Broadband Infrastructure Inquiry
Good morning, everyone, and welcome to the 12th and final meeting in 2011 of the Infrastructure and Capital Investment Committee. I remind members and the public to switch off their mobile phones—I have not switched mine off yet—because they affect the broadcasting system.
Everyone is present and correct today. Item 1 is evidence on the broadband infrastructure in Scotland. We will hear from telecom and broadband providers today, and I welcome our witnesses: Richard Rumbelow, head of corporate affairs at Everything Everywhere; Brendan Dick, director of BT Scotland; Matt Rogerson, head of public affairs and policy at Virgin Media; and Julie Minns, head of regulatory and public policy at Three.
The committee has heard evidence of a link between broadband connectivity and economic growth. For example, the Royal Society of Edinburgh said in its submission:
“An internationally competitive digital infrastructure is critical to sustainability, economic success, and social and cultural well-being”.
Will you comment on the economic advantages that will be gained if Scotland establishes a superfast broadband network and, conversely, on the disadvantages of not doing so?
Brendan Dick (BT Scotland)
Apart from the excellent work that the RSE, and Michael Fourman in particular, has done, a couple of other bits of recent evidence support the view that you expressed. You might be aware of work that came out relatively recently, which Ericsson did in conjunction with the Chalmers University of Technology in Sweden. The researchers looked at 33 Organisation for Economic Co-operation and Development countries and suggested that there is a 0.3 per cent uplift in gross domestic product for every doubling of broadband speed. A 0.3 per cent uplift might not have been a lot a couple of years ago, but in the current economic climate it is potentially quite significant.
More recently, SQW, which you might be aware is an economic consultancy with a presence in Scotland, did some work for the Scottish Government—I think that it was in spring this year. Although SQW was not looking at GDP, it came to the conclusion that one would typically see employee productivity increase in the manufacturing sector by about 5 per cent and in the services sector by 10 per cent, potentially.
There is growing evidence, but the challenge is that the deployment of high-speed broadband services, as compared with broadband itself, which was deployed in Scotland around 2004 and 2005, is relatively embryonic. That is true not just for Scotland and the United Kingdom but more broadly. Therefore, the evidence base is still growing. There is a combination of, first, evidence such as I mentioned and, secondly, a belief that high-speed broadband is the right direction of travel in the digital economy in which we live.
We live in a world in which there is a blurring between the place of work and home—members of the Scottish Parliament must live with that reality. That also applies in the context of learning and other areas, including e-health, which is a big agenda item. When we consider the deployment and use of technology, we can see that we are rapidly moving into a world in which the home is more a place of economic activity and interface with public services than was the case even three or four years ago. That is a factor that we need to take into account.
The figures that you gave were interesting. You mentioned a study that showed increases in productivity of 5 per cent and 10 per cent—but from what?
From where they are, so—
I meant from doing what? From doubling broadband speed?
No. That study referred to the adoption of higher speeds; it was the Ericsson report that considered the effect of doubling broadband speed.
It was a general observation, then.
It was a general observation, but I think that it indicates a trend and a direction of travel.
I will make a couple of points to follow up on Brendan Dick’s remarks. First, on the point about the blurring between the workplace and the home, we see among our customer base increasing take-up from small businesses, for which mobility is crucial. If you have a small workforce, the ability to stay in touch with your customers when you are travelling between appointments is critical, so small businesses increasingly use mobile broadband. The Federation of Small Businesses surveyed the use of mobile broadband as well as fixed broadband in its infrastructure report earlier this year.
The second point relates to 4G. In the press today, Ofcom says that the UK is at significant risk of falling behind in the deployment of 4G mobile technology. There is a report by Deloitte—I am happy to supply the details to the committee—that measures the economic impact of deployment of 4G services on the US economy. The figure that sticks out is the estimate of associated job creation from the deployment of 4G in the US at upwards of 770,000 new jobs.
The UK has not yet announced the rules for the auction of the spectrum that will allow us to deploy 4G services, so I think that the concerns that Ofcom has voiced today are very real.
Matt Rogerson (Virgin Media)
On Brendan Dick’s point about the embryonic nature of our understanding of how broadband can support industry and growth, I think that we have reached a tipping point. It is an incredibly exciting time—in Scotland, Virgin Media supplies about a million homes that by March next year will have access to 100 megabit broadband, which is genuinely fast. We deliver at 90 per cent of our headline speed.
Going into 2012, we have a big job ahead of talking to businesses and consumers about how they use those services. To date, we have been very good at building the network and investing billions of pounds in it, but we have not been quite as good at helping people to understand the benefits of broadband. For example, an FSB survey—it may have been the same one that Julie Minns mentioned—showed that 20 per cent of small businesses did not think that the internet mattered to them, which is a surprisingly high number, given how impactful broadband can be on economic growth.
The other thing that we have learned in 2011 is that having the infrastructure in place is not the end of the story. We are running a trial in Tower Hamlets in London with an incubator called the cube. We are supplying a very high-capacity broadband connection so that the start-ups that use that space can access that very fast broadband without having to sign up to a 24-month contract. They can pay for it for an hour, a day or a week, and it helps to support their business, especially as they do not know whether they will be there in two or three months.
We have invested billions of pounds in infrastructure and BT is doing likewise, but it is very important that we get people to use it and drive take-up.
Richard Rumbelow (Everything Everywhere)
To follow on from Julie Minns’s comments, 4G is particularly important for delivering wider-access mobile broadband services to consumers, whether they are individuals, small businesses or large businesses.
We are currently trialling a 4G pilot in Cornwall with assistance from BT that is already demonstrating clear benefits to those trialists—both consumers and small businesses—who are using it. We will learn a lot from that experience, which will help us to understand more succinctly how 4G can be applied to rural environments in particular, in terms of allowing much broader and wider coverage. It shows that mobile will be a more cost-effective solution for many people who want to get broadband access in the future.
That leads nicely on to my second question, which is about the infrastructure that your services use, the coverage, and the split between landline fibre and mobile services. We have heard conflicting evidence, with some people saying that we need to roll out fibre as far as possible, with mobile, wireless and transmitters taking up the rest. Can you give us your views on that?
Virgin Media is a huge advocate of fixed-line, fibre-based broadband. We have invested £13.5 billion in a network that covers around 12.5 million homes in the UK. In Scotland, it covers about 1 million homes, mainly in the urban areas, as you would expect. As a result of that investment, we are able to provide a 100 megabit connection today, and we have trialled a 1.5 gigabit connection, which was, for two weeks, the fastest cable connection in the world, before someone beat it. That is always the way. We also provide managed internet access for businesses large and small, ranging from 1 gigabit through to 10 gigabits.
We would argue that the market is working pretty well in urban areas. BT is competing aggressively with us, and I think that 2012 will be a pretty competitive year. In rural areas, we strongly support the idea that, when the Government intervenes with public funding, that funding should be spent on a network that is future-proofed and that is entirely open so that any provider can access it. Any company that benefits from state aid clearly has certain obligations from a Commission standpoint. That can involve a range of elements from wholesale active products such as BT’s Infinity product through to wavelengths and dark fibre, which are also elements of the broadband recipe. If public money is to be spent on those networks, it is critical that we have a competitive procurement process. If there is no competition in the process, we will be in danger of sleepwalking back into the 1970s, with a single provider having dominance over the infrastructure in rural areas. That would not be good for Scotland, or for the UK generally.
