“A report by Plum Consulting for Vodafone examines internet use and barriers to use, market changes and policy possible approach to get more people online. In terms of use the report finds that education, workforce participation and age are key considerations in explaining internet use.

Older US citizens are significantly more likely to use the internet than those in Korea or Europe, whilst those in Northern European Countries are significantly more likely to use the internet than their Southern European counterparts (consistent with the level of economic development and education at the time they were at school).

The following shows that internet adoption in the UK is not too far behind that in Sweden - which has the highest adoption in Europe alongside Denmark.

Evidence of success in relation to existing interventions by government is limited – though the million housewives programme in Korea and efforts to increase internet adoption by young people in Portugal do appear to have had an impact.

On the face of it this evidence, combined with the fact that the rate of adoption growth amongst less educated older people is lower and accounted for to a significant extent by the ageing of younger existing internet users, suggest that getting the final third online may be slow and difficult.

Plum’s research also point to skills, affordability, perceived relevance and fear as factors inhibiting internet and broadband adoption. Whilst different considerations will matter more for different target groups, changes now underway may go a long way to reducing barriers. The emerging combination of touch and gesture based interfaces, ‘apps’ for specific services (complemented by cloud computing), simpler operating systems and more flexible and affordable wireless broadband access packages may help reduce exiting barriers including skill, relevance, fear and cost.

This shift is exemplified by, but will not be limited to, the Apple iPad (pictured below) and associated more flexible wireless tariff plans (which include per MB, daily, weekly and monthly packages without a contract) available in the UK from 28 May 2010. Available data plans will include a five pence per megabyte plan with no contractual commitment – potentially lowering ongoing costs significantly for some.

Over time, more spectrum and next generation mobile technology will lower the cost per megabyte - perhaps five-fold. Tablet devices can also be expected to fall in price (for example the One Laptop per Child initiative plans a $100 tablet by 2012). To be effective interventions designed to get people online should work with the grain of these changes, rather than continuing to focus on teaching the final-third to use PCs and on fixed broadband only initiatives.

Computer scientist Bran Ferren defined technology as ‘stuff that doesn’t work yet’. Perhaps, at last, we are getting beyond technology.”

Brian Williamson is a consultant with Plum Consulting and author of numerous reports, including the BSG’s ‘A Framework for Evaluating the Value of Next Generation Broadband‘.

Looking at the views of the broadband infrastructure from those who provide services over the internet today, the report find 3 main conclusions:

- Few respondents considered current broadband as a significant barrier to innovation today. Instead they suggested that it was just one of a series of end to end issues that needed to be considered when thinking about how to improve services for consumers. Few believed that simply addressing the bandwidth issue alone would be enough to deliver the quality of service that consumers are increasingly expected to demand.

- Consumer expectations of quality are increasing as ever-richer data services, such as internet TV and cloud based applications continue to be brought to market. As a result service and application providers are starting to think about how they can manage end-to-end quality of service in the medium term (18-24 months). This raises issues surrounding net neutrality and suggests this debate now needs to be tackled in the UK.

- The major players believe that next generation broadband will spur innovation and growth in new services and applications. However an upgrade in bandwidth alone will not cancel out the need to manage the multiple pinch points across the network, to guarantee good quality-assured end to end delivery.

The BSG is hosting a launch event tonight to debate the report with stakeholders.

You can access the report here.

The June 2008 report by Plum Consulting and the BSG set out a “Framework for evaluating the value of next generation broadband”. One of the six recommendations of the report was that,

“Realising the full value of next generation broadband depends on the extent of transformation of other markets. In considering the private and wider value of next generation broadband, and potential regulatory and public policy barriers to next generation broadband, other platforms and markets should be considered including spectrum, broadcasting, mobile and copper networks.

In particular, the costs and benefits of copper network retirement alongside fibre rollout, and the policy and regulatory environment required, should be considered.”

