1987 March Sept 1988 March Sept 1989 March Sept 1990 March Sept
89.9 87.1
80.8 86.3 77.5 91.4
73.9 86.5 so.2 91.6 94.6 96.2 90.1 97.8
297
The case against competing infrastructures: J M Harper Table 2. BT’s fault clearance targets met for business and residential lines, 1991-93.
1991 March Sept 1992 March Sept 1993 March Sept
298
Business
Residential
86.3 07.2 87.9 83.0 03.2 66.3
81.5 85.9 85.8 81.7 76.4 80.2
affected from time to time by periods of exceptionally bad weather, and this can affect results. The basis of the statistics has varied, but a sufficient series is available to give an idea what actually went on. Priority had always been given to business fault clearance. In 1991 the basis of the published figures was
changed to reflect this, as illustrated in Table 2. The target for business line clearance was now five working hours, and for residential lines nine working hours. By and large performance is remarkably uniform over the whole period, with no visible link with pressure from competition.