TELECOMMUNICATIONS MANAGEMENT A 21st centurv structure J for telecommunications The Bangemann Report 'Europe and the Information Society" recommends member states of the EU to accelerate liberalisation by '. . .opening up to competition infrastructures and services still in the monopoly area'. The debate now taking place round the Green Paper subsequently issued by the Commission on alternative infrastructure provides an important op ortunity for telecommunications operating industry in readiness for the 21 st century. Britain and Europe to take stock of the structural pattern o I; the t is axiomatic that competition provides the est framework for telecomms services. In li ritain it has been successful for customer premise equipment and for specialised Value Added Network Services (VANS) and we can build on this success with confidence for the future so far as these sectors are concerned. But I wish to argue that we have not yet found the right way to organise physical plant and industry structure to facilitate the flow of service competition. As Managing Director of BT Inland Division I welcomed competition by companies duplicating our infrastructure when it was introduced in Britain in 1982.But after 13 years close observation of its working I now believe that competition in this format is against the interest of customers and of the industry. The idea that competition should operate in infrastructure as well as in services originated in the USA. US telecomms companies are welcome as competitors in Europe. But this does not mean we have to import US regulatory approaches. Europe has its own telecom- munications traditions. It should hammer out its own future pattern. The facts The UK British policy currently allows any entrant who wishes to replicate telecomms infrastructure to do so. BT currently 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 by J. M. Harper the market in 1990. Despite high penetration in small areas like the City of London, Mercury has never achieved more than a single figure nationwide market share and it has recently begun to shed staff and cut back. BT's principal local competitors are a number of combined telecommunications and cable TV companies who now hold 125 franchises. Plant has been constructed in over 70. But local telecommunications competition has only so far reached about 2.5% of customers. The biggest single interests now involved in cable TV and local telecomms are the US Regional Bell Operating Companies (RBOCs) "EX and US West. They took their stakes following the virtual collapse of the original native cable operators in 1988. They had their own reasons for setting up in the UK, concerned at that time more with cableTV than with telecomms and with gaining experience to use later in their home markets. Cable TV take-up is currently only about 22%, where that in the US is 70%. There are signs of an increased rate of cessations, as customers give up once they have experience of the service. But the operators have been more successful than they expected in winning telecomms customers from BT; they estimate the telephony take-up rate is about 20% (Reference 2, Table 3). They have been encouraged enough to make investments of over 52 billion so far; and they plan to make a total investment of 116 billion. These companies' investment is protected by two overlapping regulatory bans which exclude BT group (not subsidiaries) from providing or conveying entertainment TV. BT says that the ENGINEERING MANAGEMENTJOURNAL AUGUST 1995 159 .~ I
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A 21st centurv structure J
for telecommunications The Bangemann Report 'Europe and the Information Society" recommends
member states of the EU to accelerate liberalisation by '. . .opening up to competition infrastructures and services still in the monopoly area'. The debate
now taking place round the Green Paper subsequently issued by the Commission on alternative infrastructure provides an important op ortunity for
telecommunications operating industry in readiness for the 21 st century. Britain and Europe to take stock of the structural pattern o I; the
t is axiomatic that competition provides the est framework for telecomms services. In li ritain it has been successful for customer
premise equipment and for specialised Value Added Network Services (VANS) and we can build on this success with confidence for the future so far as these sectors are concerned. But I wish to argue that we have not yet found the right way to organise physical plant and industry structure to facilitate the flow of service competition.
As Managing Director of BT Inland Division I welcomed competition by companies duplicating our infrastructure when it was introduced in Britain in 1982. But after 13 years close observation of its working I now believe that competition in this format is against the interest of customers and of the industry.
The idea that competition should operate in infrastructure as well as in services originated in the USA. US telecomms companies are welcome as competitors in Europe. But this does not mean we have to import US regulatory approaches. Europe has its own telecom- munications traditions. It should hammer out its own future pattern.
The facts
The UK British policy currently allows any entrant
who wishes to replicate telecomms infrastructure to do so. BT currently 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
by J. M. Harper
the market in 1990. Despite high penetration in small areas like the City of London, Mercury has never achieved more than a single figure nationwide market share and it has recently begun to shed staff and cut back.