Both next generation mobile (LTE) and fibre will ultimately displace copper, yet obligations and expectations in relation to universality of voice (and potentially broadband), competition based on local loop unbundling and emergency calls over a powered network are currently structured around the legacy copper network. Uncoupling this dependency will not only ultimately be necessary, but clarifying the position early could see relatively more resources invested in next generation broadband relative to legacy circuit switched networks.

In the US the need to address this issue now has some prominence with market analysts questioning the ongoing viability of a copper network based business model, see for example the New York Times on 8 May 2009 “Will the phone industry need a bailout too?” On 21 December 2009 AT&T submitted a comment to the FCC proposing a transition from the legacy circuit-based network to broadband and comparing the transition to analogue TV switch off.

AT&T propose that the FCC set a deadline for phase-out. In contrast, both the European Commission and the UK government in relation to Digital Britain have so far failed to address this issue. Is it time to rethink our priorities?

What I found particularly interesting, however, was the number of speakers that referenced issues that the COTS Project is seeking to address. In the Digital Region workshop on Monday Graeme Dent discussed the engagement that South Yorkshire had been having with ISPs to date; this was followed on Tuesday by Stephen Timms talking about the importance of local projects, but also the need to ensure that these investments do not lead to stranded assets, and directly referencing the COTS project and the role of INCA.

During the day, further reference was made to COTS issues by Amy Chalfen of Openreach, and Gabrielle Gauthey’s excellent presentation, which would have been the highlight of the event for many, in part discussed what in essence was France’s approach to COTS. These issues were also discussed throughout the infrastructure-focused breakouts, with presentations from Quintain, Redstone and Rutland Telecom in particular highlighting the challenges facing local networks.

COTS issues are also becoming increasingly apparent in other markets. James Enck over at Eurotelcoblog has highlighted the buyout by Danish incumbent TDC of municipal fibre provider DONG Energy. According to their own press release, DONG have had difficulty engaging with service providers and have consequently struggled to generate a customer base sufficient to ensure a sustainable network. The Swedish approach to COTS issues has been widely discussed and examined here in the UK.

COTS challenges are going to be facing an increasing number of stakeholders as we move forward, and the issues will become more pressing the closer new access networks get to offering services to consumers. While the issues may be technical in nature, at the heart of the challenge are fundamental questions about the nature of the next generation broadband business model, of the relationship between network operators and ISPs, and of the relationship between end users and ISPs.

We are continuing to make progress on the COTS Project through our discussions with stakeholders. As we move forward with our process, we continue to encourage anyone who wishes to be engaged in the work, or who wants to know more about the work, to get in touch.

Peter Shearman, Policy Manager, BSG

This meeting, in Hull on 03 September, will provide those stakeholders that were unable to participate at the first meeting an opportunity to give their views on COTS. It will also be possible to participate remotely: for more information please contact us.

We have had considerable feedback from stakeholders since the kick-off meeting in July, but remain keen to hear further from anyone with an interest in the work. To give us your thoughts, either drop us an email or comment on this blog.

Peter Shearman, Policy Manager, BSG

The objective of the project is:

“to work with representatives of independent local and community–led broadband projects, national network operators and major ISPs to develop a low cost standardised approach to enable a wide range of service providers to offer retail services over local or community-led open networks to end users.

As a result of this initiative consumers and small businesses should be able to access a wide choice of service providers, regardless of how the underlying infrastructure is either provisioned or owned. It should be in the interests of all local or community-led projects to be compliant with this approach, as more service providers should mean higher take-up and greater revenue.”

Essentially, we have described this as making open access a reality for consumers, who often face a limited choice of service provider on independent networks. For more on the detail of the work, why we are undertaking it, and how we plan to do it, there is a briefing paper on the BSG website.

