1.1

Broadband has been one of the most significant developments in communications technologies in recent years. The move from dial-up internet access to broadband services has had a phenomenal impact on consumers, citizens and businesses. Take-up has reached 58% of homes in less than eight years. Broadband has fundamentally changed how people work, communicate, access information and consume media services.

1.2

The desire for operators to offer ever faster services, and for customers to use the applications or services this speed supports, shows no sign of reducing. We are now on the cusp of a new and potentially more fundamental development – the move to ‘super-fast’ or very high speed broadband. These services will deliver significant improvement to users’ broadband experience through higher bandwidths, a better balance between downloading and uploading speeds, and more reliable, higher quality services.

1.3

But delivering these new services will require investment either in new physical infrastructure or in new technologies – ‘next generation access’. A number of existing and new communications providers have already announced their investment intentions for such networks, including BT and Virgin Media.

1.4

This document updates the thinking behind our consultation “Future Broadband – Policy Approach to Next Generation Access” published in September 2007 in light of these developments and the responses we received. It focuses on how we can both encourage investment and promote competition in these new networks. This document complements the other recent publications we have seen on this topic, including the Caio review and the European Commission’s Recommendation on Next Generation Access.

1.5

For consumers, super-fast broadband will support new services and ways of communicating. Examples of these new services might include: reliable high definition video; two-way video communications; simultaneous usage of broadband services by different householders; social inclusion for disabled people through new ways of communicating; and new ways to access public service content and information, including health and education information.

1.6

For business customers new networks make high bandwidth connections that offer greater upload speeds affordable for small businesses. They can change working practices and businesses’ costs by making home working a more viable and interactive activity.

1.7

To make sure consumers and business benefit truly from super-fast broadband, we must learn the lessons from today’s broadband experience. In the early days of broadband, limited competition meant there was little choice, high prices and low take-up. Consumers were not aware what broadband could do for them, and once they had subscribed, could not easily switch provider.

1.8

For super-fast broadband to be a success, consumers must be aware of the services on offer, with suitable information to choose between alternatives. They must also be able to exercise choice by being able to move from one service provider to another. This will require good quality migration processes for consumers moving to next generation access networks, back from them, or between different operators’ networks.

1.9

Our stakeholders – communications providers, industry groups, and consumer and business bodies – tell us they increasingly believe that super-fast broadband will bring real benefits and opportunities. However, the evidence to support this is still emerging, even in those countries where these networks have already been built. This means that there is still a lot of uncertainty as to exactly who will want to use super-fast broadband, for what services, and how and where new access networks to deliver these services will be built.

1.10

In practice, the supply of super-fast broadband will be based on a range of different technologies, including fibre, satellite, cable, fixed wireless and mobile wireless. Each technology has its own benefits and costs. The best placed technology will vary depending on factors such as location, customer density, usage and demand for mobility. We believe that technology choice is best left to the market.

1.11

Ofcom’s focus is on furthering the interests of consumers and citizens. We think the delivery of these new networks is desirable, and will help to deliver both consumer and citizen benefits. We want to promote private sector led investment in the right technology at the right time, based on a competitive environment, and supported by the right regulatory framework. It is through such competition and regulation that the consumer and citizen interests can be best met.

1.12

Regulation must support investment by the private sector, while at the same time promoting competition wherever there are potential barriers to competitive delivery of services. This is especially true for fixed next generation access networks that are likely to display the characteristics of enduring economic bottlenecks. Our stakeholders have told us that the most valuable ways regulation can support private sector investment is to:

• provide a clear, consistent and transparent regulatory regime;
• ensure any regulation takes account of the uncertainty and risk in investment;
• provide flexibility in trialling and piloting to help develop and test new technologies, commercial relationships and services;
• support experimentation by all organisations on how to deploy or run these services, including new entrants, the public sector and community broadband projects; and
• reduce barriers to entry wherever possible. Our strategy of spectrum release, liberalisation and trading is a key area in achieving this aim, enabling the market to launch new wireless services when the time is right, including those that may compete in the delivering of next generation access services.

1.13

Regulatory certainty is key: we will aim to deliver this certainty by committing to ensuring our decisions are clear, timely and consistent over the longer term. We will also seek ways to ensure such certainty and consistency is reflected within the EU Framework where ever possible.

1.14

On promoting competition, we do not think that the move to new, next generation access networks means we need to fundamentally change our current regulatory approach. We continue to believe that competition at the deepest level that is effective and sustainable, supported by equivalence of access, is the right approach. What might change is what this means in practice. How to deliver on this objective in the future is one of the key areas for decision in setting the regulatory regime.

1.15

Regulatory policy can enhance the incentives for investment. There are three main incentives for investment that can be affected by regulation to varying degrees. They are:

• the degree of competition and contestable investment, which will drive investment and innovation;
• the potential for cost efficiencies or cost reduction; and
• the opportunity for service and infrastructure providers to increase revenues, either from new services or new commercial relationships.

1.16

The experience of current broadband shows that competition brings the most benefits in terms of consumer outcomes, investment and efficiency. Where there are substantial barriers to entry, it is therefore desirable to promote competition through regulation.

