Principles of intervening in broadband & digital isolation

Following on from the previous post, “Public or Private“, which looked at the different models of public intervention in markets generally, this post begins to explore the different models for intervention in broadband markets. This is not a practical critique of any particular approach – more a quick look at the theory.

The basis of this is the same scale of intervention used in the previous post, ranging from light touch loan guarantees through to a state utility model. It begins with the assumption that the market will  invest up to a natural limit; this limit may vary from company to company but will be based on some measure of digital isolation.

A key complexity for public bodies is how to determine the market’s limit for investment. Broadband markets, as distinct from traditional telecommunications markets, increasingly contain a broader range of companies and capabilities; some of these are emergent trends while some are established niche operators. This trend creates a complexity and often a degree of risk that administrations considering a broadband intervention need to assess.

Its clear from even a cursory review of international interventions that there is no universal view of this, with some administrations favouring a more traditional telecommunications play, leveraging a small number of larger, established operators, where other administrations are looking to include a wider spectrum of alternative, new and niche operators. Ultimately this will depend on national culture, the appetite for risk within the administration, and the level of stability within the niche and emerging sectors.

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Public or private?

I seem to have found myself in a number of discussions recently where the role of public and private funding has become a hot topic – not specific to any scheme or country but in general – so I decided to write up my own view of this.

Most parts of the modern world take a position that private enterprise should prosper where it makes sense, and that Government support of some kind should be focussed where its most needed. I haven’t met any fundamentalists recently so no-one questioned this and the focus of debate was primarily on when should the state intervene and what form should the intervention take.

Personally I like graphs – especially ones with axes that have no clearly identifiable scales – so this is my graph of where and how might a state fund industry.

The nature of public funding

On the vertical axis is the expectation of “commercial return” likely to be measured in terms if Internal Rate of Return (IRR), etc. On the horizontal is the expectation of “economic return” measured in terms of Gross Value Add (GVA) or Economic Rate of Return (ERR).

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National legislation with global impacts

The Internet blackout by many of the big names in response to proposed US legislation isn’t the first time law makers and internet pioneers have faced up to each other, and its also not the first time that national legislation, attempting to target a national issue, has had potentially significant impacts on the running of the international internet.

Almost exactly a year ago I wrote about the global challenges being posed by the US proposal for a domestic “Internet kill switch“; if the US Government were to switch off the US portions of the Internet it would not just deny UK citizens access to common services but may also kill entire portions of the UK’s internet access because of the global nature of internet peering.

There is no simple answer to this. Of course national Governments must act in their own self-interests but when it comes to the Internet the impact is seldom felt by local citizens alone. Internet Governance, thus far, has been largely successful in developing a fairly egalitarian, global phenomenon outside of national governance but we are entering a new world where national security, health and prosperity depend on the future running of the Internet – this makes it politically very important, not least to key knowledge economies like the UK.

US citizens have typically been more aware of this than many other nations – the importance of net-neutrality is a deeply emotional, heart-felt thing in the US but has so far been largely missed by UK citizens and is totally ignored in Ireland where the lack of transparency is actively marketed by the largest operator.

The reaction to the Internet blackout in response to the US SOPA proposals was interesting. It seemed to mark the awakening of debate beyond the US. I didn’t hear much from politicians outside of the US but the interest from commentators went beyond simply bemoaning that they couldn’t look things up on Wikipedia. When Jonathan Agnew from BBC’s Test Match Special comments about the importance of the internet and the problems that SOPA may introduce on Twitter, then it must have become mainstream.

My own position is that while copyright of course needs to be protected, the ramifications of any loosely drafted legislation can have far wider impacts, and the implementation of internet legislation specifically will always have implications far beyond national boundaries. Any Government considering a move like this today has a responsibility to world citizens and not just the self-interests of one sector of their local economy.

Today requires a generation of Internet-savvy politicians who can find new world solutions to old world problems like copyright.

What’s actually going on?

It still surprises me that after 18 months there seems to be confusion in the twittersphere about what is actually happening in terms of broadband deployment and the goal of the government’s policy.

