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United Kingdom Broadband Market Report 2006
 
 

 
 
 
An island nation in the north-west of Europe, the UK is mostly rugged hills and low mountains with level to rolling plains in east and south-east and a high proportion of coastline to area. The UK is comprised of four nations: Wales, Scotland, England and Northern Ireland. It has a population of 60 million people living in 25 million households and a population density of 244 inhabitants per square kilometre.
 
 
Wales
142 in/km2
Scotland
65 in/km2
England
383 in/km2
Northern Ireland
125 in/km2
UK
244 in/km2
 
Table 1 – Population and population densities of UK nations, 2005
 
 
GDP per capita at $36,599 was the thirteenth highest in the world in 2005 according to the International Monetary Fund. This compares with Luxembourg at $75,130 which has the world's highest GDP per capita[1]. GDP per capita in Wales stands at 79% of the UK average which equates to around $28,950[2].
 
 
The telecommunications sector became liberalised in 1982 and is regulated by the Office of Communications (Ofcom), which was established in December replacing five regulatory bodies: the Independent Television Commission (ITC), the Broadcasting Standards Commission (BSC), the Radio Authority, the Radio Communications Authority (RCA) and the Office of Telecommunications (Oftel).
 
Ofcom has indicated that by the end of 2007/8, its "aim is to have encouraged the development of an environment in which there is much more competition and innovation in broadband networks and services"[3].
 
 
The government recognises that the internet has enormous potential for education, entertainment and business and wants everybody to be able to access it and to use it confidently[4]. The government published its broadband policy, UK online: the broadband future, in February 2001, settingout the main reasons why the government believesbroadband is important: to encourage users to connect tothe internet more often and for longer; and to enable newconsumer and business services. It suggested that these changes would play an important role in national competitiveness.The official government target, as outlined in its policy, was "for the UK to have the most extensive and competitive broadband market in the G7 by 2005[5]". The Government has been less directly involved in the roll-out of broadband than in some major broadband nations, such as Japan and Korea, and has instead relied on market forces and interventions by the regulator to achieve this target. It has stated that a sound efficient strategy should rely primarily on market dynamicsto increase uptake by households and firms. However, it also recognises that there is clear rationale for government involvement in tackling the digital divide and minimising social exclusion where there is market failure[6].
 
In order to meet its target an independent advisory group, the Broadband Stakeholder Group (BSG), was setup. The group acts as a focal point for stakeholders to address both short and long-term issues related to the roll-out and take-up of broadband services. It is made up of the key players in the broadband value chain from public and private sectors.
 
 
To address the challenges facing them, the government announced the £30 million UK Broadband Fund in late 2001. Established through the DTI(Department of Trade and Industry), its purpose was to help develop innovative broadband related schemes to meet local requirements, to ensure that as many people and businesses as possible across the UK were provided with access to affordable broadband services. The fund was disseminated to the 12 Regional Development Agencies (RDAs)/Devolved Administrations of the UK[7].
 
Furthermore, in order to aggregate demand for broadband in the public sector, on both regional and national levels, the Broadband Aggregation Programme (BAP) was established. The BAP is a joint DTI and RDA initiative. Demand aggregation offers a more attractive market for infrastructure providers and facilitates better value deals, benefiting the private as well as the public sector through increased infrastructure build. BAP's stated objectives were to:
 
  • Increase broadband availability;
  • Maximise value for money in public sector purchasing of broadband connectivity by aggregating public sector broadband requirements.
 

Wales

 
The Welsh Assembly Government was awarded a £2.67 million share of the UK Broadband Fund. The Assembly Government's e-vision for Wales is set out in Cymru ArLein Online for a Better Wales. Wales's broadband strategy has a twin focus: to stimulate demand and to encourage supply. It has an economic and social rationale, improving business on one hand and services to the customer, consumer and citizen on the other.
 