BT's principal local competitors are a number of combined telecommunications and cable TV companies who now hold 125 franchises. Plant has been constructed in over 70. But local telecommunications competition has only so far reached about 2.5% of customers. The biggest single interests now involved in cable TV and local telecomms are the US Regional Bell Operating Companies (RBOCs) "EX and US West. They took their stakes following the virtual collapse of the original native cable operators in 1988. They had their own reasons for setting up in the UK, concerned at that time more with cableTV than with telecomms and with gaining experience to use later in their home markets.
Cable TV take-up is currently only about 22%, where that in the US is 70%. There are signs of an increased rate of cessations, as customers give up once they have experience of the service. But the operators have been more successful than they expected in winning telecomms customers from BT; they estimate the telephony take-up rate is about 20% (Reference 2, Table 3). They have been encouraged enough to make investments of over 5 2 billion so far; and they plan to make a total investment of 116 billion.
These companies' investment is protected by two overlapping regulatory bans which exclude BT group (not subsidiaries) from providing or conveying entertainment TV. BT says that the
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effect of this is to exclude it also from broadband. It has pressed for a long time for the bans to be lifted. In its recent reportz on optical fibre networks the all party Parliamentary Select Committee on Trade and Industry proposed a compromise on these bans. At a final hearing on the 25th January 1995 the Government confirmed that it was not prepared to accept this proposal.
The position on the ground It is relatively easy to arrange competition
and find infrastructure competitors at the long- distance level. But the main mass of managerial problems in telecomms and therefore the greatest need for competition are at local level and especially at the customer interface.
Circumstances at this level vary widely between countries, especially as regards distribution plant on the ground. In Britain 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 multi- channel TV service. Apart from the bans on BT, the principal issue in Britain 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 multi-channel cable TV, using coaxial cable. Cable TV is profitable. Principal issues concern entry by CATV into telecomms and vice versa; and upgrading cable TV plant to carry telecomms and broadband and telephone plant vice versa.
In some European countries the former MT 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 Britain. 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 telecomms start almost from scratch.
Many European countries are in transition
from monopoly to competition. Several are apprehensive that the Commission will require former MTs to be disqualified from CATV and to divest themselves of CATV networks, in the interest of infrastructure competition. BT experience indicates that this will seriously discourage them from public broadband. The former M T s are the principal national repositories of telecomms knowhow and resources. To discourage them from broadband is not desirable. This is an important issue for the future.
Judgment by results Impressive claims are made about the
progress and impact of telecommunications carrier competition in Britain. These have strongly influenced the thinking behind Bangemann and the European Commission drive for alternative infrastructure. It is true that in terms of inputs the progress is impressive. Some of the most powerful telecommuni- cations companies in the world have established themselves as competitors to BT and they have made large investments and are committed to make more. But when one looks at outputs the picture is different.
The first lesson of the last ten years, learnt the hard way by British interests, is that infrastructure competition is a tough business. We have already noted the failure of the native cable TV competitors. Of Mercury’s three original owners two have long since dropped out; and the company now appears to be faltering commercially. On take-up so far the overseas competitors’ prospects remain basically uncertain.
Competition i s often given credit for improving BT performance.
It is true that BT has made certain changes of policy directly traceable to competition as such. In the early 1980s it adopted a policy of procuring the best equipment available on the world market in response to the threat of competition; and there has been some rebalancing of prices within the total price envelope as between long distance and local. But otherwise and in terms of results it is impossible to isolate the effects of competition from those of other important developments. These include: privatisation; the separation out of regulation; the creation of OFTEL; the growth of consumerism; the rise in public expectations for public services generally; advances in technology; the separation of posts from telecommunications; and the general
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Fig. 1 Real change in 6T prices (all prices) 30 -
25
20.
15 -
10 -
5 -
-'O t U -15'
1970 1975 1980 1985 1990
reform of British industrial relations by the early Thatcher governments. One can only study overall effects and try to make deductions.