There are a number of answers to your question. In regard to the mobile network and our architecture, Everything Everywhere and Three UK have made a considerable commitment to putting more investment into our networks in the UK. We have co-operated over the past four years on improving and advancing our 3G network across the UK, and that has delivered significant benefits through extending coverage to parts of the country that an individual operator would not have been able to cover. That has shown a commitment to investment. Last week, we separately announced an investment of a further £1.5 billion in the network to improve 3G coverage across the UK and to make us ready to roll 4G out.
There is a question about the interdependency between us and fibre providers. A critical part of our connectivity involves having a backhaul network—in other words, a facility to have services connected through our network, with comparable and supporting core networks from BT, Virgin Media and others that we can use to help our deployment. It is therefore critical that we have support from them in their investment plans, too.
Lastly, on public funding, there is increasing recognition of the necessity for the Government to provide financial instruments for further investment in areas where it remains uneconomic for us to provide coverage. Those developments are welcome, and I would certainly echo the view expressed a moment ago that such funding needs to be technologically neutral. In other words, it should not favour one particular technology over another, and it should do what it says it will do in terms of improving coverage to areas that it would otherwise be uneconomic to deliver services to.
I should like to add a bit of detail about our infrastructure and the coverage that we deliver through it. As Richard Rumbelow has said, Everything Everywhere and Three share infrastructure. We entered into that agreement four years ago, and Three has invested £38 million since then to consolidate and update the networks. We now have more than 1,300 sites in Scotland, which gives us more than 95 per cent population coverage. However, that is with our existing higher-frequency spectrum. From a mobile networks perspective, there are two components that we need in order to deliver coverage. We need to be able to invest in infrastructure—the base stations—and we need the right spectrum to deploy over that infrastructure. The higher-frequency spectrum is good for capacity, so it is fantastic for urban areas, but it does not necessarily give us the coverage that we would desire in rural areas.
10:15
One of the bands of spectrum that the UK Government and Ofcom propose to auction next year is the 800MHz frequency, which is a lower frequency that will cover three times the geographic area in rural areas. Running that spectrum over our existing infrastructure would take our coverage in Scotland significantly higher, not just outdoors but, critically, indoors, because the higher the frequency of a signal, the more difficult it is for it to penetrate buildings. The low-frequency spectrum is therefore critical. With the size of the infrastructure that T-Mobile, Orange and Three share, we would be able to boost coverage in rural areas.
The timing of the UK Government’s subsidy of £150 million to improve mobile coverage is not quite in sync with the spectrum auction. We believe that there will be a significant uplift in coverage as a result of the release of the new spectrum and, ideally, from Three’s perspective, our being able to use it on our existing network. However, that will come after the UK Government has spent the £150 million, so there is a risk that some of that subsidy will go into areas that could get a significant increase in coverage just from the spectrum auction. There are some questions to be asked about how the UK Government is plotting its coverage. Is it based on current not-spots or projected ones, post-auction? For Scotland in particular, which has a higher proportion of not-spots, that is a critical question.
The big thing in my mind about the technological mix that other speakers have touched on is that we live in a world where technology changes pretty quickly and it is sometimes difficult to keep up with it. In the future, we will definitely be in a world in which no single technology is the answer, particularly in rural areas, and we will have a mixture. If we consider Cornwall, where we are doing the pilot, although the contract between Cornwall Council and BT was signed some time ago, it is clear that there will be a mixture of technologies as we move towards 100 per cent coverage. Fibre will be at the heart—I think that that is right, because it will be at the heart of what we have in the UK in the future—but there will be other technologies as well.
In such areas, frankly, we will get to a point where it is uneconomic for the private sector and indeed the Government to invest in fibre to everybody. I appreciate that some people say that we need a gigabit to every home. That would be lovely if we could afford it, but life is as life is, and it is not going to happen, certainly in the short to medium term. A mixture of technologies is the way ahead.
Evidence from what has been happening in Cornwall, where flexibility is required, shows that, in the year or year and a half for which we have been going, the coverage of fibre-based technology that we plan to build with Cornwall has been creeping up. As processes, thinking and technology improve, we are eating more into the last 15 or 20 per cent. We need to bear that in mind.
On coverage, I announced on Monday a significant investment in about 34 more exchanges in Scotland, so, by the end of next year, Virgin Media will be covering 1 million homes and we will be covering 685,500 homes with high-speed broadband services at a wholesale level. Critically, coverage is starting to tease out into areas that are not totally urban. The new exchanges include places such as Arbroath and Dumfries, and the upgrade at Nairn has already been announced.
An important point was made about the business sector. Apart from the technology that is aimed at consumers and small businesses, the industry is also investing heavily in ethernet-type services that are appropriate for bigger businesses and the public sector. Also, pricing is becoming highly competitive for growth small and medium-sized enterprises, which might be quite small but which may use high-tech capability. In Glasgow, Edinburgh and Dundee, with its gaming sector, there are a number of companies that employ few people but are dependent on those high-speed services, which are becoming much more affordable. Certainly by the end of next year, we will cover around 72 per cent of the population with different services, with ethernet being deployed harder. We need to take account of that mix of capability when we are looking at things from an economic development perspective in the SME sector.
Finally, I agree with the others that it is important that, where the Government intervenes in the market anywhere in the UK, partly because it is legislatively required in European terms that state aid must ensure wholesale capability, the tender process has to be technologically neutral. Out of that, I think that the best mix of technologies will be derived to provide the best affordable service for the geography. It depends on where people are in Scotland and the UK.
I want to ask about the establishment of a broadband network. In previous evidence sessions, the committee has heard that Scotland’s digital infrastructure is lagging behind that of other countries in Europe, and Ofcom has suggested that the development of a fibre optic cable network in Scotland is flatlining. Do you agree with Ofcom’s assessment that Scotland and the UK are falling behind other countries in broadband infrastructure?
There are two worlds in Scotland. There are the urban areas, which Virgin Media and BT cover. Basically, there is not a problem where we are because our network is capable of going up through the gears to 1.5 gigabit speed in the home. However, there is a problem in rural areas that we do not cover, as there is very little competition in them and very little incentive for the incumbent to invest in the network. It is pretty tricky out there for anybody to invest. The commercials do not really stack up. It is therefore right that the Government should consider how it can underpin commercial investment in those areas.
The key thing for us is that the incumbent is clearly at an advantage in rural areas of the country compared with any third party that wanted to come in and build a brand new network. It owns the poles and ducts in the rural areas. Ofcom is liberalising those so that third parties will be able to pay to access the network but, even when there is access to poles and ducts in rural areas, it is incredibly risky for a third party to come in and invest large amounts of money—we are talking about billions of pounds. That is an incredibly difficult job, but it is vital for the future of Scotland and especially for rural communities in Scotland.
We can debate whether the UK is falling behind Europe, but with the programme that has been initiated at the Scottish level and the broadband delivery UK level, I think that we will see massive progress in 2012. Every county in England is looking at doing something and Scotland clearly is. As I am sure members know, Wales already is doing something, and Northern Ireland and Cornwall have done something. Therefore, we will see a massive change.
Investment in Scotland, even compared with that in places such as rural parts of Wales, is massively challenging, so some sort of partnership approach is needed to finance investment in the network. We will see the industry moving towards covering the more urban and suburban parts of the country quite well. As members know, BT’s commitment is that we will cover around two thirds of the UK population by the end of 2014. The coverage in Scotland is unlikely to be two thirds, given its rurality. My estimate—it is no more than an estimate—is that around 50 per cent of the population of Scotland will be covered. However, work is taking place with the Scottish Government to try to find a way that will make it as easy as possible to get out to the rural parts of the country.