The five-year, multi-million pound, flagship Broadband Wales Programme was launched by the Welsh Assembly Government in July 2002.The aim of the programme is to underpin a positive economic outlook for Wales through addressing 'market failure' - as identified in the 'Ubiquitous Broadband Infrastructure for Wales' report commissioned by the Welsh Development Agency in 2001. The Assembly Government has developed a series of targeted interventions aimed at tackling market failure and increasing the roll-out of broadband. It is supported in its work by the Broadband Wales Stakeholders Group and its activities are monitored by the Broadband Wales Observatory. One of the original aims of the programme was to achieve 95% coverage of broadband services in Wales by July 2007. However, this target has already been surpassed and as such, focus has now moved towards achieving 100% coverage.
 
The Broadband Wales Programme includes projects which focus on both demand and supply, as they are both inextricably linked:
 
Demand stimulation/marketing - A three year all Wales campaign targeted at business, consumers and opinion formers. Its over-riding aim is to achieve a 'step change' in Wales with regards to the perceptions and attitudes towards broadband and subsequently to increase the uptake of broadband and encourage more effective use of the technology in the home and in businesses. The campaign includes: direct marketing, advertising in the local and national press as well as on the radio, and market research including surveys to better understand the characteristics of the Welsh marketplace and the specific needs and attitudes of citizens and communities towards broadband.
 
The SME Satellite Broadband Subsidy Scheme - This scheme, launched in September 2002, initially focused on giving SMEs a subsidy of up to £1,500 to take up broadband via satellite subject to a certain set of conditions. This scheme became technology neutral in February 2004 and was extended to also include the voluntary and charity sectors.
 
Try Before You Buy – A network of 24 ICT Support Centres across Wales were enabled with satellite, and where available terrestrial DSL broadband services to offer broadband try before you buy facilities to businesses.
 
Regional Innovative Broadband Support (RIBS) - The RIBS project is an Objective 1, European-funded project designed to bring affordable broadband access to the 35 exchanges in Wales that have yet to be enabled.  Additionally it will address the issue of not-spots across Wales and look to resolve cost efficiently and effectively broadband access to these areas.  The overall project is technology neutral and will make broadband more widely available. The project is designed specifically to provide access to 'first-generation' broadband services, at a cost that is comparable with urban areas of Wales. A broadband brokerage website (www.bbwo.org.uk/broadband-3161) was created allowing companies, public sectororganisations and individuals to register their interest in using broadband in order to locate the not-spots in Wales.
 
Public Sector Broadband Aggregation Project – This project is attempting to establish the most effective way of procuring broadband connectivity to the public sector throughout Wales. It will consider strategic, operational and economic benefits, with a particular focus on interoperability and collaborative working. A number of working groups have been set up with local government, health, the higher and further education sectors and others, to assist in developing the business case and identifying the most appropriate solution regarding broadband aggregation.
 
Lifelong Learning Network - The Lifelong Learning Network is a Wales wide high-bandwidth network designed to address the aggregated broadband connectivity requirements of public sector organisations. The project is designed to deliver broadband connectivity to schools, libraries and learning centres throughout Wales. Its purpose was to achieve best 'value for money' through a rational and focused investment in infrastructure, improving the availability of broadband for Wales; drive economic development; increase competitiveness and address the digital divide.This project has the ultimate ambition of connecting all primary schools and learning centres at a minimum of 2Mbps and all secondary schools and libraries at 8Mbps. Local Authorities can also use the Lifelong Learning Network to support their own electronic traffic.
 
FibreSpeed – The FibreSpeed initiative aims to provide high-speed broadband to 14 business parks across North Wales. The future network, which will be capable of supporting a minimum of 10Mbps symmetrical connectivity and be scalable to gigabit speeds, is expected to be more price competitive than current commercial broadband offerings.
 
Second Generation Broadband Development (SGBD) – This project addresses two, specific aims of the Broadband Wales programme: firstly, to ensure the availability of 'second generation' broadband infrastructure to at least 50% of businesses in Wales and, secondly, to implement an agreed strategy in relation to the provision of a direct internet connection from Wales to the global core network. 'Second generation' broadband is deemed to be between 2Mbps and 10Mbps. The broadband brokerage scheme has been designed to capture the demand for 'second generation' broadband services in Wales and the intelligence gathered via the scheme will be made available to the private sector, to encourage the provision of 'second generation' broadband services across Wales. The response of the marketplace to these findings will be monitored closely and the possible benefits of a direct connection from Wales to the core internet will be assessed.
 