Fig. 1 plots real changes in the overall BT price envelope (Note 1). In addition to rebalancing in face of long-distance competition BT has made other price reductions recently but these are more than explained by the stringent RPI-7.5% price cap. If competition was really biting one would expect to see a distinct acceleration in the rate of reduction in the overall price envelope. So far at least it shows nothing of the kind. On the contrary, in the 7 years 1988 to 94 the average rate of reduction was 4.5% pa. In the 7 years 1978 to 1984 it was 4.4%. (A striking historical feature of Fig. 1 is the big difference in the increases in the two periods of explosive inflation in 1975/76 and 1980/81, as the monopoly learnt how to control its costs under the volatile economic conditions of those days). This is an amazingly small difference, not least because there have been so many favourable factors in the recent past. BT business grew at about 7.5% pa in constant price terms (Note 1) throughout the period up to the 1990 recession, so that the ratio between revenue and expenditure was constantly improving, which in turn should continuously have reduced the size of needed price increases. The price cap values have become steadily tougher; and the economic and industrial relations environment of the 1980s was much more favourable than that of the 1970s.
There has also been remarkably little change in BT unit operating cost (Fig. 2), despite the marked recent reductions in headcount. So far as the network is concerned, the monopoly set up a major replacement programme in 1973 which was completed by the plc almost exactly on time in 1992. The consistent trend of
improvement in network quality over the whole period in Fig. 3 is a direct result.
At technology level BT has developed a world leading passive architecture for the key area of broadband loop technology. Its CATV competitors are expected to upgrade their existing conventional coaxial cable networks to broadband in due course, probably using the hybrid fibre/coaxial technology. But these rival developments owe little or nothing to infrastructure competition in Britain. BT could hardly be seen as responding to competition when it feels itself so discouraged by the bans. In reality its fibre development programme goes back to the 1970s; and the momentum of this programme continued unaffected by the failure of the native cable TV competitors. The hybrid was developed for the US cable TV industry.
In short so far there is remarkably little improvement or achievement traceable on proper analysis to competition as such. There has been an undoubted improvement in BT since 1984. Important weaknesses which the monopoly had yet to tackle in 1984-for example poor relations at the customer interface, inadequate performance on private circuits, the state of coin boxes and excessive headquarters overheads-have been success- fully dealt with. But the improvements have arisen primarily because the internal momentum set up by the PO has been successfully carried forward by the plc, building on the achievements of its predecessor with the advantages of separation from posts and the better national industrial relations climate. The privatisation of BT was a success in stockmarket terms; and operationally it has been a success in the negative sense that apart from the setback in 1987 it has not damaged this momentum. But competition as such has made much less contribution than we all expected. It
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450
400
350.
300
250
- privatisation
- competition
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Fig 2 Operating CO* per
constant 1990 prices)
may have more impact in the future, but if so connection (f sterling at this is a long time coming.
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The case against alternative infrastructure
UK experience with competing infrastructures The main axis of long-distance carrier
competition in Britain 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 based on infrastructure has added any new impetus towards efficiency in long- distance operations.
We have seen that the Government failed to find British entrants who could succeed in local carrier competition. In the end it had to rely on US and other foreign companies. To induce these companies to stay in the market the Government has had to maintain the bans on BT. Even then the business prospects of the competing operators remain uncertain.
At regulatory level the difficulties to which present policy gives rise are becoming increasingly serious and complex. While the bans on BT remain in force the cable operators enjoy what are really unregulated monopoly operations, with all the objections there are to that. This will pose serious problems in its own right if it persists; the operators may have to be brought under regulation, which would be a difficult process. If they upgrade their facilities to broadband, as they have said they will (Reference 2, para 60), and they do this before BT commences to install broadband plant in their franchise areas, this will further strengthen their positions. If it becomes apparent that broadband has real potential to earn large revenue in its own right independently of CATV proper the situation may change. Particularly in business districts BT could conclude that it is justified in investing in broadband regardless of the bans. If and where this happens or if the bans are lifted, BT could regain the upper hand. Otherwise it could simply opt out of local service, leaving the cable operators with permanent monopolies.
The distinction between telecommunications and entertainment which underpins the bans
and indeed the whole present policy position looks increasingly artificial in face of developments like interactive W. It is 13 years since we began negotiations on interconnection in this country. Over the whole of that time the commercial and technical problems have become steadily more difficult. Despite the optimism of OFTEL there is no way out in sight. And there is serious public dissatisfaction at the inconvenience of yet another new set of street works.
