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Digital Britain in Summary: Taxes for an Insufficient Network Lacking a Broader Vision

Lord Carter’s Digital Britain report contains few surprises given that its essential thrust has been much discussed during the past six months. What remains unequivocal is that the report and its (political) backers trumpet a national broadband network which promises to deliver an insufficient network. It also lacks a broader vision, which in the long-term will provide the UK with a mediocre service incapable of securing true value from its digital economy and services.

The report is to be applauded for addressing elements of the digital economy, but it does not go far enough. There is no sense of nation building in the policies proposed. It is surely in providing infrastructure and thereby creating opportunities for future generations that the true value of the initiative should be derived.

In sum, the report covers several issues. It primarily sets out the importance of the digital economy to the UK’s overall economic future, and how the digital economy (the ‘knowledge economy’) will secure the country’s competitiveness for jobs, investment and new services. The proposed measures include those which would:

  • Strengthen and modernise infrastructure to enable the UK to compete internationally;
  • Provide universal access to 2Mb/s broadband by 2012 and, though less likely, 50Mb/s by 2017;
  • Provide an investment fund (a Next Generation Fund) to deliver universal broadband;
  • Upgrade digital radio by 2015, leading to the end of FM and AM transmissions;
  • Promote upgraded (essentially HSPA and LTE) mobile coverage and services (partly to fill in territorial gaps left by fixed-line broadband), allow 2G spectrum for 3G use, and make 3G licenses indefinite to encourage investment and deliver data rates of 1Mb/s by 2013;
  • Introduce legislation to combat digital piracy.

These initiatives are well intended, though for the majority of people affected by them they are clearly insufficient. Thus the UK’s phonographic brethren decry that anti-piracy measures do not go far enough, the BBC is spitting that it is to be docked £200 million recently handed to it to help with digital switchover, and most people (55% according to a recent poll) who use the Internet understand that 2Mb/s is insufficient now, let alone in a few years’ time.

Because of a lack of a cohesive overall national vision, detractors can thus focus on four core areas: the funding proposals, the poor network access model, the inadequacy of the proposed broadband, and the missed opportunities.

Misjudged costing

The one true surprise in the report is the method of funding: it proposes a £6 annual tax (between £150 million and £175 million per year) on all copper lines (including ISDN and cable) to finance a Next Generation Fund which will subsidise operators willing to extend broadband to areas currently underserved (up to 15% of people currently cannot get broadband, up to 40% can only get the most basic data speeds). This begs the question from detractors: why should people who do not use the Internet subsidise those who do? Ofcom acknowledges that Internet use is largely socio-economic: according to its own research, 71% of the ABC1 demographic use the Internet compared to 48% of the C2 group and 38% of the DE group. Of those without broadband, 45% do not use the Internet enough to warrant being connected, and 18% are happy with dial-up.

It is perhaps difficult for those in the telecoms business, who tend to consider broadband as an essential utility, to understand why a relatively small but nevertheless significant proportion of the population chooses to opt out of having broadband at all. Nevertheless, that this is so should not be alarming. If the future of broadband relies on an FttH network (not yet for Britain, it seems), then there will be so many services available that people can opt in or out of whichever they want, including voice and broadband as we now recognize it. Furthermore an FttH network is needed to address some of the country’s growing problems in the areas of healthcare, education and the environment.

Another complaint is that the Next Generation Fund would simply pay for the major ISPs to build and upgrade networks which should have had these works done years ago. BT, which stands to take the lion’s share of the Fund’s largesse, has long had experience of tapping into public subsidies: many of its exchanges were upgraded to provide DSL not through the company’s own investments but by leaning on funds made available through regional broadband initiatives during the last decade or so.

By Lord Carter’s admission, the new tax is likely to be increased and will stay for as long as necessary. This may be government double-speak for introducing a permanent tax which will morph into a ‘network maintenance’ levy. Alternative proposals have been muted in other markets. In Finland, the government’s Broadband Action Plan (to deliver 100Mb/s FttH nationally by 2015) is to be funded by government and EU contributions, the auction of wireless frequencies, and payments collected from telcos based on the number of their broadband subscriptions, which would amount to 0.1% of net sales based on estimated revenue for 2010. In this sense, only broadband subscribers would pay for their service.