England
 
ActNow Cornwall – A regional project using European Objective 1 funds to provide broadband to an area of dispersed and low density population. The £12.5 million project has benefited from £5.25 million of European Objective One structural funds. The project is run by the South West Regional Development Agency, Cornwall County Council, Cornwall Enterprise, Business Links, Cornwall College and BT[8]. The aims of the project were to bring broadband to 12 Cornish communities and to sign up 3,300 businesses to broadband by April 2005. The aims have been far exceeded as all 101 exchanges in Cornwall and the Isles of Scilly now have broadband access, covering 99% of businesses. Furthermore, 8,000 businesses now have broadband connections; more than double the original target. It is estimated that nearly 3,300 jobs have been created as a result of the project and that Cornwall's GDP has benefited by more than £77 million[9].
 
Hampshire Broadband Project – A project led by the County Council and Winchester City Council which launched a grant scheme to help local businesses towards the cost of broadband. The three year programme involved the marketing of use of broadband to increase take-up in businesses and the home. As well as the provision of grants for businesses connecting for the first time to broadband, the programme of activity free includes advice sessions, a cash-back offer for home users, events, a free helpline and learning opportunities[10]
 
Business Link Humber – The Business Support Scheme was funded by Yorkshire Forward and the European Regional Development Fund. The aim of the initiative was to encourage local businesses to sign up to broadband. The initiative allowed businesses to claim back up to 50 per cent of the cost of broadband service for the first year up to a maximum of £3,000. Funding for the scheme has now ended[11].
 
RABBIT - TheUKBroadband Fund supported the Remote Area Broadband Inclusion Trial(RABBIT).This project was set up to promote the use of broadband to small businessesand organisations in remote areas, to trial alternative methods of providing broadband internet to small businesses in remote areas and to evaluate the effectiveness of the available solutions. In order to assist small businesses to get connected financial assistance of £300 to £800was provided for the first year of a broadband subscription. The RABBIT project was shared as a joint project between several RDAs and Devolved Administrations[12].
 
East of England Development Agency 'Demand Broadband' project -The purpose of this project was to educate residents and owners ofbusinesses of the importance of broadband, and thus persuade telecommunications providers toconsider supplying markets where demand can be demonstrated. A broadbandbrokeragewebsite (www.enterprise-link.co.uk/bbb-register) was created giving information about broadband, and allowing companies, public sectororganisations, communities and individuals to register their interest in using broadband[13].
 
Broadband4Devon - A £12.5 million private and public sector partnership project, launched in November 2003, aimed at helping 5,500 Devon firms benefit fully from the e-business revolution. It also aimed to use high speed broadband technology to create or safeguard more than 1,600 jobs in Devon. The three year project offers businesses, in the Objective 2 area, a choice of subsidised packages ranging from a connection only to integrated business solutions through to complete networked solutions.  To date, more than 6,000 businesses have benefited from the project and an independent evaluation of Broadband4Devon in May 2005 estimated that the impact on the net contribution to Devon including sales, relocated businesses, cost savings and productivity was more than £7 million[14].
 

Scotland

 
The key aim of the Scottish Executive's broadband strategy, "Connecting Scotland: our broadband future", is to "make affordable and pervasive broadband connections available to citizens and businesses across Scotland". The strategy, launched in August 2001, also aims to promote economic development and to prevent a digital divide opening up between urban and rural areas. Key issues highlighted in Scotland are access, cost and demand as well as the need to raise awareness and increase uptake[15].
 
The Scottish Executive is responsible for the implementation of the various programmes to encourage broadband provision and uptake. They provide funding support from Scotland's £4.4m portion of the UK Broadband Fund and the £24m funding allocated for the Executive's new broadband initiative. The activities are undertaken together with the Executive's enterprise agencies, Scottish Enterpriseand Highlands and Islands Enterprise[16].
 
Project ATLAS – A project run by Scottish Enterprise which focuses on the cost of broadband services along with customer choice and availability.
 