The project was launched at a kick-off meeting last Wednesday 29 July (getting the work off the ground in part explains our absence on this blog for the last couple of months). The kick-off meeting demonstrated the high degree of interest in this issue: a full house of over 50 industry representatives participated in a lively exchange, with more unfortunately not able to attend owing to the capacity of the venue. The notes from the kick off meeting are also available on our website.

The meeting highlighted three points for us. First, there is a clear agreement across the full scope of industry players that this issue needs to be addressed. No-one present felt that this wasn’t something we should be looking at; feedback before, during and after has re-iterated that this is a challenge affecting all stakeholders in this field, and that an independent body is required to address it.

Second is that, while there is consensus about the problem, there is more uncertainty about what the potential solution could be. Industry consensus will be difficult to achieve: some are already developing solutions; others have yet to consider what type of solution would work for them. There are many potential requirements, so compromise will be essential.

Despite this, however, the meeting also demonstrated a real willingness to engage and participate in the work, again from stakeholders across the industry. Building on this we intend to establish a steering group to drive the project forward that will be drawn from industry volunteers.

Since the meeting we have had a range of feedback, and we’d like to address two particular issues that have been raised. First, a number have asked about the level of engagement from national ISPs. Although they were generally in listening mode on the day, most of the major communications providers were represented at the meeting and have indicated a strong willingness to engage in the process.

The second issue is that of how we communicate and consult with the wider industry. We are keen to ensure that this is an open and transparent process - we hope that the project will achieve an industry consensus, which can’t happen without the whole industry. We are aware that we did not do as well as we could have with the kick-off event: a lack of live streaming and capacity issues meant that many who wished to take part in the meeting were unable to do so.

We will also improve our efforts to make the project more accessible. We are committed to running a second meeting for those who couldn’t participate in the first meeting (details to be announced shortly), and will make all documentation available online. We will also ensure that we build in to the process regular consultations and a feedback loop with the wider industry, to ensure that the process considers the views of all stakeholders.

Additionally, as part of our next steps we are also continuing to meet with companies and organisations, to gather feedback and thoughts on the work and how to take it forward. We are still gathering views, and are keen to hear from those whom we haven’t yet engaged. If any organisation would like the opportunity to discuss the COTS Project with us, we would encourage you to get in touch.

Over the summer we will also be pulling together a steering group, drawn from across the industry, to take this work forward, as well as appointing an independent chair. Membership of the steering group is open to anyone; again, any organisation that wishes to have representation on the group should get in touch with us.

We will continue to provide regular updates on this project as it develops.

Peter Shearman, Policy Manager, BSG

The national media have been critical of a ‘broadband tax’ and questioned the logic of whether broadband for all is an appropriate policy goal; the public are confused about what exactly the proposals are; and even rural fibre advocates appear displeased.

Here we will attempt to unravel the ideas set out by Lord Carter. The report sets out two strands to government’s approach to broadband infrastructure.

First, the universal service commitment will ensure that every household has access to a 2Mbps service by 2012. This will be paid for using funds left over from the Digital Switchover Help Scheme, a contribution from the government’s Strategic Investment Fund, and contributions from the private sector and other public organisations.

This will be delivered by a range of solutions: in some cases a simple improvement in home wiring will be sufficient; others may require wireless technologies such as satellite; and others may require new fibre infrastructure.

Second, the Final Third Project aims to ensure next generation broadband coverage to at least 90% of households by 2017. It is called the Final Third Project as cost modelling suggests that the market should deliver next generation broadband to two-thirds of UK households, mainly in the most densely populated areas of the UK. The project would support rollout to the final third of homes unserved by the market.

It seeks to do this by providing a subsidy in those areas where the high costs of deployment make commercial investment difficult. The subsidy should bring the cost of deployment down to the cost in urban areas, at which point the investment should be commercially viable. This will be paid for by a 50p a month levy on all fixed lines (including DSL and cable) that will go into a Next Generation Fund, which would raise around £150m per year. The BSG response to the idea of the Fund is available here.