On the infrastructure, we serve the whole of Scotland through Openreach, which is the arm’s-length network part of the business, and we work with Ofcom. Other internet service providers are coming in to use stuff. There is access to ducts and poles. In fact, the costs of that in rural parts are well below the European average. It will be interesting to see how the market takes that up. It is clear that, with Openreach offering that network capability to the market, including parts of BT, in a regulated situation, it is hard for anybody, including the retail ends of BT, to save while that investment is made. Matt Rogerson alluded to that.
In summary, although Scotland and Britain may have lagged a bit behind, the strategy that the Scottish Government has laid out—led by Alex Neil, the Cabinet Secretary for Infrastructure and Capital Investment—means that we could catch up if there is a will to do it.
A final point is that the demand for broadband services is lower in Scotland than it is on average in the rest of the UK, which was not the case three years ago. If that requires a separate conversation, we can have it, but that is a factor.
Historically, the mobile sector in the UK has invested considerable amounts of money in network deployments. Combining Orange and T-Mobile 3G networks will certainly improve the customer experience by giving access to a much wider network than we would have had as separate businesses. As we have said, the work that we are doing with Three on our joint 3G deployment demonstrates that the industry wants to work together to make that investment happen.
There is now a higher level of ambition in what Government policy makers and consumers want, so we will have to step up to that challenge and meet that ambition. Historically, we have a good track record in how we have deployed our networks and worked co-operatively to improve coverage and our network capability wherever possible. However, the 4G auction and the delivery of 4G are now critical to extending that ambition further.
The UK will be one of the last countries of the Europe 27 to auction and deploy 4G capability when it comes through from 2013-14 onwards. Some countries in Europe have already completed that process. In some countries, such as Germany and Scandinavian countries, 4G is already in operation. We are at a critical point. Getting that spectrum to market and getting the services to the consumer across 4G is crucial. I think that the industry can demonstrate historically that we have met the ambitions of consumers and policy makers and that we have worked together co-operatively in delivering the investment so far.
To amplify that point, I add that when we had the previous spectrum auction 10 years ago, the UK was the first region in Europe to have an auction. As Richard Rumbelow said, we will now be, perhaps with the exception of Greece—given the current economic climate, I am not sure that that is a basket of countries that we want to be in—the last in Europe to have a 4G auction.
Is there any reason why the auction is being held when it is? Is there any reason why it cannot be brought forward?
There are a number of reasons. Under the initial proposals, the auction would have taken place in autumn 2010, but Ofcom announced a couple of months ago that the auction would take place in the last quarter of next year, so we have gone back two years.
There are a number of reasons for the delay. There are issues to do with interference with the spectrum, which need to be got right. We appreciate that and we are working closely with Ofcom to help it to understand that. There is also a threat of legal action, which I am sure some members have read about in the press. It might not involve the two mobile networks that are represented at the committee today, but there have been rumours of legal action, which obviously makes the regulator quite cautious, because it must get the proposals correct or risk having them overturned in the courts.
There are a number of good and valid reasons for the delay. Nevertheless, as Richard Rumbelow says, we are at a critical point. The auction cannot slip any further than quarter 4 in 2012. Otherwise, Greece might overtake us.
We have heard about the speeds that people can get in urban areas. I only wish that that were true—my constituency office here in Edinburgh is going to get ADSL. What would be an acceptable speed throughout Scotland? We have heard that, in 83 exchanges, people get only a 0.5 megabit broadband service.
10:30
The 83 exchanges with the 0.5 megabit service have been there since 2005, so it is not a question of “going to get”; people get that now.
The situation is uniquely Scottish and goes back to the first broadband deployment in 2004-5, when economics was an issue. The amount of intervention that was available from the Scottish Government then was £60.5 million. We invested about the same. I will give you a bit of context to the challenge that we have in rural Scotland. At the time, there were 399 exchanges in Scotland—out of 565 in the UK—that BT under its own steam could not bring up to the conventional ADSL that you are talking about. Scotland had the big share of the problem in those days, and we can correlate that to the position today. Those exchanges covered only 2 per cent of the Scottish population, so there was a massive imbalance because of the rurality of the country and how that works.
To cut a long story short, when that joint investment was made the only economically viable way of doing anything was to deliver a 0.5 megabit service to 147 exchanges. The number of exchanges went down to the current 83 because, under the law, the contract, which is now concluded, stated—as many such contracts do—that if the take-up was higher than the business case had projected, the customer, in this case the Government, would be due to get some money back or reinvestment. Jointly with the Government, we reinvested money to get rid of the gap between 83 and 147, which is 64 if my mental arithmetic is right. As members know, a tender is under way in the Highlands for high-speed broadband. Clearly, the intent in Scotland is that the 0.5 megabit speed will disappear as high-speed broadband kicks in.
In the mass market, demand for speed tends to be higher in the consumer base—for home entertainment, the iPlayer and so on. I am sure that we are all familiar with that. From an economic development perspective, the issue is how we exploit higher speeds becoming available to the SME sector, which is a slightly different question.
You asked what speed is needed. A basic starting point is now often thought to be a bare minimum of 2 megabits—people can get services such as iPlayer on that—going upwards.
Coming up with a precise figure for the bandwidth that people need is always difficult. In terms of current generation broadband, you will see adverts in your paper for up to 24 megabits for X pounds per month, but the reality is that the actual speed that is delivered in the home by copper-based DSL providers—not Virgin Media, I should add—is much lower than that. The UK average is 6 megabits per second.
As a high-speed provider, we see the killer app, as it is called, as being teenage children generally and multiplicity in the home—families are living digital lives, using laptops and smartphones, and watching internet protocol television at the same time. In the future, we will see more security systems and health solutions using broadband. We are doing some exciting stuff with the national health service in the north-west of England in that regard.
As Brendan Dick said, the compression rates for services such as iPlayer always get better so they will take up less bandwidth, but there will always be new applications and new devices coming on stream that will eat away at bandwidth. A good 20 megabits connection at the moment would be really good for a household. We are selling 50 megabits and 100 megabits—so I think that you definitely need 100. [Laughter.]
I want to add to Matt Rogerson’s point about where demand comes from. I have a daughter who is still a teenager and one son in his 20s. To an extent, the challenge for us in Scotland—if one is talking about Government investment and putting it into the rural areas, largely—goes back to the conversation that we had about economic uplift and so on. Working out how to get that balance right is quite challenging. As a taxpayer, I might argue that investing in my kids watching TV, whether from Virgin or BT, is not a particularly good use of money. There are other things that the money could be spent on.
The way I see it, it comes down to a blurring of what the home is about. For example, 60 per cent of small to medium-sized enterprises in the United Kingdom—the Scottish figure is no different—start up at home. That has been true for a couple of years now, give or take. We should link all that into public sector applications such as e-health that are on the cusp of growing significantly, not just because the technology is getting easier and cheaper but because, at a time of financial constraints, the public sector is having to innovate in the way that it reaches out to its customers. Four years ago, Scotland had, in glow, arguably the best school e-learning platform in the world, although its evolution has stalled slightly. However, whatever happens, that will evolve. We are in a world where the home is about more than high-speed entertainment.
Let me throw in a couple more points while we are tossing issues back and forth. We have talked mainly about physical bottlenecks, such as issues to do with poles and ducts in rural areas, but there are a couple of other points to bear in mind. One is about access to digital rights. For example, at present in the UK, there is no version of Netflix or some other subscription streaming movie service, as there is in the US. That is because there is a competition issue with access to those rights, although Ofcom and the Competition Commission are considering that issue. For the digital economy in Scotland or the wider UK to gather momentum and for consumers to buy into it, we need the infrastructure, but we also need access to such rights to create those services. The issues are entirely interlinked. That issue must be sorted along with the infrastructure issues.