To sum up, Britain is further down the road of infrastructure competition than any other major country. British experience has been that it is slow to get moving, with consequent serious delay to service cornpetition. The business prospects of the present competitors are uncertain. It is difficult to detect that infrastructure competition has had any positive .effects on BT performance. And it is causing increasingly serious difficulties in regulation.
The realities oftbe zndustry The profitability and growth of telecom-
munications over the last 20 years have been due primarily to the telephone service. But the growth of telephony is fated to decline and I have shown that it is doing so? 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. Broadband-or more accurately interactive two-way service with high bit rates availableseems the only serious candidate to secure the future.
The practicalities of the penetration of broadband into the market are at last beginning to come into focus. They are complicated and involve some big questions.
Public seruice and business The Select Committee and the Government
in the White Paper have laid emphasis on public service and business applications. A scenario is emerging which should make broadband for them a practical and economic possibility.
A growing mass of fibre spines is spreading out into distribution from exchanges for conventional POTS (plain ordinary telephone
service) because of its cost and other advantages; and as larger customers are given broadband service using specially laid fibre cables. These spines have greater carrying capacity than is needed for their immediate purposes. They form a natural base for broadband service. It would make sense in terms both of operating economics and of public policy for public establishments like local authorities, police stations, universities, schools and other educational establishments, hospitals and doctors to be the first to be given broadband service from them. They should be followed closely by medium and small businesses which can benefit from the facilities but could never afford broadband private networks of their own.
All broadband telecommunications facilities as such should be left to develop on a strictly commercial basis, with no question of subsidy. But Government can most valuably pump- prime and co-ordinate the development of broadband applications for public service and business on a national basis. By the turn of the century broadband serving these sectors should be making an important contribution to the growth and competitiveness of the advanced economies. The potential is immense, as the G7 group of countries has recognised. We can be sure that it will be taken up by our competitors. Britain must not lag behind.
The residential market Much attention is being given to applications
for the residential market, driven basically by the perception of certain large US companies that there is big money to be made. These companies are wealthy and powerful. They can afford a lot of trial and error; there is perhaps an even chance that in due course they will come up with a family of residential applications
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which can make real money. They undoubtedly have their eyes on markets outside the USA. If they do succeed it is likely that worldwide the development of interactive applications will bear a heavy American stamp, oriented to commercial values and to American computing software standards. Is that what Europe wants?
There is a linked technical issue of importance to former monopoly operators like BT and the RBOCs in their US capacities, which have very extensive existing copper distribution networks and face competition from cable operators using their version of broadband over coaxial cable.
In the USA the early visions of fibre-to- every-home have long since faded. The majority of the RBOCs have decided to introduce the 'hybrid' distribution technology. This will involve replacing the copper with fibre out to the 'kerb' (probably fibre rings with ATM switches) and then coaxial cable to the customer. The UK cable operators may be expected to adopt the same technology.
Total change-out of copper in this way will be a very expensive business. In the US the RBOCs are also making use of adaptive technologies which will work over copper pairs (ADSL and its derivatives), apparently as an interim to get them a foothold in the TV market through 'video-on-demand'. If adaptive technology could be made to provide services over copper which are genuinely competitive with what the cable TV companies will have on offer over coaxial cable this would of course give the former monopolies including BT a big advantage. The cost of replacing the copper would be avoided and they would be able to offer a form of interactive TV service everywhere more or less at once. But the adaptive technologies have some important limitations. Only one TV programme can be
Fig 3 % calls failing due to network
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Should cable Tv with
the highly commercial
‘couch-potato’ culture which
it embodies continue to
be encouraged in Britain?
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delivered at a time; picture quality is inevitably affected by the compression techniques which have to be employed; and despite extensive testing there are persistent doubts about the ability of the actual copper in the ground to carry the signals. Early commercial trials are not encouraging. The question is open.
