Pole Tax, anyone?

The Digital Britain final report emerged yesterday to muted fanfares. We summarise our initial take on the key points here as they relate to telecoms.

The overall tenor of the report might be described as modestly interventionist, with "industrial activism" and "modernisation" as recurring catch-phrases. However, there are few signs of grand projects and those we were expecting - universal broadband now (or soonish), next generation broadband later, re-jigging the funding of broadcasting - are all quite modest in scale and funded from bits and pieces here and there. Of course there is a sprinkling of Czars, including Martha Lane Fox of former Lastminute.com fame as Champion of Digital Inclusion, though the report stops short of crowning them as such. There are no Dragons or other professionally grumpy reality TV stars that we could find.

In relation to telecoms, we see the following main objectives spelled out in the report:

1. Preventing exclusion - skills, affordability, motivation;
   
2. Promoting access to current generation broadband (the broadband Universal Service Commitment);
   
3. Ensuring that next generation broadband reaches otherwise uneconomic areas (Next Generation Final Third project).

1. Preventing exclusion

Key proposals:

• Home Access scheme - content and skills development for children, young people and their families - currently in pilot in Suffolk and Oldham - £300m budget - plus industry initiatives from Microsoft, UK online (DfES), second-hand computer schemes etc.
• Digital Inclusion Programme - under the auspices of the Digital Inclusion Champion, backed by an Expert Task Force and in cahoots with the (already proposed) Digital Inclusion Consortium. It is not yet clear what they will do, other than "move toward" a National Plan for Digital Inclusion and, maybe, merge with various other bodies into a Digital Inclusion Agency at some later date.
  

Budget: not specified.

Winners:

• The quangocracy, would-be Champions
• The "corporate responsibility" industry
  
• Digitally naive young people (if any)
  
• The poor (maybe)

Losers:

• The digitally reluctant.

2. Promoting access to current generation broadband (the broadband Universal Service Commitment)

Key proposals:

• Revise universal service obligation (USO) legislation and license authorisations to extend them from narrowband to broadband
• Establish a "delivery body" (Network Design and Procurement Group) with powers and technical expertise to procure not-spot solutions on a technology-neutral basis - CEO to be appointed by the end of October 2009
  
• Twist the arms of the BBC Trust and BBC Executive to cough-up the money left over from under-spending on supporting elderly people and others as the switchover of TV broadcasting to digital proceeds
• Pass the hat around interested corporations, local authorities, regional development agencies and the like to get additional funding and contributions in kind

Budget: £200m from the Digital Switchover Help Scheme underspend and Strategic Investment Fund combined. The rest not specified.

Winners:

• Not-spotters
• BT - will probably get most of what's going
• Mobile operators - might get some at the margins
• Virgin Media - might get some at the margins
• Local self-help initiatives (e.g. rural/village wi-fi/Wi-Max ventures) and similar

Losers:

• The elderly and confused
• The TV-switchover-support industry
• The BBC - but they have known since at least the first PSB Review that the money would probably be ring-fenced

3. Ensuring that next generation broadband reaches otherwise uneconomic areas (Next Generation Final Third project)

Key proposals:

• Impose a 50p/month tax (the Next Generation Fund) on every copper line (including coax) to fund extension of high-speed broadband (FTTx, or equivalent) to the "final third" of the country that would otherwise be uneconomic to serve. Operators will be responsible for collecting it and remiting it to Ofcom
• Allow operators to bid on a technology-neutral, reverse auction basis for tenders, which will be managed by the Network Design and Procurement Group (see above)
• Amend the Communications Act 2003 to make the promotion of investment in communications infrastructure one of Ofcom’s principal duties alongside the promotion of competition

Winners:

• Crofters, farmers, second homers, rural retreaters, owners of moats and anyone else in the final third
  
• BT - will probably get most of what's going
• Mobile operators - might get some subsidy at the margins and may benefit from some increased defections from fixed lines
  
• Local self-help initiatives (e.g. rural/village wi-fi/Wi-Max ventures) and similar
• Probably not Virgin Media, as relatively few of the final third areas seem likely to be sufficiently adjacent to their existing footprint
  

Losers:

• Anyone with a copper line (including, it would appear, a hybrid fibre/coax or fibre/twisted pair FTTC one)

What about mobile?
Key proposals:

• Existing 3G licences will be made indefinite
• The Administrative Incentive Payments (AIP) structure (annual fees paid by spectum owners) will be adjusted to achieve greater fairness, though how is still to be determined
  
• The 800Mhz "digital dividend" from shutting down analogue TV, together with the 3G expansion band will be auctioned off in 10Mhz blocks
• Appointment of the Independent Spectrum Broker to manage the above (ISB - already in place - his report was published on 13th May 2009). It is proposed to implement his proposals.
  

