Ofcom: To err is human. To rethink divine

by Alex Blowers, Head of Regulatory Affairs - CityFibre

Recently, Ofcom’s new ‘annual plan’ for 2018-19 crossed my desk. It starts by reminding us of Ofcom’s principal legal duty under the Communications Act: “To further the interests of citizens in relation to communications matters and to further the interests of consumers in relevant markets, where appropriate by promoting competition.”

Even by the usual standards of British legislation, that is a bit of a mouthful. It reflects the fact that this duty was worked over heavily in Parliament during the passage of the bill. As a close observer of that process at the time, I recall much time and effort was spent trying to accommodate the opinions of Parliamentarians whose main concern was for the future of UK public service broadcasting (one of Ofcom’s many areas of responsibility). The UK’s telecoms infrastructure – and how Ofcom would go about regulating it – was a bit of an afterthought.

Nonetheless, two key points stand out. First, that the focus – rightly – was on the interests of consumers, not producers. And second, that competition would sometimes, but not always, be the best way to secure their interests.

Fifteen years on, how are we getting on in ‘furthering the interests’ of those consumers as regards our telecoms infrastructure? Not great, really. The recent spate of good news stories – led of course by CityFibre’s announcement of a strategic partnership with Vodafone to build five million full fibre connections across the UK – doesn’t alter the fact that as a country we remain stubbornly third from bottom of the OECD full fibre league table. So, what has gone wrong here?

Increasingly, I’m coming around to the view that the problem lies with that clunky primary duty and specifically, the vagueness of the duty when it comes to a clear focus on securing a first-class national digital infrastructure. In short, Ofcom has been successful in delivering (relatively) low priced access for consumers via a mediocre legacy telecoms network, but the cost of this has been a failure to provide the right incentives to the industry to replace that network with something fit for purpose.

The best way to understand this is to reflect that high prices and crap customer service (the stock-in-trade of incumbent telcos the world over) can be rectified by two methods: you can regulate the hell out of them, specifically by forcing price cuts and imposing ‘quality of service’ obligations, or you can encourage someone else to enter the market to do the job better.

In the UK, the incumbent’s problem isn’t just the laziness that comes from being handed a national monopoly; its inheritance was a network constructed in the mid twentieth century to deliver narrowband voice telephony. As the need for ever greater bandwidth and resilience has become increasingly apparent, no-one entering the market would contemplate doing anything other than building a full fibre network. So, the likelihood is that competitive entry will not only put a fire under the incumbent on the short term consumer issues of quality and price, but will lead to a step change in the infrastructure deployed across the country. Regulation, in other words, can be designed to mimic competition, which might create short-term gains for consumers, or it can promote competitive market entry, leading to longer-term gains for consumers. And, on any reasonable analysis, the latter – if it spurs the creation of a resilient, full fibre infrastructure – is going to provide greater long-term benefit than the former.

But back in the early noughties when Ofcom was created, it faced a dilemma. The TMT stock market crash had wiped out the principal infrastructure investors, ntl and Telewest. This had created conditions where there was zero investor appetite to build out new infrastructure. Ofcom initiated a piece of analysis called the Telecoms Strategic Review, which I led. The depressing conclusion of that was that a ‘make do and mend’ approach (to encourage at least some competitive activity through unbundling of the existing copper network) was probably the only realistic option available. From that, in turn, came the creation of Openreach and a wave of what was essentially resale of the copper network.

The problem of the looming obsolescence of that network was put off for another day. We were aware that this might be an issue, of course, but hoped that the competitors entering the market as copper unbundlers would, in due course, start to build their own fibre networks. This was referred to as ‘climbing the ladder of investment’.

During the TSR, some US academics visited us to share some insights from the analysis of their own Telecoms Act 1996, which had also had unbundling-type regulation as its centre-piece. They warned us to be wary that unbundling would create its own ecosystem of regulatory dependents. When investment conditions improved, these firms would (they argued) not respond as we expected. Instead of starting to construct their own infrastructure, they would use their lobbying muscle to double-down on resale by demanding ever better terms of access to the incumbent’s network. I’m ashamed to say we brushed these objections aside. At one industry conference, I even recall rather patronisingly telling one of the US academics that we were far too bright to make the same mistakes as the Yanks (or words to that effect).