The development of the residential market in the UK will be greatly affected by future policy for broadcasting. A future Government will have to address some basic questions at political level. Should cable TV with the highly commercial ‘couch-potato’ culture which it embodies continue to be encouraged in Britain? If so it would follow that the cable TV interests should continue to be fostered. O r should the British public service broadcasting tradition be renewed by re-invigorating the BBC and the IBA? Should satellite TV be drawn into a proper public service role, for example as a vehicle for common programmes across the whole EU? In that case cable TV would have only a subordinate future role, and might eventually wither away. Other factors are pointing the same way. The traditional appeal of cable TV is the large number of channels which it can deliver, but digital satellite broadcasting can now also provide a large number of channels; and the advertising industry now prefers the wide coverage of satellites. These are big questions outside the scope of this article; but the position on them needs to be known before the future of telecommunications in Britain can be properly mapped out.
Prospects for residential interactive service are therefore fraught with debate and uncertainty. In my view the public service and business applications of broadband deserve higher priority.
The financing problem Whatever the exact form the practical
development of broadband turns out to take it is going to require a great deal of investment. The industry faces one of its toughest ever financing challenges.
To attract and justify investment on the scale involved one must be able convincingly to demonstrate and predict profitability. Most available savings in telecommunications operating cost are currently being used up in holding down present tariffs while maintaining dividends. Infrastructure competition is adding a new layer of costs, through loss of economies of scale and increase in idle capacity.
Competition is depressing long-distance 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 most unwelcome; and as was demonstrated when a selective price cap was applied to rentals, local prices will always be constrained by political pressures whether the operator is privatised or not.
Taken together, these effects must substantially depress the future overall profitability of the operating industry. Information highways could bail it out but they require investment and investment requires profitability. The industry is caught in a vicious circle. The necessary caution of managements facing the uncertainties of competition in a highly capital intensive i n d u s q must contribute further to slowing up the rate at which information highways are built.
Duplication of infrastructure obviously increases orders for the supplying industry in the short term, and injects extra funds and jobs .into the economies concerned. But not all the orders for extra plant are going to Britain and in any case these effects will not last unless the flow of investment by operators is maintained.
Infrastructure competition is the last thing the industry needs from the point of view of its future viability.
Practical considerations In the early 1980s there were what were seen
as important practical 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. Practical competing networks are always inter- dependent. The Mercury network cannot provide full service unless it can interwork with the BT network; and so on. The industrial relations argument was already losing force even then. 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. Large modern software controlled networks are vulnerable to catastrophic breakdowns. If such a breakdown occurs on an
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ex-PTT network there are obvious advantages in having other networks which remain unaffected. But once again the competing networks can only give partial service in such situations. And in any case the consequences of major breakdowns are so serious that the problem will undoubtedly be cracked anyway, by duplication of plant or other measures in the operators’ own bailiwicks.
The arguments for diversity obviously go up with distance. Cable communications between, say, London and Moscow are more vulnerable than those between London and Croydon. From the security of service point of view there is a good case for duplication of facilities for trans-oceanic and trans-continental telecomms. But diversity arguments are not enough in themselves to justify alternative inland infrastructures in countries like Britain or smaller.
The limitations ofpresent 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 co-ordinated communications network in this country since the Romans. Butwhen 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 telecomms up to the First World War is of increasing concentration of services on monopoly operators. This was almost certainly an essential pre-condition for the development of telecomms as a universal service. It is highly improbable that competing private operators would have created the country-wide 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-utilised. Identical issues arise for broadband.
The history of telecomms 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 cable have standard capacities up to 2.4 Gbit/s, 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 Gbit/s, enough for nearly a million simultaneous voice connec- tions. 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 BT and the BPO have between them invested the equivalent at 1994 prices of well over E60 billion or over E l 000 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 market is seen at its best as a mechanism for optimising the use of resources and for stimulating advance in design and technology in consumer products like cars or detergents; or in services like life insurance or 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. Telecomms 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 telecomms networks. Secrets always leak over time.
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Telecomms has made its huge
strides through a deeply rooted
tradition of international
pooling of knowledge
Secrecy is foreign to the tradition of the industry and would almost certainly be counter-productive if enforced. Telecomms has made its huge strides through a deeply rooted tradition of international pooling of knowledge. Experience has shown over and over again that telecomms engineers produce the biggest advances if they are allowed to share thinking across company boundaries. There is no room 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 purchasing behaviour directly influences its characteristics. The end- consumer of telecommunications does not have such acquaintance with or influence on exchanges or transmission systems.