A second point is about what kids do with broadband access. Recently, the chief executive officer of Google asked why in the UK, where computer science was founded, we no longer take computer science seriously in schools. That is a huge gap. We can put in place all the infrastructure in the world, but if kids do not know how to use it and be creative with it to drive economic growth, we are missing a huge trick.
The issue of speed is a little different in the mobile market. As an industry and a group of mobile operators, we do not predominantly market our services on speed. The reason why the majority of consumers who take up mobile broadband do so is, as I alluded to earlier, the additional benefit from mobility—it is portable. There are some interesting statistics in Ofcom’s report about the take-up of mobile among people in short-term rented accommodation. It is not possible for some consumers to enter into a 12 or 24-month fixed contract, so they take out a mobile dongle on a pay-as-you-go contract, which can be taken from property to property. Our market is not so much about speed. Nevertheless, the average speed that our customers receive using our mobile broadband is just under 3 megabits, which is above what is deemed to be a reasonable universal service.
In policy making, we must be careful not to emphasise too much the move to high speed, because significant parts of the UK do not even get 2 megabits. There is a risk that the more focus we put on speed, the greater the divide will become in the next few years. I absolutely support the view that we need both, but in policy making as much focus needs to be put on ensuring that everyone throughout the UK has access to at least 2 megabits as is put on the cities that are aiming to get 100 megabits.
I echo what Julie Minns said. There has been a focus in public policy on speed, the aim of which has been to encourage and incentivise the private sector to invest in structures, infrastructure and network. However, we should be careful that although speed is the headline and is driving the process, in some cases speed is irrelevant to the type of services that people commonly wish to use.
Our 4G trial in Cornwall is demonstrating that. For example, the speed that we have been able to get through 4G mobile is significantly higher than the current 3G experience. That is opening up huge opportunities for the trialists to see that the level of service from mobile broadband is comparable to, if not better than, the service level that they are experiencing currently from their fibre or fixed provision. They are able to download films and movies, access Government services, do voiceover IP and access a variety of services through mobile broadband that they would otherwise not have experienced and which they certainly cannot experience through their existing fibre connections.
The speeds that we are getting are nowhere near the targets that public policy wants to achieve by 2015 or 2020. However, the ambition around speed needs to be tempered with the fact that people are benefiting from more services at a lower speed than they would be able to receive through their fibre provision or, potentially, through 3G currently. That is one clear example of how the 4G trial has helped us to understand how people will use it in the future.
We have touched on the fact that we will need a mix of technology to provide a broadband network in rural and remote communities. What would the optimum mix be, and is there anywhere in the world where that mix already exists?
I can give you a quick view based on what is happening in Cornwall. As we have said, the mix will vary. When we started the build, the assumption was that it would be 85 per cent fibre deployment using the copper network. The key—I said it earlier and I will say it again—is to maintain flexibility in the relationship between, in this case, Cornwall and BT in working with others to ensure that we can take advantage of changes as we move, learning and all sorts of stuff. The build is now up to nearer 90 per cent fibre, and I think that that would be the case in Scotland. In the Highlands, it might start at a different level but, hopefully, over time, it would evolve. The same would happen in the south of Scotland.
I ask members to keep their questions brief, as time is moving on and we have not got very far through our questioning. If the witnesses agree, they should just say, “I agree.”
I want to focus on priorities. The Royal Society of Edinburgh has suggested that the priority in the development of Scotland’s digital infrastructure is an open-access fibre backbone. Should that be the main priority for public support in rolling out next-generation broadband?
I know Michael Fourman quite well and understand where he is coming from, but his suggestion is flawed in one major respect. The cost of taking high-speed broadband out to consumers and businesses is not primarily in the backbone, but in the bit that goes from the exchanges and cabinets out to the houses. That is where the bulk of the cost is. Scotland’s backbone—even out into some rural parts where current DSL technology is already deployed—is pretty good. Some of it needs uplift, especially in the very rural parts, but the bulk of the cost, as we go on that journey, will not be for the backbone.
I worked for a company that spent billions of pounds and went bankrupt building an access network, which is where the majority of the cost is. The real cost lies in digging up residential streets. The core network market in the UK is very competitive and the cost is in the streets where you live. One way in which that cost could be reduced would be in the deployment of more cables above ground. The UK Government recently put out a consultation on a proposed relaxing of the constraints on deploying cables above ground. We think that the cost of the access network could be massively reduced in local areas if that were possible.
The cables would be similar to telephone lines.
Indeed. We have trialled that in Crumlin, in Wales, where we took a 14km fibre along electricity infrastructure and then down medium and low-voltage poles into a home, where it was converted and they use 50 megabit broadband and the V+ service. We think that that could contribute to a reduction in cost.
What support are you looking for for that? How would you advise the Government to roll out next-generation broadband more quickly, particularly in areas that are not, it might be argued, commercially viable?
10:45
Matt Rogerson makes an interesting point. We all constantly consider any and every new way of doing things better, faster and cheaper. That is clearly a benefit for us and for the country. Matt Rogerson’s suggestion is one means of doing it. At any point in time, we can say that we could do X, Y and Z but, to return to my earlier point, we must maintain flexibility. As deployment of fibre over telegraph poles or other utility poles becomes doable, that can become part of the mix. There will be a genuinely evolving picture. New technologies will come in as we explore the issues here and with the global partners whom we work with to find technological solutions, whether that be for fibre, satellite or mobile.
You are saying that the backbone is not the biggest issue.
Correct.
We heard evidence last week that existing networks, such as JANET for the universities, could be linked into to help the development of the broader network across the country. Could that play a significant role?
Throughout the broadband development UK process that the UK Government ran and the rural broadband programme, we thought really hard about whether the most cost is in the backbone or the metro network—the network that goes from the core close to villages and towns across the UK. That programme lessened the cost, but the local access network is where the bulk of the cost is.
To return to the point about overhead cables, one way in which the Government could incentivise that approach to roll-out is by working with the electricity companies to ensure that they benefit from that relationship with internet service providers. At present, there is discussion with the Office of Gas and Electricity Markets about whether those companies can earn revenues from providing that service, but that needs to be considered further.
The difficulty is that lots of processes are going on to streamline the environment and make it easier to roll out broadband, while at the same time there is a huge political and economic imperative to get a broadband network out there as quickly as possible. The problem is that not all the processes are in sync. We could get into the situation that Julie Minns mentioned in which public money is available but some of it is wasted because the processes are not streamlined enough. The money could just go into black holes—rather than private entities wasting money, public money would be wasted instead, which would not be a good outcome for taxpayers.
We welcome the commitment by the UK and Scottish Governments to provide public funding to give incentives for roll-out in areas where that is considered uneconomic for the industry. A failure to allow the mobile industry to benefit from some of that public funding would miss a significant opportunity, given that we would be delivering, through improved 3G as well as 4G services, much wider and more cost-effective broadband access to people who have not benefited from it in the past.
I keep talking about the Cornwall trial, but it is demonstrating that people who have had limited access to broadband, whether through mobile or fixed connections, are enjoying an experience that they have not had before. To eliminate or remove the opportunity for the mobile industry to benefit from that public funding would mean that a significant swathe of people would not have access to broadband. Those are the very people whom we want to support, such as small businesses and individuals, and who would benefit from it. If we do not do that, they could suffer from e-poverty and a lack of access. That is a highly important issue.