The first phase of Project ATLAS was to set up a virtual Telecoms Trading Exchange (TTE) in Scotland supported by a backhaul link to London. The TTE is a virtual marketplace for wholesale broadband connectivity. It opened in January 2003 and is providing businesses with high capacity bandwidth at competitive rates. The TTE is a website where worldwide telecoms operators can post their prices for services available in Scotland and is open to any telecoms operator or ISP. Users of the TTE will be able to benefit from increased transparency and quality of service in their purchase of bandwidth, as well as the likelihood of lower prices through a competitive marketplace.
 
The second phase of the project will spread the benefits of ATLAS more widely, through building remote hubs in six of Scottish Enterprise's business parks, with backhaul links to the main ATLAS hub in Edinburgh. ATLAS will provide the passive fibre infrastructure needed to deliver advanced broadband and telecoms services to the business parks. This infrastructure will be owned by Scottish Enterprise and operated on its behalf by a managing company. Access will then be leased to service providers on an open and non-discriminatory basis. Scottish Enterprise will not provide any retail services to end users itself. The network will be based on next generation technology in order to ensure future proofing. Deployment of these networks in the business parks is due to be completed early in 2006[17].
 
Broadband Pathfinder Projects - two projects launched in December 2004 in the Highlands and Islands and the South of Scotland to aggregate public sector demand for broadband infrastructure. The £70m project to wire up schools, libraries and other council buildings with high-speed broadband services will deliver services to more than 800 sites. The sites will be connected using a mix of fibre, wireless and copper-based infrastructure. In June 2006 a procurement team chose Scottish telecoms operator Thus's bid for the project ahead of BT[18].
 
Demand stimulation projects:
 
Neutral Broadband Website – A website (www.scottish-enterprise.com/broadband) launched to raise awarenessof the benefits of broadband and to provide independent advice and information on broadband for businesses. The website contains online seminars, an operator search facility and a self-assessment tool to show how businesses can gain from broadband[19].
 
Local demonstration centre network – A network of broadband demonstration centres focused on the business benefits of broadband, and the widespread availability of service through satellite. Broadband workshops promoted interactive and functional hands-on demonstrations to help businesses to appreciate the broadband 'art of the possible' with actual business benefit examples. There was also a mobile Broadband Learning Unit in the form of a satellite-enabled coach that delivered mobile broadband awareness and learning to the wider community using the programme and learning materials developed for the fixed centres[20].
 
Supply stimulation initiatives and technology trials:
 
Business Broadband Incentive Scheme – The aim of this scheme was to encourage businesses to take up a broadband connection by offering grants that were available throughout Scotland until March 2004.  Grants of £300 were available to businesses to install broadband services such as telephone line, cable or fixed wireless. For businesses in areas where these services were not likely to be made available in the near future, grants of £1,200 were made available to help with the cost of installing and running a satellite broadband connection, or a bespoke solution.The originalscheme provided over 3,000 Scottish businesses with £2.2 million in order to install broadband. As a result of this success the scheme was extended for another year after a further £1 million was made available[21].
 
Powerline Trials - Two technical trials of broadband powerline technology were undertaken in Crieff and Campbeltown in partnership with Scottish Southern Electric (SSE). SSE launched commercial services in Stonehaven as a result to test the case for further deployment of powerline broadband. However, SSE has since stopped signing up new powerline customers and the technology seems unlikely to feature in the mass market due to issues regarding radio interference[22].
 
Community Network Demonstration project – The Highlands & Islands Enterprise set up the project to provide broadband in communities that were not already covered by broadband technologies. Wireless networks were set-up in 6 communities to demonstrate wireless broadband technologies and test the process of rolling out to the most remote communitiesthroughout the Highlands and Islands. As well as getting end-usersconnected to broadband, the project provides real life experience on how to overcome logistical, technical, organisational and legal challenges posed by this model[23].
 
Scottish Borders Rural Broadband Service – A pilot project designed to trial innovative approaches to the delivery of broadband services in underserved areas. The Scottish Borders area was chosen as the location of this pilot, as it was the area with the lowest availability of broadband in Scotland at the time. A key objective for the project was that it would continue to provide broadband services to end-users on a self-sustaining basis, beyond the pilot phase. Wireless technology was used to deliver services as it can provide access to broadband services where other technologies are not commercially or technically viable. Scottish Enterprise Borders does not provide broadband service directly to the public, but has set up a subsidiary company, SBRB Ltd, to act as a wholesale provider of services to ISPs. After an extensive and rigorous selection process carried out under European Union OJEC tendering procedures, Scottish operator THUS was chosen to deliver the contract on behalf of SBRB Ltd[24].
 