Present policy for telecommunications infrastructure takes no account of these special characteristics. This cannot be right.
The business interests of competitors There is therefore a very strong case for
keeping physical networks unified at national level.
In Britain the question would be one of re- unification and how to bring it about. The business interests of competing companies must be respected. They cannot be made to give up assets they own by compulsion. The point to be emphasised is that the arguments above demonstrate that it would be in the companies’ business interest for the network to be reunified-a point underlined by the cable TV companies’ recent difficulties in raising money on the Stock Market? 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. Only Govern- ment could give the necessary leads.
In present circumstances 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 them using facilities owned by anyone other than themselves or BT was not considered when the present regime was formulated. If a country’s network is to be kept unified or re-unified it must be owned by some body other than the ex-monopoly. This necessarily raises the question of the structure of the industry.
Telecommunications policy in Europe Recent developments in telecommunications
policy in Britain and Europe have been heavily influenced by concern about general competitiveness compared with the USA and particularly the counties of the Pacific rim. There has been very specific concern about high long-distance leased line and international tariffs. These matters are important. But they are primarily to do with specialised communications for business at international and, so far as Europe is concerned, cross-Union 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 such distances. All the signs are that once competition in this format is introduced tariffs come down to acceptable levels.
But this is a relatively limited issue, sensibly dealt with for Europe at Commissionlevel. The really weighty issues for the future revolve round broadband for general populations. In this case the existing telecommunications circumstances of the different countries and their legislative and administrative cultures are so diverse that the issues and especially the structural issues have to be addressed as national matters by each country for itself.
Change in structure Continuing with Britain as the example, in
the early 1980s the functions of the BPO 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 nationalisation 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; telecomms 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 privatisation, without our realising it. In recent years, as BT has approached its present size, radical changes in internal organisation have become more frequent.
Competition adds a layer of difficulty of its own. Examples which seriously trouble the UK regime are the difficulties of interconnection already referred to and of arranging fair competition in services and customer apparatus, when BT is at once the dominant
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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. Things will get more and more difficult.
All these arguments apply or will apply before too long in most European countries. The larger countries will no doubt wish to keep one operator big enough to hold its own on the stage of world business communications. But most of the ex-MTs are now or soonwill 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 including Britain radically to re-examine its operating structure at national level is unanswerable.
A structure for the 21st century The changes in telecomms over the last 15
years have been profound. They call for equally radical change in structure.
There is a valuable pointer to an alternative structure already working in Britain. Mercury’s service to the bulk of its customers is provided over BT or cable TV company distribution 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 from the outset. The idea of such a distinction is increasingly becoming recognised in other contexts.
The Select Committee received written evidence on the question of co-operation in infrastructure but did not go into it at hearings. It did, however, recommend (para 77) that: ‘...the Government and OFTEL examine the possibility of encouraging PTOs and cable
the industry. (b) The network should be kept unified or
progressively re-unified by fair negotiation. (c) The organisation in the new structure
responsible for this re-unified network should be free to provide and retail services for international business at home and abroad; but it should have no other service functions. It should be subject to regulation as regards its network responsibilities but any international services it provides should be unregulated.
(d)All other services should be created and retailed by unregulated companies in competition with one another.
BT’s present functions and those of its competitors should be divided by Government in accordance with this pattern.
In such a structure it will be crucial for the network to be run efficiently. PO telecommunications experience (including my own eight years with responsibility for operations) showed that it is difficult if not impossible to run a monopoly of the old kind with full efficiency. A new formula is needed.
The formula I propose is this. The principal service competitors in the new structure (who would no doubt include the inheritors of the service functions of BT and the main cable operators) should be steered by Government to form a nationwide network company which they jointly own in equal shares. Government itself should take a stake of, say, 20% in the company to enable it to protect consumers’ interest and as a guarantee of fair play.
