reviewOctober 2016 YOUR FREE ECONOMIC REVIEW UPDATE

The battle

over broadband DMYTRO SUKHAREVSKYY/FOTOLIA Jon Guest considers the debate over fibre-optic cables. Why hasn’t this investment already the provision of broadband in the UK taken place? Observers have blamed it on the structure of the industry. n the last 12 months there has been a public debate about the quality of broadband services in the UK. The role of Openreach IIn July 2016 the internet service providers (ISPs) The fixed-line network is maintained and operated by Sky, TalkTalk and Vodafone launched the ‘Fix Britain’s Openreach, a subsidiary of BT. The business has over Internet’ campaign. The chief executive of BT, Gavin 500 wholesale customers (ISPs) who pay a fee to rent Patterson, responded by claiming the campaign was parts of the network they require to supply broadband misleading consumers. services to their retail customers. Some of Openreach’s wholesale customers are separate businesses (e.g. The ‘last mile’ TalkTalk and Sky) while others are subsidiaries of the Most of the disagreements in this debate have focused BT group (e.g. BT Consumer and BT Business). Without on the ‘last mile’ of the fixed-line network. This regulation, the BT group would have an incentive to includes the system of telegraph poles and ducts that make sure that Openreach provides BT’s subsidiaries carry wires from local exchanges to users via street with a better deal than their rivals. To address this cabinets. The quality of this ‘last mile’ determines the issue Ofcom ruled that the business should remain download speed that can be obtained when accessing functionally separate from the rest of the BT group. the internet. This means that Openreach has an obligation to treat Although the UK’s record on superfast broadband all of its wholesale customers equally. is good, its performance on accessibility to ultrafast Some ISPs have argued that this has not been the broadband is poor. This will only improve if there is case and so the regulation has been ineffective. The BT substantial investment in the ‘last mile’. In particular, group has also been accused of limiting the amount much of the existing copper wiring that connects of money it provides Openreach for investment in the premises to street cabinets would have to be replaced by fixed-line network. Commentators have argued that Next page review there isn’t much incentive to upgrade the network Ofcom’s recommendations when wholesale customers have little choice but to use Ofcom accepts that increased competition through existing infrastructure. DPA will only be economically viable in more densely populated regions. In many areas ISPs will have no What can BT’s rivals do? choice but to supply their services using the network If rival ISPs are unhappy with the service provided maintained by Openreach. Ofcom has responded to why don’t they build their own rival network? One this issue by recommending that Openreach remains issue is the costs involved in building another fixed- part of the BT group but gains more independence, with line network. It would involve considerable upfront its own board of directors and articles of association. costs such as digging up roads, installing new ducts, Companies such as Vodafone and TalkTalk have and purchasing and laying fibre-optic cable. Once a called on Ofcom to go further and insist on the full network has been built, the marginal cost of supplying separation of Openreach from the BT group. The ‘Fix customers would be relatively small. Industries Britain’s Internet’ campaign is an attempt to get more with this type of cost structure — relatively high public support for the proposal. infrastructure costs and relatively small marginal costs — experience significant economies of scale. As one firm expands, its average costs will fall as it is able Activities to spread its large infrastructure costs over a greater 1 Draw an average total cost curve to illustrate the number of customers. economics of building a fixed-line broadband network. Clearly label the minimum efficient Regional competition scale. Although Openreach is the only business to operate 2 Compare and contrast the current structure of a national fixed-line system in the UK, it does face the fixed-line broadband sector in the UK with competition in some parts of the country. For example, that of another utility such as gas and electricity. Virgin Media owns and maintains a separate network 3 Using a diagram, explain how the fixed-line that can supply broadband to approximately 45% of network might be a natural monopoly in rural premises in the UK. These are in predominately urban areas but not in densely populated areas. and densely populated areas. 4 To what extent does DPA help to create a Ofcom wants to encourage more network competi- contestable market? tion by reducing upfront infrastructure costs. It plans to do this by making it easier for rival firms to gain access to the existing ducts and poles that are currently managed by Openreach. The policy is referred to as the Weblinks to follow up Duct and Pole Access Strategy (DPA). Once access has BBC article on BT’s avoidance of Openreach break- been obtained, rivals could effectively rent space inside up: www.tinyurl.com/j9pr4eh the ducts and deploy their own cables alongside the Guardian coverage of Ofcom’s BT recommendations: existing copper wiring. In this way they would avoid www.tinyurl.com/hkusy2h having to carry out any civil works, which account for approximately 80% of the infrastructure costs. Those opposed to the policy suggest that the cable Find out more about our full Did you like this article? has natural monopoly characteristics — it would be far range of magazines and online archives of back issues at Tell us what cheaper to have one set of cables rather than two or www.hoddereducation.co.uk/magazines you think more running through the same ducts.