These two policies (the universal service commitment and the Final Third Project) will work together to ensure that the most appropriate solutions are developed in each case. For example, in the report the government sets out that the universal service commitment may have to use a fibre to the cabinet solution as the most cost-effective and efficient solution for around 420,000 homes - delivering on both the universal service and Final Third goals.

The benefits of ensuring everyone has access to superfast broadband will be substantial: supporting rural businesses, particularly SMEs; strengthening communities; and enabling genuine transformation of public services in areas where it could make the most impact. A failure to act risks leaving behind remote, rural and even some suburban communities as the UK moves into a 21st century global digital economy.

It is important to emphasise that this is not simply about providing next generation broadband in deep rural areas, however. As the map below demonstrates, the benefits would be felt across the UK (the areas in green will likely see investment by the market; those areas in yellow and red are likely to require support from the proposed Next Generation Fund).

This is a challenge that governments around the world are attempting to address, and a variety of solutions have been proposed, usually involving large scale government funding. We feel that this approach is a forward-looking solution in that it is targeted, proportionate, and smart.

It is targeted as the subsidies are aimed at those areas that require them because they are currently unattractive to investors. Blanket subsidies end up subsidising deployments that the market would have made anyway, wasting valuable public resource.

At the same time, the subsidy itself is proportionate, in that it is at the right level to be able to tip the balance in favour of investment in many areas, without crowding out private investment.

Finally, payment through a levy is smart in that it places no further burden on the UK’s already-strained public finances, and the level of the levy, at the price of a cinema ticket a year, is comparatively cheap compared to the level of taxpayer funding found in other markets.

As with all of these ideas, however, the devil will be in the detail. There will be a need to ensure that the proposal doesn’t favour any one operator; that it leads to open access networks; that it is technology neutral; that it is properly targeted at areas that genuinely need subsidy; that it has no negative impact on broadband take-up; and that an appropriate role and remit is set out for the design group charged with structuring the and delivering both the Final Third Project and the universal service commitment. Government will consult on these and other issues in the autumn.

It is perhaps worth considering that ultimately consumers will pay for this investment one way or the other, whether through higher prices for current broadband, through general taxation, or through the proposed levy, which is perhaps more transparent than funding from general taxation.

Many governments have committed to expansive public projects, using significant levels of public funding.
- The Australian government is committed to a A$43bn (£21bn) fibre to the home project to 90% of the population, with 12Mbps to the remaining 10%.
- New Zealand are spending NZ$1.5bn (£0.6bn) of public money on fibre to the home to 75% of the population.
- Singapore have committed public funds of $0.75bn (£0.46bn) to their fibre to the home project.
- In the EU, Finland and Greece have both recently proposed spending significant levels of public money on superfast broadband.

On a per home basis, the UK’s commitment is one of the cheapest of those made across the world, demonstrated below (note: the US intervention is mainly to expand coverage of current generation broadband).

During the height of the economic stimulus discussions late last year superfast broadband networks were touted by many commentators as one of the best infrastructure investments to make - the Keynesian solution for the 21st century.

Now that government has accepted its importance and made a commitment to ensuring coverage of superfast broadband for at least 90% of households, ire has turned towards how it is to be funded.

However, it is not possible to have our cake and it eat it. Funding and investment will ultimately come from us as consumers in one way or another if we are to deliver this critical enabling infrastructure for the entire UK.

Peter Shearman, Policy Manager, BSG

This would appear to be an impressive level of support, and reflects UK citizens’ position as the most active broadband population in Europe. However, this week Ofcom offered a slightly different version of events.

According to their research, 30% of adults do not have Internet access at home; 43% of those felt they had no need for it, or felt that Internet access held no interest for them.

Of course, these results are not incompatible, and allowing for questioning bias and other factors support what previous studies have found - digital exclusion is found in those without means and those who feel they have no need (the self-excluded).