There have been conversations which seem to jump from a position that fibre to every home is the only real NGA solution to suggesting they are being short-changed by some mythical NGA satellite with nothing in between.

This is far from a simple binary mechanism – anyone who suggests “Fibre good, everything else bad” is at best badly misinformed. The debate is far too important to be stifled by this kind of mantra – it has to move on.

One of the great shifts in thinking within the industry has been to consider multiple solutions – gone are the days when ADSL won simply because it was the best solution to reach the widest audience. Now the best technology from a basket of possible solutions is becoming the norm.

So this is my attempt to make it all a little clearer – hopefully.

There are essentially two different government broadband policies:

  1. Basic broadband – To ensure everyone has access to at least 2 Mbps
  2. NGA broadband  - To make the UK the best superfast broadband market in Europe

Both policies are currently working towards 2015, and both are being delivered by BDUK. But, while the delivery of NGA broadband may have some impact on the basic broadband policy, they are essentially two different things – basic broadband is not NGA and vice versa! This is a simple undeniable fact.

The two EU Black/Grey/White models

The grid shows how these two different measures – NGA and basic broadband – are likely to play out in the UK. The purple area is where the commercial developments will focus, and the red is where the Government’s policy will have its key impact – the black boarder around the NGA White/Basic White is where the rural community broadband fund will focus.

NGA Broadband

The definitions of NGA and superfast broadband are many and varied but essentially the Government’s goal is to deliver fibre to the cabinet to 90% of the population as a base reference offer – that is not the same as actually delivering FttC to 90%, only that this is the base upon which other solutions will be measured.

It means that a company wanting to bid into the framework will need to offer at least FttC but will be able to deliver FttP or anything else they can successfully argue delivers at least as much as FttC.

The EU currently views NGA as a fibre-based fixed-line solution and specifically excludes satellite and wireless solutions; it is highly likely that some microwave technologies will be included in future definitions if they deliver specific characteristics but unlicensed and light licensed solutions like WiFi are unlikely to be ever considered as NGA even if they deliver high speeds.

Any suggestion that satellite or BT’s BET are NGA is simply wrong, and I’ve never heard anyone in either BT or the satellite industry claim otherwise! Just ignore anyone who suggests they are, they simply aren’t credible.

The main NGA contenders today are FttC/VDSL and FttP in both point-2-point/Ethernet or PON variants.

Changes to NGA broadband in the UK

The two bar charts above attempt to show the impact of the Government’s policy on NGA broadband. Today there are commercial pledges to deliver a competitive physical infrastructure to at least 50% of the country, predominantly in the areas where Virgin Media are updating their cable network and BT is delivering their Infinity service.

In addition, BT has pledged to reach two-thirds of the country with an open-access wholesale service, making a further 17% Grey in the EU’s language. This leaves the “final third” where traditional commercial approaches begin to fail.

The Government’s aim is to extend the Grey area from 17% of the population to 40%, with only 10% of the population unlikely to see NGA services in the medium term.

Why only Grey? I find it difficult to see a case where the Government would invest in a competing NGA platform where one already exists but it is at least a theoretical possibility if the existing NGA service doesn’t deliver a whole service and is vertically integrated. As I’ve written before, if you run an NGA network and you don’t offer wholesale competition then you are carrying a risk that it is at least legal for the state to subsidise a competitor even if its poor value for public funds and probably unlikely to happen.

The focus of the £20m rural community broadband fund is on this final 10%, where communities are prepared to become more actively involved in a more ambitious plan.

Basic Broadband

Today its possible to argue that anything above 512 kbps might be classed as broadband; the Government is redefining that as 2 Mbps and that it should be as near universal as practicable.

Changes to basic broadband in the UK

The bar charts above show how today there are in fact two degrees of White basic broadband – there are those that currently receive a services above 2 Mbps but have no choice of provider, and those below 2 Mbps regardless of how much competition there may be at the telephone exchange. The Government’s policy is to remove the top White section, where services are less than 2 Mbps.