It is envisaged that this will lead to mobile broadband download speeds of up to 100 Mbps being available in urban areas and 5-6Mbps elsewhere.


In conclusion

On the face of it the report might be accused of a lack of ambition, particularly in setting the universal service criterion as low as 2 Mbps and with a relatively leisurely progress towards high-speed broadband. Perhaps understandably in current economic circumstances, it avoids extravagant spending commitments, or almost any spending commitments, to the extent that we wonder whether even its modest ambitions are realistic given the amounts proposed, for example the 50p/week/line tax in relation to the billions said to be required for next generation broadband. However, we'll return to that topic in a forthcoming post!

Regulatory Holidays

Well it's a timely discussion, despite the rain here in the UK, with the "Digital Britain" report due to be published today.

As I see it, there are two things to bear in mind here - the problem and the proposed solution.

First, the problem. FTTx networks are being installed in many places around the world by incumbent telcos, cable operators and newer challengers alike without any special regulatory inducement. The trouble is that it seems that the economics of FTTx make it unlikely to be profitable to cover the whole population. This cuts across political objectives such as regional policy and plays to a fear that sections of the population will be excluded from some as-yet-undefined, but essential, social and economic activities.

So the politicians and regulators must either appeal to a patriotic consensus, as seems to have happened in some Asian countries, such as South Korea, or they must provide incentives to the market to produce what they want.

As Andrew Sharpe suggests in his blog, "not interfering" looks unlikely to work, given the economic issues described above. For incumbent telcos, though, the holiday bargain they seek is freedom from downstream competition. In other words, in exchange for making an unprofitable, or marginally profitable, investment in their (upstream) network business, they get to avoid downstream competition for retail customers, enabling them, or so they hope, to extract monopoly profits for at least long enough to repay their investment.

But regulatory holidays, like real ones, are seldom as free from the normal constraints of life as we hope and may cost more than we plan. For those who would not otherwise get high-speed broadband, it might seem like a reasonable deal - monopoly service, probably at a regulated price, is better than no service. But to the rest of us, there is a clear risk that what is, at least here in the UK, a highly competitive and fast-moving industry might turn into a sluggish monopoly.

Of course one might try to draw a distinction between profitable and unprofitable areas and set the rules accordingly. But it seems inevitable that this would lead not only to lots of arguments about what and where is profitable, but also to the perverse result that monopoly high-speed broadband would be imposed in just those areas where there is least competition for the current generation of broadband.

There are, of course, alternative solutions, such as allowing the incumbent to pass on more of the costs where they are higher, setting up a universal service fund and allowing operators to bid for subsidies, or even taking on the whole project, as is happening in Australia with the National Broadband Network.

Note: this post was published earlier in substantially the same form as a comment on a LinkedIn article. It is re-posted here for the benefit of anyone who is not a member of LinkedIn, and of its Telecom and Media Regulation and Public Affairs group.

Mobile Skype Update 2: Walking Slowly Backwards

According to a report in Total Telecom, T-Mobile Deutschland is now offering to charge its customers EUR9.55 per month to use Skype on their iPhone or other mobile device. This is instead of banning such a transgression outright. According to Total Telecom:

'A Deutsche Telekom spokesman said the company has to make "significant investment" in its networks and the number of available Internet protocol, or IP, addressees to offer its customers the option to use VoIP within its mobile network in Germany. However, the spokesman declined to elaborate further on the details of this necessary investment.'

Ironically, it would seem, one of the reasons that operators are moving towards all-IP networks and new generations of technology such as LTE is that this will reduce the costs of carrying voice calls. In this instance it appears that either the costs of carrying VoIP are higher, or that T-mo is looking to recoup revenues it might have received had the calls been made over its GSM network.

NGA projects still looking for the money

The Next Gen Roadshow at Basingstoke this week, organised by the Community Broadband Network, was another excellent set of presentations about the exciting NGA developments around the country, featuring the Gateshead, Fibrespeed Wales, Bradley and eHampshire projects.