The key point about JANET and, bringing it closer to home, the pathfinder north and south projects is that they are services. Although there is an underlying network, they are services that the public sector has bought—with pathfinder it is local authorities, and with JANET it is the academic sector. At a network level, it is not unknown in the UK and abroad for network providers to buy connectivity from one another. That is a separate conversation that they have in bringing the best solution to bear. However, we should differentiate the service from the network.
As you probably know, if you were to look at using, say, pathfinder or JANET—projects that are for a specific use for the public sector—as part of that service, there would be quite messy state aid implications, because we are talking about a service that is for mass use.
I would like to make a brief point on the £150 million that has been made available for mobile infrastructure to plug the not-spots that exist across the UK. That £150 million is welcome. Our understanding is that it is for capital expenditure only—in other words, it is for build costs only. Mobile networks that deploy across that infrastructure will still have operating costs. The procurement has to be done on an open-access basis, which means that the infrastructure cannot be built for just one network. The question that does not appear to have been answered yet is how Ofcom will ensure that any mobile network deploys its services across that shared infrastructure. We are talking about masts that will be put up in areas that are not-spots largely because it is not economic for us to build there. If the funding is for cap ex only, it will still be uneconomic for us to run services and to keep our services across those masts in year 2.
There are a couple of questions that need to be answered. Is any non-cap ex subsidy available in that £150 million? How will the regulator ensure that all four mobile networks run their services across that open-access infrastructure? Will it put conditions in the licences that are auctioned next year, or will it revise the existing licences to force the networks to run their services across that shared infrastructure? Those questions have not been answered.
I think that my other questions have been covered.
When we took evidence from local groups, Aberdeen city and shire economic future talked about the use that could be made of the public sector’s property portfolio and suggested that wireless operators putting base stations in public buildings could reduce costs. I hear what you say about the infrastructure not really being the problem, but do you agree with ACSEF’s comments? Could more be done to hasten the roll-out of broadband, to increase its availability and to provide the speeds that are required through making more use of public infrastructure?
Brendan Dick mentioned glow. There are facilities that are being used during the day that might not be being used at night, which is when, for example, the kids at home might want to watch iPlayer in their separate bedrooms. Could we make more economic use of existing infrastructure?
Virgin Media is undertaking a specific initiative to build out metro wireless networks, which sit between fixed connectivity and wireless connectivity in that they use the power of our fixed-line fibre broadband network in urban areas to connect to small cells that sit out on the street and provide ubiquitous connectivity. For example, in the middle of Edinburgh, that would provide pretty high-speed mobile connectivity that people could log on to seamlessly with their smartphones.
To make that happen, we need access to lamp posts. It is not particularly sexy, but that is all that we need. If the process of procuring access to those lamp posts could be as streamlined as possible, that would help to get such networks into our large cities around Scotland and elsewhere.
I back that up. Scotland is not different from the UK in this regard: once the decision has been made to build something, whether it be fixed or wireless, the general issue of working with local authorities and planning is critical. Where that is successful, generally speaking, the local authority planning department will see such development as an economically important thing to enable—I am talking about facilitation, not breaking the rules. We have had one or two slight glitches in Scotland, which, fortunately, have been overcome. That whole process is critical, because we are talking about big engineering stuff.
On the use of public buildings, the comment has been made about people working in a mobile world, and that is true. Even though fixed-line technology will be the predominant component, the vast majority of us have some mobile technology. We have routers lying around at home and we use hand-held devices—even people of my age do.
We will therefore live in a world of mobility, but in Scotland it is critical to avoid a series of disparate bits of network that are owned by different people, become unmaintainable and are certainly not economic. There are two reasons for that. First, if we want to provide the country, citizens and businesses with industrial-strength capability, the harsh reality is that we need the industrial-strength build and people who know what they are doing. That is just a fact, and it is true in any industry.
Secondly, at the consumer level in the UK and in Scotland, we have a degree of choice from a variety of providers in both pricing and services that is among the best—and possibly is the best—in the world. That competition gives people relatively cheap prices and choice in what they procure. It is important that we maintain that position, whether or not we use public buildings—that is an option, but there is already a lot of mobile and wireless technology. For example, I do not want to be restricted to having no choice even if I have high-speed broadband. I live in Edinburgh so that should not happen, but it would be the wrong answer.
There are two or three points from our side.
First, our critical infrastructure is radio spectrum. Radio spectrum for mobile services is co-ordinated certainly at a European level and often at a global level. The release of radio spectrum—in other words, getting spectrum bands that are clean, cleared and for us to use—is done at that level. Therefore, we have to rely on regulators to determine and put forward changes to spectrum ownership and band, which allows us to bid for it in the future. Spectrum is not within our gift to control. We rely on regulators to make it available for us to use at certain periods in the future.
The second key part of delivering the infrastructure—and one regulatory barrier—is the planning system. Whether it is to deploy 4G in the future or to be involved in the £150 million not-spot programme, there will be a requirement for new build. The planning system therefore needs to reflect the economic investment that we will make and, to a certain extent, to be responsive to that. In the past, we have sometimes seen the planning system in Scotland being resistant to new build—new masts and new infrastructure. That issue needs to be reflected in how quickly the infrastructure and service can be deployed, whether that is across Scotland or the rest of the United Kingdom. The planning system is a critical instrument in allowing us to deliver the services as quickly as possible.
I will not ask you to comment on this; I just cannot help myself. I find it a bit ironic that companies that champion competition are the same ones that are hungry for subsidy. That is just a comment.
You spoke about using infrastructure—poles and various other things. Should it be a requirement on authorities and other utilities to allow you access to their infrastructure in order to develop services?
That is a potential revenue stream for local authorities in cash-constrained times. Ideally, we want to reach a situation in which there is a market for publicly available infrastructure in our towns and cities across the UK. It is right that if there is a public asset, such as a tramway in Edinburgh, where lines could have been laid down at the same time—
Bad choice!
Lines could have been laid down at the same time—
And then dug up again?
And then dug up again, and then laid again. [Laughter.]
That could save costs and enable the faster and cheaper roll-out of networks. The UK Government announced the urban broadband fund. Money will be available to Edinburgh, and it will be interesting to see how the City of Edinburgh Council approaches that. Will it try to build the network itself, or will it use the money to subsidise a company such as BT to build the network in Edinburgh? If the council has a superfast urban ambition, we want it to look at the infrastructure that it has available, put a fair market price on it and see which market players are able to access it.
11:00
A number of us in the industry have been involved in things such as wireless cities projects. Planning access to infrastructure at a fair price is vital, otherwise it just does not happen. That involves not only lamp posts but, for example, the ability to put wee wireless things on the side of a tenement block in Edinburgh or Glasgow. That is part of the on-going learning and activity that we need to take part in. Whether the approach needs to be so draconian as to involve legislation and so on, you are more of an expert than I am—
I would not bet on it.
It would be a pity if it got to that point. It strikes me as an issue of common sense, frankly.
Should we introduce new access requirements to the building regulations?
Sometime around 2007, when the Parliament was dealing with legislation on that matter, I spoke to the minister who had responsibility for housing. I took the strong view that the regulations to make the deployment of what we are talking about today as easy as possible should be the same as those around the requirement for infrastructure going into houses for water, electricity and so on. I say that because, in the modern world, it is generally felt that the infrastructure that we are talking about is critically important to our society, socially and economically—that is why you have invited us to speak to you. I would support work being done to introduce new access requirements to the building regulations.