There was a renewed emphasis in the Digital Britain Interim Report (iDBR) on increasing take-up of broadband, as part of the government’s commitment to a broadband universal service. So, as the publication of Digital Britain draws ever nearer, what do these studies tell us?

The Ofcom study in particular shows the challenge that lies ahead. When given options for policies that would encourage take-up, such as cheap computers and discounted Internet connections, a third of those with no access said none of the ideas appealed. Broadband simply held no interest for them.

Amongst the remainder, no particular idea stood out, reflecting the broad range of reasons why some don’t have broadband (financial concerns, lack of skills, lack of available infrastructure, no need and so on).

Providing the infrastructure through delivering the broadband universal service commitment is only part of the equation for government. They must also, with the help of other stakeholders, drive usage and take-up of the infrastructure. We wait to see what the final Digital Britain Report has to offer to this debate.

Peter Shearman, Policy Manager, BSG

Considerable uncertainty existed then as to consumers’ willingness to pay for next generation broadband, which in effect is a premium service. There was some initial evidence, particularly from the US, that we cited, but ultimately there was little certainty for investors to go on.

It is willingness to pay, however, which is crucial for the business models of investors. Increasing demand for bandwidth and bandwidth-hungry services could not form part of a business model for investment unless consumers are also willing to pay for that increase in bandwidth.

So, almost a year on, how has this picture developed? Here I will look at three areas for evidence: consumer spending, particularly on telecoms, in the UK; consumer appetites for premium services; and fibre demand emerging from other markets.

The most obvious place to start is the economy’s impact on consumer spending. The collapse of Lehman Brothers, the bailout of AIG and others, and the onset of a global recession has hit consumer confidence hard. Retailers have struggled as consumers have kept their money in their pockets.

For the broadband industry, this has perhaps been reflected in a slowdown in the growth of fixed-line broadband subscriptions. Quarterly net subscriber additions across the industry have broken the cycle of the last few years and are falling quarter on quarter.

However, this could equally be due to the market reaching a natural saturation point, heightened by the growth in popularity of mobile broadband (and increase of mobile-only homes) and the reduction in the number of people moving homes.

Perhaps a better indication of the sector’s performance is the level of ARPU (average revenue per user) companies are achieving. Spending on telecoms by UK consumers has been particularly robust, indicated by the results of the consumer divisions of BT, Sky, Virgin, Carphone, O2 and Orange.

- BT Retail reported an increase in ARPU in their most recent results.
- Carphone’s broadband ARPU grew during 2008 (although ARPU will be impacted over 2009 by the recent Tiscali acquisition).
- O2’s parent Telefonica reported that O2’s ARPU is up year on year.
- As did France Telecom, who reported ARPU growth for its UK subsidiary Orange.
- Virgin Media’s Q1 results this year showed a year on year quarterly ARPU increase, as did Sky’s most recent results

Although many of these results include products other than broadband, such as fixed-line and mobile telephony, and pay-tv servce, these results add weight to the argument that in times of tightening consumer spending, household spending on communications could be one of the last areas that households are willing to cut. Broadband could perhaps be becoming an essential digital utility for the majority of households.

So what of consumer spending on premium products? There was initial concern that premium products would be adversely affected. However, recent results from Pay-TV operators have been promising, with Sky in particular highlighting a consumer demand for premium products through the success of their HD push (they now have over 1m HD subscribers, up from 465k a year earlier).

HD is a useful comparator for next generation broadband, as consumers are paying a premium to access the same service, but at a higher quality. While consumer demand for premium products has not been maintained across the economy, it is interesting for this debate that it appears to have been sustained in the in-home entertainment market.

To add to this, Virgin have said that their 50Mb service is experiencing the take-up levels that they expected. However, it is likely we won’t see useful, mature results for this service for at least 12 months, so it is too soon to consider this as evidence of willingness to pay.