Poorly regulated access

Given that the newly imposed tax will help build the universal broadband network, it could and should be expected that the government regulate that the network provides open and non-discriminatory access to all organizations which need to use this utility (telcos, ISPs, government agencies, energy companies, etc), along the lines of the Australian model. This would also require an amendment to the current regulated protectionism for BT, both in terms of pricing and access: in February 2009 Ofcom proposed that BT should not have regulatory controls on its wholesale (fibre) pricing and that the company should be guaranteed a reasonable return on investment (ROI). This policy contrasts with the Dutch example, whereby Glashart, the joint venture between KPN and its part-owned fibre provider Reggefibre, provide non-discriminatory network access at a fixed wholesale rate, depending on the build costs for particular areas. Wholesale FttH access prices are fixed at €14.50 to €17.50 per month per line, depending on the build costs for particular areas.

Despite the public funding, BT can set whatever charges it wants for wholesale access (or what the market can bear), though for FttH networks the company’s ROI is set at 15%. This level of return makes it economically difficult for telco competitors and for providers in other sectors (those using the network to provide healthcare, education, smart grids etc) to make a profit. Unless ROIs are set at around 8% (or preferably lower), it will not be viable for operators to provide their services, thus defeating the entire raison d’être of the Digital Britain initiative.

Inadequate broadband

By the government’s scheme, universal broadband is to be made available through a combination of technologies, including DSL, FttC, wireless (mobile broadband and WiFi/WiMAX), and possibly satellite. As such, the scheme is similar to one conceived in Australia, and rejected on the understanding that an FttC network would inevitably need to be upgraded to FttH, which would mean that a considerable portion of initial investment would be wasted and so represent poor value to the taxpayer. Although universal broadband is in itself an excellent proposition, as it now stands the service would only universally allow for digital economy applications. This is unforgivably limiting.

At the very least, the proposed 2Mb/s universal broadband service is inadequate by today’s standards, and will be deplorable in 2012. Similarly, the proposed 50Mb/s service by 2017 (the further down the track the less plausible it becomes) will also be inadequate come the time. Many countries in Europe, including Spain and Portugal let alone The Netherlands, Sweden and Norway, already have significantly more advanced FttH deployments than the UK, and, as mentioned, countries such as Finland have ambitions for nationwide 100Mb/s services. FttH—pointedly not the copper-dependent FttC—is the recognized end-game, and by concentrating on the poorer alternatives for delivering broadband the government is showing how far off the mark will its intended digital economy leadership prove to be, how lacking in ambition are its policy makers, and how frustrated the end-users will become when they are still served by insufficient networks.

Missed opportunities

There are few governments which consider future IP networks in a larger framework. The UK is a case in point. When building a nation’s NGN, policy makers should take the opportunity to think big, which means thinking far beyond broadband as is currently perceived. At present, the Digital Britain report has taken a silo approach in that it addresses elements such as telecoms, content, radio and TV in isolation of each other.

The trans-sector approach, by which broadband taps into and co-ordinates with other sectors, is currently being championed by Australia, and under its example and guidance is being explored by New Zealand, The Netherlands and the USA. Other sectors include the use of IP infrastructure for a range of services, of which telecoms is only one. Bandwidth tenants will include government departments developing e-health and tele-education services (as well as the private sector doing the same), utilities managing their smart grids, security and entertainment firms, and a plethora of new and entrepreneurial services yet to be thought of. Applications such as e-health, tele-education and smart grids will together account for at least 50% of the digital infrastructure capacity, while broadband as we now know it will represent 10-15%. In effect, broadband will in future years become such a small component of overall IP-enabled services that it can provided for free, much as email and computer-to-computer VoIP are currently free.

So despite the posturing, the government faces a bleak fact: that without a broader vision and a coordinated approach to IP infrastructure it will be impossible to maximise the economic and social benefits from its Digital Britain initiative. This will be shameful for the government, and a pity for all citizens.

By Henry Lancaster, Senior Analysts at Paul Budde Communication

Henry is also a contributor of the Paul Budde Communication blog located here.

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