But even amongst the audience of committed enthusiasts for NGA, for whom it can sometimes seem more like a religious quest than a commercial activity, some notes of caution were being sounded by those whose role it would be to convince investors to loosen their purse-strings. It seemed to be fairly generally accepted that standard commercial business cases would not fly without some other funding, so looking for justifications has become the name of the game.

Ed Vaizey, the Shadow Minister for Culture, wanted to “encourage” local community initiatives, and was not happy with the Digital Britain proposal of only a 2Mb/s USO, but he was far less keen on any central government involvement. It appears that an incoming Tory government would be even less likely to fund NGA development than the current one in these straitened times.

There are still some “build it and they will come” technology enthusiasts around, but there were also some very much more practical suggestions as to how to fund the investment:

• Local authority-led projects could use the “externalities” of savings elsewhere – eg on transport, in the NHS etc – to add extra benefits into the case; avoiding the problem of budget silos is the main challenge here
• Looking to the examples of the US and Australia where even in these free-market conditions, state funding looks to be favoured
• “MUSCOs” (multi-utility service companies) could be a way of reducing the highest cost element, the civil engineering, by sharing it across several services
• new business models which change the relationship between end user and content provider (the so-called JON model, which aggregates patchwork developments)
• integrating NGA into wider local planning decisions on infrastructure
• requiring property developers to install NGA on all new build plans, or at least to install open access ducts
• bringing communities together to have an ownership and interest in the local services (ie increasing take-up and penetration)
• or even, as in Bradley, use local farmers to dig up the roads more cheaply (the “Bradnet” speaker seemed to be suggesting a protection racket with the electricity company – “our tractors do seem to be damaging your overhead lines a lot, so why not build a new underground duct” !!).

Adroit Economics shared their views on developing the business case in a way that gets through the bureaucratic process. But each case will still be a challenge, and will need some fairly fancy footwork to show a positive result.

Mobile Skype Update

The antipathy of some mobile operators to their customers using VoIP services like Skype over their networks (see our earlier post) looks set to heat up further. UK operator 3 has announced that from May 1st 2009 it will offer Skype-to-Skype calls and instant messages for free over its data network. It is not clear from the announcement whether users will be able to make calls to and from the public telephone network (i.e. involving normal telephone numbers), for which they would presumably pay Skype, rather than 3, though other commentators have suggested that this will not be possible.

Perhaps more importantly, 3 plan to make the service available over the summer to anyone with a compatible and unlocked 3G phone - in other words to users of competing networks. Presumably the thinking is that once a user has a 3 SIM card in their phone, it will be easy to persuade them to take additional paid-for services. Despite 3's claim that "Skype is only available for free with 3 because we don’t think you should have to pay for mobile phone calls anymore." - an unusual sentiment for a mobile phone company - this would probably include paid-for calls, since this is likely to be the only way to reach people who don't have a Skype account, or are not online.

It will be interesting to see how people use this new service. One option would be to put the £1.99 SIM from 3 into a spare, or second-hand, phone for separate Skype use, to avoid having to swap SIM cards. This would be less promising as a basis for enticing Skype-only customers into taking other services. Of course another option for someone with a reasonably high-spec phone is to use a service like Fring, that runs as an application on the phone and enables Skype or other VoIP calls to be made over mobile or WiFi networks without changing the SIM card.

CARTER HAS A CHALLENGE ON HIS HANDS AS GLOVES COME OFF IN DIGITAL BRITAIN DEBATE

Lord Carter has received over 200 responses to his interim report on Digital Britain, and now faces the challenge of reconciling many different views and standpoints without recourse to primary legislation and without legal challenge. Responses come from across the spectrum (apologies !) of the business, with the creative industries (“poets”) outscoring the telecommunications industry (“plumbers”) on the list of respondents published on the DCMS site.

I reckon these responses break down as:

Commercial telcos/ suppliers
12 responses; BT, O2, Vodafone not listed, presumably confidential responses

Creative industries – commercial
13 responses; similarly the main broadcasters (BBC, ITV, 4) not listed

Communications Industry groups
18 responses, including engineering groups

Councils/RDA/Community groups
14 responses; surprisingly several Community Broadband Network groups are not listed; includes Upper Deverills Parish Council !