Some of this will be solved by the NGA plans – there are locations where the cabinet, as well as the premises, is a long way from the exchange. Evidence is already beginning to appear where BT is deploying Infinity in Hertfordshire with some homes now in an NGA Grey area when they were previously in a notspot – it is also the focus of organisations like Rutland Telecom.

Where the NGA policy won’t solve the notspot problem, the Government will intervene to ensure all premises are reasonably able to receive at least 2 Mbps.

In communities where the 2 Mbps offer doesn’t meet their ambition, the £20m rural community broadband fund may be able to help turn a basic broadband offer into a viable NGA plan where the community will exists.

Steering the QE2

The hand wringing over the global economy continues, and the UK is now having to consider a second round of quantitative easing (QE – hope no-one thinks this will be about luxury cruises).

In normal times we have Qualitative Easing – changing the quality of the money supply by adjusting interest rates. When you can no longer adjust the quality of money then you need to adjust the quantity – in earlier times that meant printing new notes but today that typically means the central bank buys bonds (debt).

The last Government’s QE1 programme resulted in the Bank of England buying government bonds, and the money was used to fund general government expenditure. This resulted in criticism from some quarters that the new cash didn’t optimise its impact on the wider economy. Expanding the money in circulation can have two high-level impacts:

  • It can ensure money is circulating so the economy doesn’t stop, and
  • It can be used to re-shape the economy so its more competitive when recovery comes.

It was certainly true that the former happened – because nurses and policemen kept their jobs and were paid the economy kept flowing. But the process didn’t have any lasting impact on the efficiency of the economy.

If we are to have a second round of quantitative easing, so called QE2, then a lasting impact will require investment in the shape of the economy - infrastructure, for example.

It is widely accepted that the funds available to BDUK form only a small proportion of the investment needed to ensure every UK business benefits from super-fast broadband, even when added to the level of funding already committed by the industry. However, if QE2 was used to underwrite local authority bond issues, the sums committed to broadband could be dramatically increased – and I purposefully use the word “underwrite” rather than simply “buy”.

Under the localism agenda, communities are encouraged to become more involved in their area but for many its simply not reasonable for them to build their own broadband infrastructure as it was the first time around, but that isn’t to say they don’t have a role beyond simply marketing the benefits of broadband.

By encouraging their local authority to issue infrastructure bonds, the community may be encouraged to invest in their future; by having the Bank of England underwrite the issue means the risk is somewhat reduced and the full funds may be raised in areas where there isn’t the investment cash available. This could be the 21st century “Tell Sid” campaign!

By using a local authority to issue the bonds, rather than a commercial telecoms company, ensures the wider economic impact for the area can be embeded in the process, alongside the commercial reality.

But since bonds are essentially long term loans that need to be paid back at some point in the future, today’s preferred gap funding models favoured by BDUK may not be ideal. As the local authority is today essentially providing grants to a third party to own, build and operate the network, there is no obvious mechanism for the local authority to recoup such an investment.

However, a model where the local authority issues a concession to a third party to build and operate the network but ownership remains with the local authority – or at least a stake is owned by the local authority – means they can at a later date refinance their investment to repay the bonds.

The UK already has examples of this kind of structure. NYnet in North Yorkshire is an example where the local authority retains 100% ownership, while FibreSpeed is a joint-venture model between Geo and the Welsh Assembly Government. There are pro’s and con’s to both approaches but the essence is the same – the bond owner would retain a stake to secure their investment.

I’ve no idea if we will see QE2 but if we do, this kind of approach would ensure not just the immediate re-floating of the economy but also a longer lasting impact on the UK competitiveness – we could become the first G20 country to have a fibre switch-over!

Its all about black and white

Anyone who has been close to any public sector involvement in broadband is likely to have come across references to Black, White and Grey areas but I get the impression that the meaning is often not well understood; this is perhaps not surprising because there are in fact two models and rarely in my experience is the specific one being used named.