Earlier, you made a comment about waste and public money. The evidence that we have heard so far suggests that loads of wee bits of work are being done by loads of people and that an entire industry has emerged of people attempting to do something, but their efforts are all over the place and there is a huge danger of duplication and of wasted public money. Is that reflected in your experience?
I think that there is more of a danger of that at a United Kingdom level than in Scotland. I do not want to be parochial but, down south, there is the BDUK process, which is clearly where there are big chunks of money for what we are talking about; there is the funding from the Department for Environment, Food and Rural Affairs, which does not apply up here but which comes to around £20 million; and there is the £100 million for the cities, from which Edinburgh will benefit and for which Glasgow could bid. If I am being honest, the situation at a British level is a bit disparate.
In Scotland, the Government has a Cabinet Secretary for Infrastructure and Capital Investment. That is unique in Britain—no other Administration in Britain has an equivalent post. Together with this committee, that represents quite a lot of brains focused on the issue, which means that there is less danger of things becoming as disparate as they are in the rest of the United Kingdom.
However, to get the best bang for our buck, it is important that the direction of travel in Scotland acknowledges the scale that is involved. The tender process is running in the Highlands, and I would guess that the process will kick in in the south of Scotland pretty soon. My personal view is that, of the rest—however you define that—there is one more that is still to kick in.
Those are the inputs. In terms of the outputs, when one is looking at state intervention—we have experience of that from first generation broadband and from what has happened elsewhere—the commercial relationship between whoever wins the tender and Government can be constructed so that excess returns are not made by the private sector winners. European law helps in that regard. Earlier, we spoke about reinvesting in the networks in relation to first generation broadband. If that is thought through carefully, and the inputs are pulled together—I think that we are making a stab at doing that in Scotland—it will work.
Local groups and organisations are conducting audits of infrastructure. Aberdeen city and shire economic future found a cable that runs along the A90 and the A98 that does not belong to BT and is being used to make a significant contribution to connectivity in the region. Some local organisations are pretty professional and can access private money that might not otherwise be accessible.
Speaking from the point of view of a retail ISP, I point out that when we are thinking about connecting to networks and integrating new networks into our business, we usually look for scale. Scale is absolutely critical. For us, connecting to a network of fewer than, say, 1 million is highly cost-prohibitive. Lots of processes are involved in connecting with new networks, so the build-up of a patchwork of networks of less than 1 million is bad for us—
Do you mean 1 million customers?
I mean 1 million homes.
To go back to the earlier question of whether public money was being wasted, there is a concern that splitting the BDUK process into small lots has made it difficult for most third parties in the private sector to bid for them. To run all the procurement processes at the same time is heavily resource-intensive, and only a couple of companies—one of which is represented here at the table—have the resources to cope with that process. There is a train of thought that the inherent tension between localism and building the network should be resolved by clubbing together some of the smaller procurement processes so that they are offered in bundles of 1 million households. That would make the process commercially viable for a third party to bid for, and for a retail ISP such as Virgin Media to provide its services across the network.
I will add a quick point from the mobile sector’s perspective and will pick up on the point about co-ordination. As I said, there is a timing issue in respect of the spectrum auction and the procurement process. The BDUK projects will procure over the next two to three years, and it will be difficult for Three, as a mobile network with only one spectrum band, to participate in that procurement exercise. We cannot say with any confidence what spectrum we will have on which to deliver our services in the next two to three years, because the auction will take place slap-bang in the middle of that period. The critical issue for us is the low-frequency spectrum. We would like to be able to engage with a number of the pilots, particularly those in rural areas, but without that low-frequency spectrum, we cannot compete with the networks that currently have legacy low-frequency spectrum.
I will move on to a slightly more general point, which has already been touched on. The Scottish Government recently published its infrastructure plan, in which it made a commitment to improve substantially Scotland’s digital infrastructure. Is it essential to achieving that that we have genuine leadership from the Scottish Government?
That is absolutely essential. The Government strategy deals with infrastructure and with demand stimulation. There is also an ambition, as you know, to get take-up in Scotland back to the same level as that of the UK by 2015. It is not the same at the moment. Such leadership will be critical, because only the Government here can bring together the industry, the Government itself, public bodies such as local authorities and other interested parties.
Is there any other specific action that you or others would like to see the Scottish Government taking that would broadly define that leadership?
To be fair, I should say that we have seen significant ramping up of activity over the past few months. It is a bit frenetic for the civil servants just now and I think that that leadership is beginning to come through. To come back to Matt Rogerson’s point, there is obviously a desire and a necessity to move fast. At the same time, however, it is important not to come up with initiatives just for the sake of being seen to do something. It is critical for Scotland that we go for solutions with industrial-strength economies of scale that have sustainable evolution behind them. If we can achieve that clear direction of travel by the spring of next year, that will be a major step forward.
I support what Brendan Dick has said, and, as Julie Minns pointed out, co-ordination and ambition are also important.
The policy needs to reflect the timing of how the mobile sector can participate in any future direction because of the strategic investment decisions that we will make in the next 12 to 15 months, particularly in relation to the 4G auction, and how Ofcom and the Department for Culture, Media and Sport will allocate the £150 million for the mobile coverage not-spot programme. Those two issues are in the front of our minds at the moment: we certainly want to participate in Scotland, but timing of how to do that rests on those two issues.
In its written evidence, BT suggests that the Scottish Government’s
“target of ‘significantly’ improving access to faster broadband speeds across Scotland by 2015 needs to be more specific and defined in order to judge progress.”
Will you comment further on that?
There is a difference between access and usage. The Government has set a target of getting us to the end of the process by 2020. My view is that it will be possible—with a fair wind and the kind of speed at which we are beginning to move—to achieve it before 2020, but a staged approach will be critical.
Realistically—Matt Rogerson alluded to this—apart from the technological aspects, this is just about engineering stuff that requires a lot of guys out in the streets doing the work.
It is critical that the process gets started but, a bit like in the climate change debate, staged targets for what we want to achieve, and by when, must be built in because not everybody will benefit instantly. It is just not realistic to expect that they would. The ambition is to get to the end of the process as fast as we can, so we need a process—which is what I think Alex Johnstone alluded to—of measuring progress against targets at three, six, nine and 12 months. That is doable and should be done.
The key thing for me and for Virgin Media is to ensure that any network that is built with public money is genuinely future-proofed, so that in five or 10 years we are not here having the same conversation because we have run out of bandwidth on a network that has been built with public money. It is crucial that the solution last for 10, 15 or 20 years.
The Scottish Government has indicated that it is currently developing, in consultation with key stakeholders, a next-generation action plan. Do you, as key stakeholders, feel that you have been consulted?
Yes—we have been consulted on two fronts. First, there has been consultation at infrastructure level. Secondly, there has been a lot of consultation on how we will raise the level of demand. The Government is looking to the industry—but not just to the industry—to become more collaborative in driving take-up and use of information and communication technology. The industry has not been very collaborative in that. Although we run a lot of initiatives, there is no point in talking about them, because we do not necessarily bring them together. However, the committee may be aware of the digital participation charter, which was launched at the GovCamp conference. It basically brings the industry, the third sector, local authorities and the Government together to increase collaboration. It is a good step in that direction.