Creative industries - industry groups
34 responses - the most active group; wide range of organisations covering film, TV, print, radio, libraries

Public interest organizations
3 concerned about rights, 1 about security and 1 child protection

Unions/political parties
5 unions and the Green Party

College/research groups
3 responses

Individuals
14 including two responses from academics and two from MPs

Others
7 responses; eg British Space Centre

At a macro level this represents a lot of different standpoints at different places in the value chain – a nightmare to resolve. But even within distinct parts of the market there are deeply entrenched views. Here are a few comments on those responses I’ve managed to get through so far – contact me if you want more.

“PLUMBERS”
No way are Vodafone and O2 going to give up spectrum without a fight. Despite the best endeavours of the ever-charming Kip Meek from BSG, this one looks like going to the wire. In its tussles with the regulator and Government, BT eventually learned that short-term wins often translated into longer-term problems – this penny has not dropped for these guys yet.

BSkyB wants Virgin Media to open up its network by offering wholesale products, are against public subsidies for USO and want duct sharing. BT will have pointed out the practical difficulties of duct sharing and will be wary of a USO fund (they’ve played that sort of game before). Virgin also favour a market-led approach, but “keep your hands off our network”. The Number (118 118) are more concerned about service provider competition, good wholesale products and Voice over Broadband.

“POETS”
Here the Channel 4/PSB issue is a key focus of debate. Sky and Guardian Media Group (GMG) want controls on the BBC and a market-led approach to PSB. Five is trying to hang on in there with the idea of linear TV and its PSB role (keeping its C4 arguments behind the scenes). The NUJ wants the spectrum released from the Digital Dividend to be earmarked for the PSB. The Beeb’s response is not on the DCMS site, but SamKnows reports that they are keen on playing a “central role” in partnership with other media players, opening up iPlayer for other broadcasters.

Carter’s proposal for a Rights Agency gets a lot of attention. There is almost uniform agreement that piracy is bad, that protecting rights is essential to ensure investment in creative industries. The Design and Artists Copyright Society is concerned that small players will lose out. The “Alliance against IP Theft” ( a collection of 21 organisations mainly focused on the film industry and video games) want a clear role for the Agency (focused on illegal downloading), but for commercial issues to remain managed by the private sector. Even the Premier League get in on the act, demanding protection for their IPR and looking for the Rights Agency to be given clear direction.

GMG also raise the issue of value disappearing to search engines and other aggregators and want Carter to help them keep control of some of this.

COMMUNITY GROUPS
The views of community groups on network issues are more consistent: “we must have superfast broadband”; a “digital divide” or “two-speed Britain” is a bad thing; “the broadband USO does not go far/fast enough”; and “BT won’t do it, so Government should fund it as a means of economic recovery”. Digital Birmingham argue for public investment in duct; eHampshire want support for local community networks and for Building Regulations to insist on fibre installation in new homes; the RDAs suggest public sector procurement as a way forward; and Upper Deverills Parish Council are using all their influence to press for a faster USO.

THE FREE-THINKERS
There are enthusiasts for 4G and internet radio, concern over the problems of migrating to DAB, and demands for better funding of talent development. The Green Party want mobile base station sharing to reduce energy use and spectrum allocation which allows energy-efficient solutions.

So best of luck Lord Carter – there’s no way to please everyone. Personally, as a “plumber”, I find the “poets” arguments generally self-serving, idealistic and uncommercial, when sharing value with those building the networks has to be the only way forward. However, as the media likes nothing more than talking about itself, I’m sure that’s what we’ll be hearing most about in the coming months.

Banning Mobile Skype

T-Mobile has reportedly threatened to disconnect users of the iPhone in Germany and four other European countries where it has a distribution deal with Apple for the “Jesus phone” if they download and use the Skype application. This is not the first time that T-Mobile have encountered adverse publicity for blocking, or attempting to block, the use of VoIP by users of their service. However, in this case the application only works over the iPhone's connection to local WiFi networks and not via T-Mobile's data service. The operator's suggestion that there may be issues of technical compatibility seems rather unconvincing and is denied by Skype, making the bad publicity worse still.

It is entirely understandable that mobile operators should be concerned about customers whose expensive handsets they have subsidised rendering that investment worthless by avoiding paying for calls. A top-of-the-range iPhone sells on eBay (Skype's parent company) for around $630, though presumably an operator would pay somewhat less and European mobile operators such as O2 in the UK are prepared to give their subscribers one of these for free, in exchange for a hefty £44+ per month subscription. Apple's deal with their franchised network operators unusually involves them getting a share of network revenues and perhaps it is for this reason that they have ensured that the Skype application is limited to calling over WiFi, rather than over 3G or other mobile data networks.