A bit of background. In 2009 the EU laid down some guidelines on where it was reasonable for a state to consider intervening in the broadband market; this introduced the concept of Black, White and Grey areas for classifying market failure in both NGA and basic broadband areas. A black area is generally one with a strong, competitive market; grey with a developing market; and White where the market has essentially failed. White does not necessarily mean there is no broadband, just no functioning market.

Basic Broadband

  • A Black area is one which has two competing fixed line infrastructures. So in the UK that typically means areas where both BT and Virgin offer services.
  • A Grey area is one where there is only a single physical infrastructure but it supports a wholesale marketplace. In the UK this covers any unbundled telephone exchange where there is no cable service, for example. Perhaps surprisingly this covers both Ofcom market 2 and 3 areas.
  • A White area is one where there is no choice of physical infrastructure and no wholesale marketplace. This in the UK means Ofcom Market 1 areas with no other infrastructure.

NGA Broadband

The definition for NGA is broadly the same:

  • An area with competing NGA broadband infrastructures would be an NGA Black area. In the UK that might mean an area with both Virgin DOCSIS3 and BT Infinity services, for example. Somewhere like Bournemouth with City Fibre and Virgin would also be Black.
  • An NGA Grey area is where there is only a single NGA provider with a wholesale market. This means an area with only BT Infinity would be classed as Grey – but an area with only Virgin would not as they don’t wholesale access services.
  • An NGA White area is one where there is currently is no NGA market available and no credible plans to deliver an NGA service within 3 years. This could include areas where Virgin is the only NGA operator and the footprint of many community projects like Alston Cybermoor as they don’t currently wholesale their services.

There are some major caveats in this!!

Only fibre-based fixed-line technologies are currently considered NGA technologies – wireless and satellite are currently considered “complimentary” and an area served by either is not considered as NGA Grey or Black. This means an operator using a Gigabit microwave technology could legitimately face state subsidised competition from a 40 Mbps FttC provider – FiWi is not currently protected! This may (should!) change but its a risk that needs to be born in mind today!

What’s an Area?

The EU guidelines recommend that an “area” isn’t defined as an exchange district as it may benefit the incumbent. So what is an area? At the moment this is something of a grey area, to stay with the theme. The UK government is providing local authorities with some latitude to choose between postcode areas and ONS “super output areas” (LSOA).

For a community thinking of building their own broadband solution, this loose definition may be critical. A postcode may only have 20-40 premises while a LSOA typically has about 400. A small community scheme may be protected from subsidised competition if the local authority decides to use postcodes as their defining area.

BUT if the LA uses super output areas as their measure, then any network which is much less than 400 premises could face a competitor legitimately subsidised by the BDUK framework.

Since BDUK are currently modelling communities as groups of around 100 premises, this seems rather contradictory.

BDUK Ambitions

The three years rule means that BDUK are able to focus their funding on the final third – the bit that BT haven’t formally announced. Their ambition appears to be to increase the NGA Grey and Black coverage from 66% to 90%. In the final 10% they want to ensure its at least Basic Broadband Grey (ie at least a single wholesale infrastructure).

NB: Big things you can’t ignore!

  1. Anyone considering building a network, whatever their motives, needs to make sure both BDUK and the relevant local authority are completely aware, not just of the currently footprint but the credible expansion plans covering the next three years. Failing to be on their radar may mean state subsidised competition and a battle over illegal state aid few smaller operators will be able to afford.
  2. A vague intention to offer wholesale services or simply making an offer to the market that is ignored is not good enough to be classed as “Grey” – you need to demonstrate a functioning wholesale market! Failing to demonstrate real wholesale agreements means your area remains “White” and could be legitimately subsidised. Working with a  national franchise model like Broadway Partners and including an existing mediator that can deliver a proven wholesale market will certainly help both whether you’re at the planning or delivery stage!
  3. And communities going it alone need to know what their local authority considers to be an “area” – if its an ONS LSOA, make sure your project covers one!

The more you think about this, the more implications you will stumble across. This a very messy, complex, and shifting space. Whoever you are, don’t do it alone!

Everything should be made as simple as possible. . .