One aspect is still missing, however. I do not have an answer to this; if I did, I am sure that I could sell it somewhere. At this stage, encouragement in digital participation is aimed more at consumers who do not participate. We know about the challenge in Glasgow, so I will not labour that point. However, the key thing from an economic perspective is how we re-engage with the 25 per cent of SMEs in Scotland that do not see value in using ICT. That figure has been static for at least two or three years. Some years ago, the remits of Scottish Enterprise and Highlands and Islands Enterprise were changed and their role in interacting with the mass market of SMEs changed, which means that our getting to the SME base is now quite challenging—it is not something that the industry can do on its own. That part of digital participation needs to be thought through more; programmes need to be put in place.
You have talked about co-operation and participation with the Government. Is the structured approach that is coming from the top adequate to ensure that we are avoiding duplication of effort and avoiding spending money—as Matt Rogerson suggested—on things that we do not need to spend money on? Is that co-ordination working to achieve the best efficiency in terms of resources?
11:15
I can give my view, others can give theirs. Such co-ordination is certainly what I am asking for. People are thinking this through carefully, but the proof of the pudding will be in the eating. By the first quarter of next year into March, when more of the detail behind the thinking will come through, we will have the proof of the pudding. I am certainly pressing home the message, as I am sure others are, that it is fundamentally important that we provide industrial-strength infrastructure, that we maximise impact and that we use the money as efficiently as possible because—let us face it—we have a big challenge ahead.
I would not be wrong in saying that BT is likely to get quite a lot of the available public subsidy in Scotland. As for the proof of the pudding being in the eating, it is important to have a completely open book on how money is spent and on what infrastructure, in order that every pound of public money—which is so scarce at the moment—is put to best use. We are certainly playing messages back to the UK Government and the Scottish Government about the need for a co-ordinated approach. If we receive any feedback, we will let you know.
I get the clear indication that you have not had the degree of co-ordination that you hoped you would have at this stage.
We deliver the same message across all the four-nation Governments. You are no different from Northern Ireland, Wales and, to a certain extent, Westminster and Whitehall. Greater co-ordination is needed in how pilot projects are delivered. I reiterate that we have two crucial investment decisions to make in the next 12 to 15 months. Those decisions are at UK level and it is imperative that the devolved nations be involved in that conversation. However, the conversation is taking place not here in Edinburgh but in Whitehall and Westminster. That is where decisions are being made about how the spectrum and the £150 million will be allocated. We are being guided by where the conversation is taking place, but it is imperative that the Scottish Government has a seat at the table in order to understand what is being decided, over what time period, and what its involvement in the process is going to be.
One point of optimism for me is that two years ago, when we had our first meeting with officials in the Scottish Government, I do not think that there was even a reference to mobile technology in the digital strategy in terms of delivering broadband in Scotland. That has shifted; we have been listened to and mobile technology now has equal prominence with fixed technology. That is critical, but it also reflects how Scottish consumers are accessing broadband, particularly in rural areas.
I got some statistics before coming here today about what we see on our network in Scotland, and I was quite surprised to find that total mobile broadband traffic—that is, using a dongle with a PC or a laptop—is equivalent to eight UK cities, including Manchester, Birmingham, Liverpool, Sheffield, Bristol, Leeds and Cardiff. It is quite a sizable population. We also see that 70 per cent of broadband traffic on the network is outside Glasgow and Edinburgh, so there is significant use of mobile broadband in rural areas. It is therefore absolutely right that the digital strategy now puts at its heart mobile technology, alongside fixed technology. That has been a very welcome shift over the past two years.
On the terms of reference of the 4G auction, should there be a single UK target for coverage, or should there be a separate Scottish target, and what should that target be?
Three has said publicly that the target that Ofcom initially consulted on—for 95 per cent UK-wide coverage—could increase beyond that. If the low-frequency spectrum, to which I have alluded, were to be deployed across the existing infrastructure without adding a single additional mast, we would exceed that 95 per cent target—we would hit 97 per cent.
However, 95 per cent UK-wide coverage does not necessarily mean 95 per cent coverage in Scotland, Wales and Northern Ireland. We have not taken a position on whether there should be national targets for each country. I guess that we would say that by increasing the overall UK target, Scotland would get an additional uplift that it would not currently get from the 95 per cent coverage.
The other critical issue in the design of the auction is the amount of low-frequency spectrum that the networks need. Ofcom originally consulted on the basis that it would be possible to achieve that national coverage target on two times 5 megahertz of low-frequency spectrum. Our analysis shows that we could get the coverage from that but not the speed, which would be well below 2 megabits per second. To get a universal 2 megabits per second service in Scotland, we need access to two times 10 megahertz, so we have been pushing Ofcom on that.
We hope that before the end of the year we will have from Ofcom another consultation on design of the auction. I urge the Scottish Government and committee members to look carefully at how Ofcom’s thinking has evolved on the coverage target and on the amount of low-frequency spectrum that is needed to deliver coverage across the whole UK—specifically in rural areas.
I have nothing to add to those comments.
A lot of what I had hoped to pick up on has been covered, but I still have a few questions. In response to Alex Johnstone, Mr Rogerson referred to the scarcity of public funding. I am sure that he and all our witnesses will appreciate that the Scottish Government wants the £143 million that it has set aside for development of broadband to go as far as possible , and that it will try to leverage in other funds, which would mean seeking private sector funding. How do our witnesses respond to that? What would the appropriate balance be between public and private investment?
The appropriate balance will depend on how the development is done. The Government could say that it will spend taxpayers’ money on building the network, but that is not the right answer.
The model for BDUK is what we did with the first-generation contract in Scotland and the way in which the process works means that private sector investment will be needed. No one around this table is suggesting that any Government intervention should be a cost solely to the taxpayer. That is not the way it works. First-generation broadband in Scotland was half and half for the 2 per cent of the population that we were talking about earlier. The cost will, however, vary according to the difficulty of the geography. If I take Cornwall as an example, first-generation broadband got roughly £80 million from BT and £50 million from Cornwall. Northern Ireland got roughly £30 million from BT and £18 million from the Department of Enterprise, Trade and Investment and the Northern Ireland Assembly. The Highlands is more difficult than either of those areas; I will not know the figure for the Highlands until we have been through the tendering process. No one has won it yet and that will—
It has been suggested that it will cost £300 million.
HIE suggested that figure, which would be the total within which there would be a mix of private and public sector funding. The mix in the Highlands will be different from that in Fife or Perthshire, for example, and it will come about through the process that has to be gone through. The gap-funding mechanism is partly backed up by European law, and the way it works means that it is not possible to overcook the investment from the public sector such that the private sector benefits. That is how it works.
Virgin Media has never taken and does not take state aid for the building of our network. We would therefore not be involved in taking public money to build the network. We would play what we think will be a vital role as an anchor tenant on that network, but we would not build or own the network ourselves.
I do not mean this in an aggressive or negative manner, but we could be talking about areas in which Virgin Media has not stepped up to the plate because it has felt that its doing so would not be worth while for market reasons. Is that not slightly different? Is there not even an opportunity there for Virgin Media or other providers?
The key to making networks commercially viable in rural areas is getting as much traffic and as many providers on them as possible. An open wholesale network, which we are not set up to provide, is needed. A BT or a Fujitsu—which has discussed entering the market—getting the most possible retail ISPs marketing products in rural areas would be the best way to make the network commercially viable. The tripartite approach—based on the investment of public money, private money and European money—straps the private sector in to make the network work as efficiently as possible.
I think that I am right in saying that the digital region in South Yorkshire was, essentially, created by giving public money to a private contractor to build a network. The network that now exists in South Yorkshire is pretty poor—the speed that is available is about 15 megabits maximum. That is not a great example of public investment in broadband. We need to give the private sector an incentive to build the network as efficiently as possible.
