Tuesday, October 23, 2012

Birmingham ultrafast broadband state aid challenge


Lots in the press yesterday about the challenge by BT and Virgin Media to Birmingham City Council's proposals to deploy ultrafast broadband in an area of the city centre.

The European Commission gave the go-ahead for the project in June 2012. From the related press notice:
"The European Commission has found a proposal by the United Kingdom to grant around €6 million of public financing for the construction of an ultra-fast broadband network in the city of Birmingham to be in line with EU state aid rules, in particular because it will be genuinely open to all operators and will therefore promote competition...The target areas of the measure are two districts in Birmingham where private operators have no or very limited investment plans in the next three years. This means that in the absence of this project most consumers would only be able to use basic broadband services or very expensive business leased line services. The Commission's investigation found that the ultra-fast network of Birmingham was designed in a pro-competitive manner, exceeding in several respects the requirements of the EU Broadband Guidelines. In particular, open access will be granted for at least 25 years for alternative operators, whereas the guidelines require only seven years. Moreover, the network will be operated on a wholesale basis so as to ensure more competition at retail level. Finally, all possible wholesale access products will be offered to third party operators, including dark fibre, which is one of the most pro-competitive wholesale access products."
However yesterday's coverage reported that both BT and Virgin Media are now seeking to challenge the European Commission's decision. From the Financial Times ("'Super-connected' digital city faces challenge"):
"BT and Virgin Media have made a formal request to the European Commission that it revoke the decision to approve state aid funding to create a superfast broadband network in Birmingham. Virgin has also lodged an appeal with the general court in Europe requesting that the decision be struck down...BT and Virgin Media are worried that the money will be used to build a state-funded rival to their own broadband networks, and argue that this is wasting taxpayers’ money in areas already well covered. Virgin Media covers about 94 per cent of central Birmingham, and one person familiar with the situation estimates that there could be about 25 per cent overlap with the network proposed by the city council. The companies are as keen to prevent a precedent for future city tenders, which could damage business in large urban hubs that typically include the heaviest, and highest spending, users of broadband services."
Similar coverage from ISP Review, the BBC, the GuardianPC Pro and UKAuthority.com. PC Pro's report gives some insight into the reasons for the challenge:
"According to sources at Virgin, the company is not against the funding per se, but said the project's boundaries were so poorly laid out that the EU couldn't be sure where the proposed network would overlap commercially available networks. Neither company has spoken directly against the government funding for city projects, but are concerned that the money is being wasted on areas that already have connectivity - more specifically that compete with their own networks. BT...said the Birmingham project would undermine investment from the commercial sector...Birmingham's project involves laying cables to areas left without fibre connections by private firms that will only upgrade networks where they expect a profit, but was always likely to tread on the major networks' toes. The situation is complicated by the patchwork nature of superfast broadband, with Virgin admitting, for example, that in some city areas, consumers on one side of a street might have fibre, while the other side goes without."
This from the Guardian, attributed to a Virgin Media spokesperson:
"We believe it involves a significant overbuild with our network...It's a poor implementation of what is otherwise a sensible policy. It sets a bad precedent and sends a really bad signal to our investors."
From Birmingham City Councillor James McKay's (Cabinet Member for a Green, Safe and Smart city) response:
"...we are surprised that they have now chosen to appeal at such a late stage. We developed a robust State Aid case, based heavily on evidence that Virgin Media and others provided to us that clearly demonstrates a strong market failure. We have proven that it is an imperfect market and have presented to the Commission a case that the majority of SMEs in Digbeth, Eastside and The Jewellery Quarter areas cannot receive affordable high speed broadband. This decision has the potential to damage the creation of up to 1,000 new jobs, preventing up to £200 million per annum of GVA being pumped back into the economy. We are liaising with Government and the European Commission and we are advocating that this matter be treated with some urgency as a ‘test case’ for Europe and that everything that can be done to expedite it through the legal process is done."
The text of the European Commission's state aid decision makes for interesting reading in the light of these challenges. One of the reasons for the intervention being approved was the lack of affordable high speed broadband in the area:
"Most businesses within the area use basic broadband ADSL services which for many lack the speed and reliability required to maintain competitiveness. Typical download speeds are below 20Mbps and upload speeds below 2Mbps. Companies requiring higher speed connectivity in the Districts must procure LAN Extension services; or pay for dedicated bespoke fibre connectivity, the price of which is often prohibitive for SMEs with high bandwidth needs."
Pricing is a particular problem for SMEs with requirements for high-speed symmetrical connectivity:
"The prices are particularly high for connectivity services required by business customers (high bandwidth, symmetrical connections) and which are only available from the market through the installation of a dedicated LAN extension services. Businesses typically have to pay connection prices in excess of £10,000 for such services. In addition, the rental charges for a non-contended 100 Mbps service are above £1000 per month. Typically a prices point of approximately £200-£300 per month is viewed as an acceptable rental price to drive adoption...a key objective of the public intervention is to lower the access cost and encourage a competitive service provider environment to deliver this price point. The lack of competitive service supply results in price points that are constraining the market and having an adverse economic effect on the districts."
The current and planned future broadband infrastructure in the intervention area was considered insufficient for the requirements of the businesses located there:
"The business model of companies active in the 'creative and knowledge based industry' requires very high speed, reliable, symmetrical broadband speeds to be able to transfer large amount of data, to stream videos, and to effectively cooperate with other companies located worldwide. Considering the capabilities of the current networks and the investment plans for the near future, the UK authorities concluded that these infrastructures are not able to satisfy the needs primarily of the business users in the area concerned."
While BT has plans to upgrade partly its existing infrastructure to deliver FTTC services to cover some of the target area over the next three years, FTTC was felt to have limitations in relation to the needs of the businesses in the area:
"The capacity of FTTC networks is dependent on the distances between the end user premises and the cabinets: in principle, within 300 meters of cable length from a cabinet download speeds up to 40-50Mps could be offered, but beyond 300 meters from a cabinet the speeds fall rapidly to 10Mbps at 2km from the cabinet. In addition, FTTC networks provide only asymmetric connectivity services with strong limitations on the upload speeds, therefore such network types are in general not adequate for business users' who require high capacity, reliable, symmetric broadband connectivity."
Virgin Media' infrastructure was also found to be unsuitable for the purposes of the project:
"Virgin Media has basically no presence with its own cable infrastructure in the targeted areas thus there is no additional competing infrastructure available. According to the UK authorities, Virgin Media has extensive duct infrastructure across the Digital Districts, but this is not widely fibred and the company does not permit access to its ducts or fibre infrastructure by third parties. Virgin Media has no publicly announced plans to expand and upgrade its infrastructure in the Digital Districts, and was involved in the consultations…"
None of the other fixed network operators were found to be serving consumers in the targeted areas. Problems were also found in relation to re-using BT's and Virgin Media's existing infrastructure for the project:
"With regards access to the duct infrastructure of Virgin Media…the company will not permit access to its ducts or fibre infrastructure by third parties on commercial terms and has no legal obligation to grant such access. With regards to BT, access to its duct infrastructure, which is possible under the applicable regulatory framework, the UK authorities argue that there are a number of operational and regulatory constraints that prevent it being a solution for the Digital Districts. Firstly, when BT built its duct infrastructure it was not envisaged that multiple providers would be installing, subducts and/or blown fibre of their own alongside the BT infrastructure hence there could be technical limitation for the use of ducts. Secondly, the Birmingham authorities argue that BT's wholesale pricing for the access as well the as price of ancillary services hampers the effective use of its duct infrastructure. Most importantly, under the applicable UK regulatory framework, ducts and poles access can only be used as an access product for retail internet, but not for leased line services. These restrictions on the use of ducts access substantially reduce the benefit of this wholesale product to cities like Birmingham with a large base of SMEs."
The intervention would deliver a significant improvement to current connectivity:
"The aid measure will support the development of ultra-fast broadband network within a small geographical area but which is scalable to larger geographical areas and other regions. The new infrastructure will be able to provide genuine ultra-fast services (i.e. 100Mbps, 1Gbps, etc) at an affordable price which is not currently provided by the market. End users will benefit from fibre to the premise and will be served by service providers offering download speeds far in excess of those available in the market today."
Provisions would be put in place to ensure fair and equitable access to the new infrastructure for other operators, ensuring competition and choice:
"The infrastructure will be a genuinely 'open access' NGA network offering operators and service providers' access to a full portfolio of wholesale services including ducts, dark fibre, wavelength, ethernet and co-location services...The subsidised infrastructures will be opened for third party operators, including both passive and active infrastructure elements, which will satisfy all different types of network access that operators may seek, including access to ducts, dark fibre, wavelength services, Ethernet services and co-location services. The wholesale access conditions will be designed in a way that all existing operators shall be able to utilize the infrastructure. All new ducting installed will be sufficiently large to host multiple operators and point-to-multipoint and point-to-point topologies as well. Third party operators will have wholesale access to the subsidised broadband networks in a non-discriminatory way during the entire duration of the contract and for a minimum of 25 years. To further incentivize take-up rates and competition, and to reduce any potential distortion of competition, the subsidised broadband infrastructure will be used only to offer wholesale access services to third party operators, but not retail services."
Birmingham City Council took several steps to engage with the marketplace and stakeholders prior to the intervention, in relation to the availability of existing infrastructure:
"As regards the presence of existing infrastructure in the targeted areas, firstly, the UK authorities started the analysis on the basis of the central mapping prepared by the national competition and regulatory authority, OFCOM. Secondly, to verify the data for the two targeted districts, further street level analysis was undertaken. Thirdly, the UK authorities have consulted widely with the telecommunications industry and other stakeholders on the planned measure. Fourthly, the Digital Birmingham has its own website which provides details of key projects and is updated regularly. The formal consultation was published on a dedicated website with all important details on the target areas, project plans, funding and envisaged services. The UK authorities confirmed that no stakeholder raised any concern on the planned measure."
The intervention was found to be in line with EU policy, pursuing "well defined EU policy objectives" with appropriate market analysis and consultation having been undertaken:
"...the UK authorities undertook a detailed analysis of the existing broadband infrastructure. The consultation with existing operators in an open, transparent way ensures that any potential investments plans of commercial operators are sufficiently taken into account, and public funds are used only in areas where similar commercial investments do not exist and they are not planned in the near future. The Commission concludes that the detailed market research and "mapping" together with the public consultation conducted by the UK authorities will limit any potential distortion of competition vis-à-vis existing operators and reduce the amount of State aid required for the measure."
 Affordable, high-speed symmetrical connectivity was the key criterion for the intervention:
"...existing and planned network infrastructures are not adequate to satisfy the needs of the local business consumers even if an FTTC network will be partially deployed in the target area in the near future of three years...a high proportion of radio stations, e-learning and training companies, data centres, academic institutions and other digital intense users located in the Digital Districts require high-capacity and reliable bandwidth of above 100 Mbps with very high upload speeds. If no public intervention takes place, such services will only remain available through LAN lines, for which the prices are considered to be prohibitive for SMEs…"
It would be interesting to know in more detail the basis of both BT's and Virgin Media's challenges, given the analysis and arguments presented in the European Commission's decision. It remains to be seen whether other super-connected city proposals (more here) will face similar challenges. According to the DCMS website, the second wave of super-connected cities will be announced as part of the Chancellor's Autumn Statement on Wednesday 5th December 2012.

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