The debate about what’s going wrong with the broadband policy is becoming quite complex, messy and somewhat emotional.

For me, the key policy of making the UK the best “superfast” (meaning > 24 Mbps) broadband market in Europe is the right one. Delivering that in tandem with the localism bill and while supporting SMEs couldn’t be better. These are all things that get my total support – and I hear very few detractors (quite the opposite).

The rub for many people seems to be in the delivery – a matter of policy implementation and interpretation. A key example (totem?) is the framework which contains what appears to be little more than lip service to the policy – an opening few paragraphs that give the appearance of supporting the policy followed by a long list of qualifying criteria which, one by one, chip away at the goals until there is almost nothing left – even the stated objective of super-fast broadband seems to have been discarded, or at best re-framed, along the way.

There have been conspiracy theories that this is a stitch up between Government and BT but I don’t support that for one minute. To begin with, I suspect that the framework isn’t something BT would prefer to support but will pragmatically go along with as its what’s on offer.

Einstein is quoted as saying:

Everything should be made as simple as possible, but not simpler.

For me this is a case of a very complex problem that’s been reduced beyond the possible degree of simplicity – the framework assumes a level of homogeneity of technology, scale, business model, financing, risk, partnership and so forth that just isn’t possible – BUT it is much simpler to manage.

The original policy objectives appear to have got lost in a drive to find the optimal process – or at least the one that’s the least bother to oversee.

This isn’t a time for a difficult u-turn – this is a time for politicians to crack the whip and make sure the policy is implemented as stated.

There are very good people inside BDUK, and they didn’t suddenly switch off. Something has happened that group at the top – whether it was the change of management or the influence of KPMG but it is something that can be corrected – but time is not on anyone’s side. One or the other or both need refocussing, and very soon.

BDUK Framework update

Since I wrote about the impending BDUK procurement framework, there seems to have been a little movement which I think it right to acknowledge.

I wrote that a source told me that the framework would require revenues of at least £40m in each of the last two years – in the “final draft” I understand is due for publication tomorrow (Thursday 30th June) this has been reduced to £20m, and it includes the following paragraph:

“In line with the Coalition Government’s policy on supplier diversity, DCMS is designing the framework agreement to maximise opportunities for Small and Medium Enterprises (SMEs) to form part of framework suppliers’ supply chains for projects where appropriate”

Does that mean SME’s and the bulk of the industry currently building and operating NGA networks will be able to join? Almost certainly not!

There is just a four week window proposed in which companies can form partnerships and consortia, leaving the smaller, specialist companies that are already busy building networks very little time to negotiate the terms any sub-contracting agreement – most probably with a much larger company that has far less experience of building networks than they do.

In theory, excluded companies could club together to form a consortium of fantastic expertise BUT if the consortium isn’t formally incorporated then each member has to demonstrate the same requirements as if they has applied individually. Which in addition to requiring at least £20m in revenues, I understand may also require that you have delivered services to at least 30,000 premises excluding back-haul (so that’s major names like Geo and Vtesse probably disqualified).

So unless something radical happens in the next 24 hours, assume that the Government won’t be supporting the nascent NGA industry:

“The framework agreement is expected to be the procurement vehicle for the majority of local broadband projects once they have been allocated BDUK funding. There may be a small number oflocal broadband projects that do not use the framework agreement and this will be agreed with BDUK.”

It would seem that the best we can hope is that the contracts BDUK let won’t simply roll over the much more creative, ambitious and forward thinking projects that are already under-way from the bulk of the industry this process appears to be excluding.

Yesterday I wrote about the hopes and ambitions of Chipping Norton in David Cameron’s constituency. This framework may well turn out to be a significant threat to Big Society community actions like theirs. The gap between policy and action is now becoming a chasm.

(I’ll let others tell you how “superfast” appears to redefined, making it easier to achieve)

Let’s hope the next coming hours see a serious re-think!

What’s happening to the Big Society in broadband?

For many who’ve been campaigning to get better broadband into the UK’s rural areas the Government’s Big Society policy agenda is a very welcome opportunity to really make a difference, to fix this problem once and for all.