I back up Matt Rogerson’s comments about the slight differences between Virgin and BT at Openreach level. He is right that we are deploying under our own steam a £2.5 billion investment—the whole industry is spending shed loads of money in tough times—and that getting into the tough areas to which Jamie Hepburn refers will require partnership. In our network, that brings to a certain level the number of retail communication providers. In the mainstream network in the UK, across the whole industry there are about 400 CPs, some of which are local Scottish ones. In the earlyish days of our deployment of high-speed broadband, 50 CPs have already come in on the back of that to offer different prices or services to consumers.
That brings me back to my previous point. Even if you accept that some intervention will be required in rural areas, the model that has traditionally been used in the UK, which is backed up by European Union law, means that if the industry does better than the business case planned for, the money goes back to Government or is reinvested, so there is a method for managing the process.
The mobile sector is slightly different. From Orange and T-Mobile’s point of view, all the investment in our networks to date has been self-funded. There has been no public intervention in how we have funded and built our networks. That heavy lifting of investment will certainly continue for the next phase of our work. As I said in my opening remarks, we have already announced that over the next three years £1.5 billion will be put into the network in the UK for 3G services and to get it ready for 4G.
We still await detail on how the £150 million spend that the UK Government announced a couple of months ago will be implemented across the UK and what our participation will be. Historically, our sector has self-funded investment. One reason why is that the licence conditions on coverage have been the instrument by which we have determined and allocated what funding we need to support provision across the UK. Acceptance of the intervention of public funding is a relatively new concept for us and we are waiting to see the detail of what it means for us in the future.
Can you confirm my understanding that, although Virgin is a player in the mobile marketplace, it has no mobile telecommunications infrastructure, as Three and Orange provide that as subcontractors?
That is correct, but I add that we provide backhaul to Three and Everything Everywhere. We provide elements of our network to—
The mobile structure is provided by Richard Rumbelow’s company.
That is right. Virgin was the first mobile virtual network operator in the UK and T-Mobile provides that service, as a service partner, to Virgin.
We have touched on the final issue that I will raise. Brendan Dick referred to the quarter of small and medium-sized enterprises that, for whatever reason, do not feel the need to get on the internet. We also received evidence last session that there are particular communities and groups of people that, for a variety of reasons, choose not to get online. What are the barriers to that and what are you doing to overcome them? Brendan Dick said that that attitude is not something that we can challenge on our own but that it should be done by a partnership between the industry and the Government. That suggests that the industry has work to do to encourage people to go online.
11:30
We are all doing stuff, but collaboration needs to be scaled up. I genuinely believe that that is not just down to the industry but a social issue for the country.
We have a range of geographically specific initiatives. Over the past few years we have run, with the third sector, projects in Edinburgh and Glasgow to set up hubs to get people to come in and learn how to use and benefit from the internet. Those projects have been good. I have seen people in the Gorgie and Dalry areas of Edinburgh going through that process and ending up getting work, which is fantastic. However, such projects are pretty small scale—we are talking about a few individuals rather than hundreds or thousands of people. We are also doing projects in the Highlands and other parts of Scotland.
On a bigger scale, one of the main things that we are doing is our get IT together campaign, which uses 7,000 BT employees in Scotland working in their communities, often with kids, to help people such as grandparents to become familiar with the internet and to get value from it.
The hard part is that, by the nature of the spread of the population base, a lot of people are not online, but not because they cannot be. Glasgow is wired up to the gunwales; it is a big British city like any other and it is just a question of turning people on. It comes down to individuals’ perception of value. People ask, “Why would I?” and it is awfully hard to work that out.
The industry is collaborating more with the third sector and the Government. Michael Fourman might have mentioned the fact that the Royal Society of Edinburgh is planning a study into digital participation and what will drive people to become users. It will go into some depth—which has not been done—and will take time and run in parallel with the start of the digital participation charter. Hopefully we will learn from that.
As I said, we are collaborating more, and we have some initiatives, but we need some pretty rigorous research.
There are probably four reasons why people do not currently go online. I agree that the least important of those reasons is lack of access. Nevertheless, we have delivered mobile broadband coverage to areas that were still reliant on dial-up connections, and we have recently embarked on a rural broadband working group with the Countryside Alliance and race online 2012. We are offering small communities the ability to use mobile broadband for a year either in individuals’ homes or, as in the first project that we launched in Nottinghamshire—we have another one going live tomorrow in Cumbria—we have put in the small MiFi devices, which get the mobile signal in a pub or community centre, for example. We want to see what happens when broadband is brought to a community that has not previously had it.
An awful lot of work has been done on the other three reasons why people do not go online. The first is relevance: people just do not see what is in it for them. Some people cite cost as a barrier in which—going back to my earlier point—mobile broadband has a part to play, with its pay-as-you-go offering. For some households, that ability to control cost might be their first step to going online. For other consumers, it is about fear: my mother, who is 78, is probably slightly anxious that she might set off something that she should not by going online. People also worry about whether their details are secure online.
As in industry, we have all begun to do more on those reasons. Three has been a partner with race online 2012 for the past 18 months and has been involved in a range of activities. Most recently, over a week, all our retail stores gave an hour and threw open their doors so that people could come in and not get a hard sell or be put off by walking into a mobile phone shop. They could spend some time being given an understanding of what is on the internet and how it is relevant to them. We have invested quite a lot of resource with race online 2012 during the past 18 months in helping people to overcome the three barriers of relevance, fear and cost.
As a superfast broadband company, Virgin Media has not been very good at telling people what they can use 50MB or 100MB speeds for; we just sort of believe in it and sell it. It was a big job for us to explain the benefits of superfast broadband, because we almost have two problems. One is getting people on to first-generation broadband. The other job that Brendan Dick and I have is in getting people excited about buying products such as our 100MB product and BT’s Infinity. People using superfast speeds is when stuff such as e-health can really come on stream. There will be lots of potential savings for the public sector through such applications, so there is a big incentive for the public sector to work with the industry to make people understand how transformative broadband could be.
On getting people on to first-generation broadband, there is something in the idea of getting people to use mobile devices as a way into the connected world. My four-year-old nephew uses an iPad. He can just click on applications because it is very intuitive and that seems to me to be a good way for people to make a similar first step into the connected world if they are reluctant to go on a desktop PC or a laptop. We have been working on a bid to meld that into what we are doing and we hope to get some good results from that work.
We have all demonstrated that, in different parts of our businesses, we have provided people with the opportunity to get better access. That is certainly the case for us. Our Greenock contact centre, for example, has open days and sessions at which the local community can come in to see what we do there, as well as see demonstrations of products and services. We also have an active schools programme, and although that is targeted at online safety for children, it is clearly an opportunity for them to engage with technology and to see how it works.
The prepay market has been critical for us. It has given people the opportunity to access mobile services far more than they have been able to through fixed connection, for example. As we are now undoubtedly entering the smartphone revolution, in which smartphone penetration is outstripping conventional mobile telephony products and devices, that will give people further opportunities to access and drive access to internet and mobile broadband services in the future.
Jamie Hepburn is right that we have all done individual things, but there might be certain aspects on which we could be more collaborative. I acknowledge the work that race online 2012 is trying to do on co-ordination and bringing different bits of the industry together to create much wider digital inclusion than exists at the moment.
No one else has questions, so I thank you gentlemen and ladies very much for your evidence. It has been most helpful to our inquiry. If you think that we have missed anything, please send it in in writing as soon as possible.
11:38
Meeting suspended.
11:42
On resuming—