The company would have a professional Board made up exclusively of its owners’ representatives, including at least one Government director. To ensure efficiency its Managing Director and its top executives
companies to co-operate in providing would be appointed by the owners on regularly broadband infrastructures in areas where there renewable contracts, with stringent is no likelihood of cable television franchises being awarded by the end of 1995’. In reply OFTEL has indicated (para 31 of the OFTEL reply) that it regards co-operation as a matter for the competitors. Were they to come forward with proposals OFTEL would welcome this.
The principles I propose for a new structure are as follows:
(a) The creation and retailing of services and the provision and operation of the network should be treated as two basically distinct activities, conducted by separate sectors of
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- performance-related pay requirements. The Board would control the spread of superhighways across the country, in step with the development and take-up of applications. The existing BT narrowband network would gradually wither away. The recently constructed networks of the cable TV operators 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 earnt by blue chip
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The case for each EU country to re-examine its operating structure at national level 1:-
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companies generally and ratified by the regulator. Profits would be re-invested or distributed by agreement between the owners. Initial investment and later investment requirements not met from profits would be found by the owners or from the market. Anyone who wished to create and/or retail services to the public, including of course the heirs of 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.
Recasting of the structure on this basis would greatly help service competition and network development. The investment expenditure and the risks of individual companies would be greatly reduced. The new network company should find it very much easier to raise capital. And the technical and commercial problems of interconnecting competing networks would progressively disappear.
An objection which may be seen to these proposals concerns the separation of service creation on the intelligent network platform from network operation. This is a subject with a long and very loaded history. The issues involved lay at the centre of the disputes between computing and telecomms interests in the USA which led to the division of the old Bell System into AT&T and RBOCs. These issues can no longer be pushed to one side. The proper development of advanced services is so important for the industry’s future that they must be properly faced.
There is good reason to believe that if a structural separation is enforced by Governments at this boundary the industry will rapidly accommodate to it. In the late 1970s there was strong engineering resistance in Britain to the idea of structural separation out of customer apparatus, on the grounds that the telephone instrument was an integral part of the network. Such separation was enforced for wider reasons of policy and it has been accommodated at engineering level with remarkable success. The customer premise sector is now distinct from the rest of telecomms operations in all respects. The separation of the service platform from the physical network is a close parallel. It presents complex engineering problems. I have myself argued in the past that in the normal run of things engineering considerations should weigh considerably more heavily in the formation of policy than they do. I still believe this as a
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general matter; but when issues as important as those involved in future industry structure arise it is the responsibility of the engineering community to accommodate policy rather than the other way round. I am confident that given the right policy lead the engineering community will successfully meet the technical challenge of separation between the service platform and the physical network.
Conclusion The linking of competition in services to
competition in infrastructure is wrong. Because competing infrastructures are immensely expensive and take years 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 ten or twenty years while competitors to the old monopolies laboriously construct networks and wrestle with funding problems. A new approach is overdue and has been described.
References 1 ‘Europe and the Information Society’, issued by
the European Commission, May 1994 2 Third Report of Trade and Industry Committee
Session 1993-94, HMSO, London, HC 285-1, July 1994, ISBN 0 10020 164 4
3 ‘Creating the superhighways of the future: developing broadband communications in the UK’, HMSO, London, November 1994, Cmd 2734
4 Response to Trade and Industry Committee Report on Optical Fibre Networks, OFTEL, London, November 1994
5 HARPER, J. M.: ‘The Flagship is dropping behind the Fleet’, Engineering Management ]ournal, 1994,4, (3), pp.137-144
6 Financial Times, 21st April 1995, p.27
NOTE 1 I am indebted to Mr. J. J. Wheatley, former BT Chief Economist and now a consultant, for the numeric data for Fig. 1 and for the information about volume growth at constant prices. The remaining data is taken from BPO and BT Annual Reports and Accounts, from BT Telecommunications Statistics 1983 in respect of the period before privatisation and from the annual Blue Books of the UK Central Statistical Office.
0 IEE: 1995 John Harper was the last Managing Director before privatisation of BT Inland Division. From 1985 to 1992 he worked for NEC as Advisor to the Board of NEC (UK) Ltd. He is now Senior Partner of the Lullington Group of telecommunications advisers. Mr. Harper is a Companion of the IEE.