Internationally, the US provides perhaps the most appropriate market to examine for evidence of willingness to pay. It was the main market examined in our report because: information is readily available; investment has been underway for a number of years and is more mature than other deployments; no public funding is used; and no price regulation is in place, so pricing and take-up is likely to reflect genuine consumer willingness to pay.

AT&T, with their fibre-to-the-cabinet (FTTC) U-Verse service, has 1.3m fibre broadband subscribers, a take-up rate of 12% of homes passed by their network. They have reported a year-on-year quarterly increase in ARPU on their wireline business.

Verizon’s fibre-to-the-home (FTTH) service FiOS has 2.8m broadband subscribers, with a take-up rate of 27% of homes passed by the network. They have also posted a significant increase in wireline ARPU. Both have seen subscriber growth increase quarter on quarter over the last year, in spite of the recession.

These results do suggest that there is consumer willingness to pay for a fibre-based premium broadband service. However, caution must be used when reading across from these results, as broadband subscriptions are in part driven by the respective IPTV offerings of AT&T and Verizon. As such, it is difficult to separate out demand for high-speed broadband and demand for their video services.

There is also little sense of what broadband speed packages consumers are taking, although according to Verizon their most popular plan is their 20Mbps service (although this doesn’t necessarily mean that ADSL2+ would be sufficient, as with their FTTH service 20Mbps really means 20Mbps).

Following our report, BT announced an intention to deploy superfast broadband to 40% of homes, so they clearly see a business case for it. However, there is still some scepticism about whether a willingness to pay really exists for these speeds in the UK, particularly for FTTH - with BT CEO Ian Livingstone saying that “the economic case is not great” at the government’s recent Digital Britain Summit.

The evidence set out above is not conclusive, comes with caveats and ultimately is not direct evidence of the willingness of UK consumers to pay for superfast broadband. However, they are useful indicators, and a fuller picture will develop as this evidence continues to emerge.

We would be interested to hear from anyone who has views on emerging evidence of willingness to pay from other markets.

Peter Shearman, Policy Manager, BSG

The report uses three examples of digital infrastructure - next generation broadband, the smart grid, and intelligent transport systems - to show the possible impact of significant investment in each of these on direct jobs in these sectors, indirect jobs in related sectors, and induced jobs in other sectors.

The report makes for interesting reading, and will certainly grab the attention of policymakers - a £5bn investment in next generation broadband, they estimate, could retain or create as many as 280,500 jobs. At the launch the authors indicated they would make available their model to demonstrate how these numbers were arrived at, which should shed some light on how the numbers involved are as big as they are.

Although the report focuses on jobs and stimulating consumer spending, the more important point to come out of the report is the reason for investing in these networks, above other stimulus investments. The report suggests that investing in these networks creates a network effect, or ‘multiplier’, which grows as more and more individuals and organisations join the network.

This multiplier basically points to the innovation and productivity gains that existing and new businesses would develop once connected to the network. This benefit would only be realised by new networks, as improvements to existing infrastructure (to which the majority are already connected) would not have the same capacity for growing the number of individuals and organisations attached to it.

So while the immediate benefits in terms of jobs retained or created would exist regardless of the sector in which investment was made, only new networks actually provide the network multiplier. This is an important point for policymakers considering stimulus spending.

The BSG has something to offer to this debate. Our report ‘A Framework for Evaluating the Value of Next Generation Broadband‘ discusses the value of the network effect of next generation broadband. We estimate that it would be valuable, but less so than the biggest areas of value.

This is because the benefits of the new network would often be that existing services worked better, which would not generate a network effect. Furthermore, the network effect for services on next generation broadband would be global, and so would not rely overly on the UK’s rollout and take-up of superfast services.

However, in so far as new services are developed that require the higher speeds and better quality connectivity (particularly those requiring two-way communications), a network effect would be evident. And as other countries move towards next generation infrastructure, and consumers increasingly take up these services, we would want to be part of the global network effect that superfast broadband would create.

Peter Shearman, Policy Manager, BSG