Thankfully for the mobile operators, their immediate predicament is scarcely dire. For one thing, the customers with whom the risk is greatest, those whose handset is heavily subsidised, have (like O2's well-heeled, or gadget-crazy, £44+ per month set) already committed to pay for their minutes whether they use them or not. Even pre-pay customers, who will have paid nearly £400 for a 16Mb 3G iPhone, are likely to find it more convenient to make their calls in the normal way over the GSM network. Perhaps it is for this reason that some mobile operators, such as Vodafone in the UK, have apparently so far refrained from blocking or forbidding the use of VoIP over their networks. Others, such as Huchison's 3 UK have come to commercial terms with Skype and made a virtue of it. Even those who use a VoIP application that has not been blessed and taxed by the operator, such as Fring or Gizmo, may find themselves paying a not-insignificant amount to their operator for the data connection.

Nevertheless, as mobile data becomes cheaper and faster and as the VoIP applications become slicker and better-integrated with the phone's basic functions such as call buttons and directories, very large amounts of currently profitable revenue from both voice calls and text messages are at stake for the mobile operators. This is underlined by over a million downloads of the iPhone Skype application in its first two days - making it the number one download from the App Store in 40 or so countries around the world, including Germany, according to Skype.

T-Mo is not alone in blocking the use of Skype and other VoIp services on their networks through technological and contractual means. So do all the other mobile networks in Germany and their French counterparts do the same, as does AT&T in the US, raising calls for regulatory intervention and not just from the likes of Skype. The VON Coalition, for example, a pressure group which includes, amongst others, BT, Microsoft, Intel, Cisco and Google (and, at least as recently as last year, T-Mobile USA), reportedly argues that

"Blocking of voice applications on mobile devices, such as the announcement of T-Mobile to block Skype on iPhones in Germany, is highly detrimental for consumer welfare in Europe".

The VON Coalition describes itself as:

"Member supported coalition of service and software providers and equipment manufacturers organized to advocate and educate policy makers and regulators the viewpoint that the IP Telephony industry should remain as free of governmental regulation as possible."

Never mind the potential irony of such a body calling for regulatory assistance, the tenor of arguments so far advanced is that of net neutrality, or as Robert Miller (Skype's General Counsel) puts it:

"Skype passionately believes that consumers should be entitled to access an open Internet on a variety of devices and on fixed and mobile connections to the Internet."

Unfortunately for them, network neutrality seems to have failed to ignite the same degree of emotional intensity in Europe as it has in the US - perhaps because Europeans believe that if their ISP restricts their access to information or applications unreasonably they can always switch to another one. And, as Miller wistfully points out, current EU legislation in front of the national Parliaments would not help much, requiring no more than that service providers inform their customers first if they are going to restrict traffic in this kind of way.

Whilst the network neutrality debate is probably not yet over in Europe, it might be worth considering whether there are other red rags to the regulatory bull here. This would very probably turn on whether each national regulator deemed that the network operators had Significant Market Power (SMP) in the relevant market (and there might be some debate about which market that would be) and, if so, whether blocking or forbidding access to VoIP services is an abuse of that power.

One problem is that the most likely Market, as defined within the Framework, is Access and Call Origination on Mobile Networks, which was deleted from the list as part of the 2007 reforms, meaning that it is not a requirement for national regulators to carry out regular reviews of the extent of SMP and of the remedies they should apply. It does not mean that EU and national regulators will not take action, though, as has recently happened with the prices charged for calls when one is outside the country in which one's phone service is registered. But action would most likely only happen if regulators are spurred on by public concern and lobbying.

Network operators, for their part, are likely to argue (again) that the loss of profits they make from calls and texts would lead to them cutting back on investment and force them to raise prices, forcing vulnerable consumers off the network.

The glass-half-full view would be that the regulators are (implicitly) right and market forces will not allow what consumers want and technology allows to be blocked by suppliers for very long. After all, T-Mobile's earlier apparent démarche in the UK and the indignation surrounding this latest incident suggest that using restrictive contract clauses and network blocking to strong-arm customers away from using VoIP has about as much chance of longer-term success as the record companies have of stopping illegal copying and downloads of music tracks by brandishing copyright laws.