1.17

In the future, it remains likely that effective competition will depend on regulation, at least in some locations. As with today’s broadband market, promoting competition may require regulated access for third parties to the networks and products of operators with market power.

1.18

One of the key questions for industry and Ofcom is what form any wholesale products should take. In our last consultation, we identified two types of wholesale product: ‘passive’ products, relying on access to physical network elements, like copper, fibre, or duct; and ‘active’ products relying on access to the electronic equipment that is connected to the physical infrastructure.

1.19

Active and passive products both have different strengths. Active products may result in lower costs, but can limit product and price innovation and differentiation to competing providers. Passive products on the other hand offer much more opportunity for differentiation, but suffer from the risk of duplicative investment and fragmentation, increasing the cost of competition.

1.20

We believe that passive products offer the most desirable means to promote of competition where economically sustainable. However, in practice we are likely to need a mix of active and passive inputs initially, allowing scope for technical and economic experimentation. As is the case today with current broadband, both may be required into the future. However, the distinction may not be as simple as a choice between active and passive products. In reality, both active and passive products can take a number of forms, each with subtly different characteristics.

1.21

Openreach’s consultation on its proposed next generation active product, Generic Ethernet Access, is the first move from industry to explore the potential of future wholesale access products. We look forward to the outcomes of this discussion and consultation. Our final regulatory decisions will be heavily influenced by the outcome of these industry discussions.

1.22

Responses to our previous consultation, stakeholder discussions and third party analysis all suggest that widespread use of some options for passive access may be uneconomic on a mass scale. This is because of the potential for higher costs and smaller scale at each location than today.

1.23

However, passive access could take many forms, based on different network deployments or commercial models. Some of these may improve the underlying economics making these products more attractive. We think that industry needs an opportunity to explore such options, and to look at innovative ways of making competition based on passive access work economically and practically.

1.24

We are particularly interested in how joint investments or risk sharing may be able to improve the economic case for passive access. This is where more than one party shares part or all of the investment cost. For example, operators might co-invest in some shared parts of the network, while still investing in some pieces of the network individually.

1.25

Joint investment has benefits both for existing network owners and alternative network operators. It can help existing network owners to share, and reduce, the risk associated with upgrading to next generation access. Also, drawing on more than one organisation’s financial resource may allow a wider, and potentially faster, rollout. For alternative network operators, joint investment allows a greater degree of control of the underlying network, offering more opportunities for innovation and differentiation in products and prices.

1.26

However, co-ordination and effective management of joint investment approaches can be difficult. We are keen to understand the benefits and potential risks arising from different models of joint investment, or other new commercial models like up front payments or guaranteed demand in return for lower ongoing prices. These actions all have the potential to improve the case for investment and the end result for customers. However, it remains fundamentally important to us that any new commercial relationships are not discriminatory or anti-competitive.

1.27

Duct access is another passive product that is receiving significant interest across Europe. We are undertaking a survey of BT’s ducts, with the aim of publishing results before the end of the year. At the same time, we welcome thoughts on how far duct and pole access is a necessary part of any future regulatory regime and what interest there is in using these products. This complements the recommendations from the recent Caio review, which considered how greater use of new poles and co-ordination of street works could reduce the cost to build these new networks.

1.28

One key element in securing investment and promoting competition is regulated pricing. We have previously expressed our belief that risky investments should be allowed to earn returns that reflect the level of risk faced when the investment is made. We recognise the risks of investing in next generation access will initially be higher than those associated with today’s access networks. There is still a large amount of uncertainty on both the demand for the very high bandwidth services as well as the technologies that can be used to deliver them. This uncertainty may diminish over time as demand becomes clearer and technologies better understood. However, while the uncertainty remains, so does the risk.

1.29

Pricing mechanisms need to reflect this level of risk, while allowing investors the freedom to experiment and try combinations of new services and prices. At the same time, we must ensure that consumers are protected from excessive pricing.

1.30

We are keen to understand views on an approach to wholesale pricing that:

• allows network operators freedom to set the price of active products. This may be a suitable approach where there are indirect retail price constraints, for example from today’s broadband services or services offered over other access networks to limit the risk of excessive pricing. Such an approach allows the market to find the right price for these services; and
• applies more traditional approaches based on costs for wholesale passive products, but with suitable considerations for the risk incurred in any investment. This approach has the advantage of promoting efficient use of these products, while reflecting the risks associated with investment.

1.31

Such a pricing approach is based on the current state of market development, and the relative immaturity of super-fast broadband services. If the current situation were to change any pricing approach put in place would need to be reviewed. One example would be where the closure of current access networks results in a change to the overall market structure and reduced indirect pricing constraints.

1.32

Simply preventing excessive pricing is not enough on its own to ensure a good consumer outcome. To really benefit from new services, consumers must also have effective choice, for example choice of retail supplier. We see it as a very positive development that investors including BT and new build fibre providers are already proposing wholesale products that will support such choice.