With BD-UK’s programme under way and DEFRA announcing £20m to support rural community broadband things seem to be moving in the right direction – but there are some major challenges ahead.

There is a clear sense that politicians are not just espousing the big society principals, they really believe in it - just look to people like Rory Stewart, Peter Aldous and Jesse Norman, and of course Ed Vaizey.

The challenges, to my mind, lie elsewhere.

Generally, public servants have spent the last decade and more centralising – local government had become a delivery body for central government, spending money as they were told, micro-managed from above.

Localism means the direction of travel between local and central government is being put in reverse; the thinking should now be coming from local authorities in tune with their communities, and with the support of central government

This is very hard if you’ve not done it before

Whitehall civil servant’s natural belief is that they have the big picture.

Local government staff are quite naturally risk averse when confronted with new and difficult decisions which may affect the whole of their community.

It will take some time before Whitehall feels comfortable supporting rather than leading, and it will take equally long before local government feels comfortable sitting in the driving seat, guided by their communities.

In this climate, it is perhaps no surprise that the thinking  influencing some local broadband plans is drawing from the known, and appears to be taking those local authorities towards a traditional procurement exercise that will ensure only the biggest, most traditional businesses win,  and where community engagement is limited to little more than free marketing support.

Perhaps not surprising but it is disappointing given that the Big Society is a key strand of the Government’s policy agenda.

In the way that people like Jesse Norman introduced new thinking which led to a new wave of localism in politics, there is now a need to adopt some new thinking which will lead to localism in our digital society.

And this new thinking isn’t radical as in hippy – its radical as in different – its tried and tested in countries that have found the will to move on, and its has room in it for big companies, public bodies as well as communities – in a respectful partnership.

Successful local broadband strategies need to seek a balance:

  • Which permits the safety of an established major operator while underpinning the heart and soul of a community initiative
  • Which allows industrial scale investment while respecting the local stakeholders at the helm
  • Which attract the best national and international services while encouraging local services attuned to the community

There is no shortage of communities wanting to become stakeholders their digital future.

There are respected and experienced organisations that can provide the support that can focus that demand into action.

There are organisations willing to help raise funding to support the demand.

All that’s needed is for the processes already in motion to be encouraging of this demand rather the dismissive, and for the industry to try something a little radical.

The reward? A new contract with communities which delivers innovation, investment and opportunities. What’s not to like?

Why we should care about the US Internet “Kill switch” proposals

There is a proposal running through the US Senate at the moment which would give the President powers to shut-down critical internet infrastructure, the so called “kill switch”. Apart from any concerns at a distance we might have about free speech and rights, there is an equally big issue which may be more critical to our own homeland security.

In the dawn of time, the internet was a peer network where each organisation with a network they wanted to open up linked, or inter-netted, with others on an equal basis. Since then major providers have moved into a position of some power and the equality of peering has pretty much gone. Small providers often have to club together or pass through multiple hands to get to a universal audience, so a small number of US-based infrastructure items have become critical to us as well as Americans.

Casting your mind back to the Autumn of 2008, you might remember a few days when odd things happened on the internet, where you could Skype some people and not others or reach some websites but not others, while your friends and colleagues experienced the same but it affected completely different sites and services. This was caused by a spat between Sprint and Cogent in the US, where Sprint decided to shut-down its peering relationship with Cogent (see here for a reminder).

Because peering is no longer egalitarian, a significant amount of the UK internet traffic needed to pass through this peering point in order for UK internet users to reach UK services; that’s why you could skype some people and not others, and why some websites disappeared but not others, and depending which way you passed through the peering point determined which services you could access.

I’m quite sure that proposals passing through the US legislature will have more safeguards than they do in Egypt and I’m sure the US President will act more calmly than Mubarak is but surely our national security should be in our hands?

While our diplomats should be ensuring we have assurances and safeguards as the law passes through Capitol Hill, we should also use this time as a moment of reflection, to make sure we have an internet that we can always use and can’t be impacted by the decisions of others far away and beyond our control.

 
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