Sometime in the last decade, that pragmatic decision in the TSR to ‘make do and mend’ has hardened into a worryingly dogmatic view that this resale-based competition must be maintained at all costs and accompanied by continuous downward pressure on the incumbent’s wholesale prices. This is all described as being necessary to ‘further the interests of consumers’. And they are supported in this by the Greek Chorus of access-seekers who entered the market after the TSR and have used their lobbying power to try and improve their own business margins on regulated access. In short, exactly what those US academics predicted would happen!

Meanwhile, out in the rest of the developed world, other countries have steamed ahead of us. They’ve achieved this by adopting a more balanced approach and encouraging new entrants to build full fibre.

When I joined CityFibre, I took some comfort from the recently published Ofcom Digital Communications Review – essentially the Telecoms Strategic Review Mark II. It signalled at least some recognition that we couldn’t, as a country, go on like this and that investment in new full fibre infrastructure should now be encouraged. Unfortunately, though, this strategic rethink is hardly visible in Ofcom’s actual decisions. In both its recent business connectivity and wholesale local access (i.e. residential broadband) market reviews, Ofcom has essentially maintained the same course, focused on regulating wholesale access to BT/Openreach’s legacy assets down to cost – even at the expense of blunting new market entry opportunities for competing full fibre operators.

When pressed, their explanations are revealing. They will not contemplate any course of action that drives short-term price increases for consumers, even if the long-term benefit would be a healthy competitive marketplace with much lower prices. In one memorable exchange, we were told “Today’s consumers cannot be asked to pay for tomorrow’s network”. This is a wrong-headed view on two levels. First, any infrastructure upgrade of any kind involves some foregone benefit today for a more substantial benefit in the future. Consider, for instance, the way that the push for renewables is leading to some short-term pressure on energy prices. Apart from a few marginal voices though, no-one questions the national benefit of this policy. Second, the timescale on which consumers would benefit from a mass market deployment of FTTP is not some time several decades hence, but in the next decade – provided Ofcom genuinely put its shoulder to the wheel to make this happen.

There is also an increasing recognition in broader public policy circles that the UK is experiencing a crisis of under-investment in critical national infrastructure. Whereas the focus of the Communications Act was on delivering private benefits to consumers, attention is now switching to the broader, public benefits of a switch to full fibre; not just in terms of faster and better access for consumers to movies and other content but in terms of increased productivity and closing the troubling regional disparities across the UK. These broader public benefits are hardly touched on in the Communications Act and therefore, unsurprisingly, don’t seem to loom large in Ofcom’s thinking.

I’m all for the interests of consumers. I’m one myself, who happens to be experiencing one of the mysterious periodic outages to which my copper connection is prone as I write this. But somewhere along the way, the idea that regulatory policies should involve a proper balance of short term and long term interests, both public and private, has gone missing. The problem is exacerbated by the lobbying power of the regulatory dependents who entered the market to exploit what was only ever intended to be a temporary expedient of regulated access to the legacy copper network. These firms have consistently argued for lower priced copper, regardless of the effects of that on long-term investment incentives to deploy fibre.

Whilst Ofcom may yet choose to do the right thing under its current functions and duties, it is clear to me that some ‘course correction’ is needed. As and when there is a legislative window, the Government should amend Ofcom’s duties to make clear that focusing on low priced access to a twentieth century metallic phone network is not, on any realistic view, a good way to ‘further the interests of consumers’ let alone to equip the country with the infrastructure it will need to stay globally competitive in an uncertain future.

Alex Blowers is currently CityFibre’s Head of Regulatory Affairs. This opinion piece was first published by Alex on LinkedIn. The views contained within it draw on his experience in previous roles and may not necessarily be endorsed in full by CityFibre.