1.33

Next generation access networks will eventually replace the current broadband networks. Old and new networks may operate in parallel for a time, but there will be strong business reasons to move to a single, modern access network as super-fast broadband services become mass market. For current network owners, effective transition is likely to be one of the keys to the long term success of these new investments. New networks offer the chance to increase efficiency and reduce operating costs for network operators after transition.

1.34

Moving from existing to new access networks poses some difficult challenges to existing competitors, regulation and the consumer. Any transition may result in fundamental changes to the regulated wholesale products or the features they support. It is not our role to protect communications providers from the impact of technology change. However, we would not wish any transition to prejudice the competitiveness of the market or result in a poor consumer experience during change over.

1.35

When transition becomes an issue will depend upon the take-up of super-fast broadband services and the potential cost savings from transition. If these services are a success, the need for transition could reasonably be expected to arise within the next two to five years. When it does, we will need to work with our stakeholders to understand the implications and define a clear process to enable transition. The right time for transition depends on a number of potential triggers, including: the take-up of super-fast broadband services; the availability of good quality access products on the new network; a clear plan and process discussed with industry; and suitable bulk migration processes.

1.36

We believe that any transition to new access networks needs to be carefully managed, with clear consultation, notification and migration periods. We are interested in stakeholders’ views on how this might work in practice, including the triggers, timescales and geographic phasing.

1.37

The third incentive for launching super-fast broadband services is to generate new revenues. This may be even more important now than it was for current broadband services given the larger cost of investment in new access networks. New revenues could come from new applications and services, consumers being willing to pay more for access, or new commercial models.

1.38

The introduction of new business models can be controversial, but may be very important in the delivery of new access networks. Regulation can have a role, for example in helping to increase consumer confidence in new services. One example is improving consumers’ perception of behavioural advertising. We are interested in views on where else Ofcom can assist in new commercial developments.

1.39

At the start of current generation broadband, people thought that the market may only deploy services to around 60% of UK homes. In the end, it significantly exceeded this. However, some modest public sector intervention was still required to deliver broadband to the current 99% availability.

1.40

We agree with the conclusions of the Caio review that the private sector should play a principal role in investing to deliver super-fast broadband. However, there is uncertainty on how far the private sector will go – it depends on the demand, take-up and cost of these new networks. It is highly unlikely that the private sector will deliver truly national coverage: current plans are for 40 to 50%, the Broadband Stakeholder Group (BSG) believes it could reach two thirds of the UK. This uncertainty makes it difficult to predict what role the public sector should play at this point.

1.41

How far super-fast broadband may add to both wider social and economic value also remains uncertain at the moment, though evidence on will emerge over time. If there are substantial benefits from widespread availability of new access networks, and the private sector will not deliver this availability, there will be a case for an enhanced role for the public sector.

1.42

We believe that, in this period of uncertainty on the demand, usage and reach of next generation access networks, it is best for the public sector to adopt a partnership approach with the private sector to delivering super-fast broadband services. Specifically, it should seek to:

• focus near term attention on those geographic areas that can already be identified as remaining under-served in the future;
• facilitating market-led investment at community level; and
• co-ordinate its activity across the UK.

1.43

Many of the issues in this document relate to next generation access networks built in parallel to today’s access networks or upgrades to existing networks. But developments are already underway in some areas, with developers and communications providers installing fibre to new build premises. We published our statement on the regulatory regime for fibre in new build developments in parallel with this consultation . This document sets out clear positions on the delivery of existing regulatory obligations and products, universal service and uninterrupted access to emergency services.

1.44

The wider debate on next generation access will continue to develop in the coming months. We have already started to engage with industry in this debate through the industry round-table held on 2 September 2008. This consultation seeks to provide clear leadership and proposals for how to progress this debate.

1.45

We have set out a number of proposals in this document for how regulation can set the right environment for investment. We will:   

• provide flexibility in trialling and piloting of next generation access  networks and support new ways to deliver investment, for example though the use of sewers;
• provide clarity and consistency on the pricing mechanisms that may be most appropriate for next generation access in the near term, as well as outlining approaches to estimate what a risk reflective rate of return may be;
• work with industry to develop a fit-for-purpose product set, including passive and active remedies, depending on demand. We strongly favour a policy of supporting a range of investment models to promote competition in next generation access;
• work with industry bodies to ensure that all next generation access remedies can be bought and managed as easily as possible, with suitable purchasing, provisioning and migration processes;
• promote standardised technical requirements for wholesale active line access products, working with communications providers, standards bodies such as the Broadband Forum and other European regulators. We are publishing a draft of these requirements alongside this document;
• consult on specific proposals for a wholesale duct access product, subject to the outputs of our initial duct survey and receiving clear declarations of interest to this consultation in duct access from communications providers
• support transition to new networks when this issue arises, while at the same time preserving competition;
• encourage constructive debate between players at different stages in the value chain in order to ensure, wherever possible, the timely rolling out of new and innovative services; and
• build on the guidance on best-practice intervention that we have already set out in order to encourage effective public sector intervention in rural locations where the market seems less likely to invest.

1.46

We will progress these actions and the positions outlined above in the coming months through a range of activities which continue the debate with the full range of our stakeholders.