Northern Ireland

 
The Minister of the Department of Enterprise, Trade and Investment (DETI) launched a new vision for telecommunications in N. Ireland in October 2003 entitled "Broadband Northern Ireland – Fully Connected". This vision is to have a fully connected Northern Ireland with equitable access to cost effective broadband services for all. The government set the following targets for N. Ireland:
 
  • To be the leading broadband region in the UK;
  • To be the first region in the UK to have 100% coverage of broadband services;
  • 100% broadband access with a minimum of 512kbps for all households and businesses by end of 2005;
  • 12% of households and 20% of business take-up of broadband by the end of 2005;
  • 100% broadband at 2Mbps at cost competitive prices by end of 2006[25].
 
Northern Ireland secured £1.46m as its share of the £30m UK Broadband. Broadband initiatives include:
 
The Broadband SME Programme – This programme encouraged SMEs to get a broadband connection in order to help them gain the benefits offered by broadband connectivity. Financial help of up to 40% of the cost, up to a maximum of £5,000, was made available to eligible businesses.
 
Electronic Libraries for Northern Ireland (ELFNI) - A £36.5m private finance initiative projectintended to bring electronic information services to almost all public libraries inNorthern Ireland. Rollout across the 126 public libraries and the schools library system was achieved within 15 months with fully operational status being achieved by the target date of August 2003. The aim of this project was to "deliversocially inclusive, cost effective, efficient and modern public library services tothe Northern Ireland community[26]".
 
C2k (Classroom 2000) - A £200million project to provide educational servicesthrough information and communicationstechnology infrastructure for schools. The project provided email and messaging systems, onlineconferencing services, web publishing andhosting facilities for all 350,000 pupils andteachers in Northern Ireland's grant aided schools.Every teacher and student will be connectedfrom their school to the Internet and each child from his or her first day at primary school will have his or her own secure emailaddress. As part of the project all 1,200 Northern Ireland primary,secondary and special needs schools will havebroadband connections by the end of 2006[27].
 

Other projects supported under the UK Broadband Fund in Northern Ireland include:
 
  • Broadband wireless services trial in the South Antrim area;
  • Development of a virtual trade fair and business broadcasting channel in Belfast;
  • Radio mesh broadband wireless trial in Dundrum;
  • Feasibility study into an optical fibre network in the waterways of Ireland;
  • Rural ATM access hub trial in Fermanagh;
  • I-Burst pioneer trial at the NI Science Park;
  • Feasibility studies into the provision, use and demand for broadband in 19 council areas[28].
 
The initiatives and projects discussed above are not exhaustive and further information can be found from the following sources: www.bbwo.org.uk/initiatives , www.connectingsw.net , www.broadband.wales.gov.uk , Broadband in the Devolved Administrations, November 2003.
 
 
With regards to privatisation of the telecommunications market, the incumbent operator, BT, became a public limited company in 1984. BT was fully privatised in 1993, when the UK government sold its remaining share of the company.
 
 
As regards international bandwidth, the UK had the fourth highest level per inhabitant in the world in 2004, according to theInternational Telecommunications Union (ITU), with over 13Mbps per person. Denmark had the most at around 35Mbps per person, leading The Netherlands at 20Mbps and Sweden at 17Mbps[29].
 
Wales currently has no International Tier 1 broadband connectivity. However, a project within the Welsh Assembly Government's eWales unit will evaluate whether an International broadband connection is required to ensure economic prosperity for Wales and meet future broadband development requirements. 
 
 
 
There has been considerable investment in backbone infrastructure over the last decade resulting in a number of international backbone operators, including Thus, Cable & Wireless and Telindus, having extensive networks. Cable operators NTL and Telewest also have a significant backbone network. Despite this BT remains the dominant network operator with a network that reaches all major towns and cities in the UK[30].
 
 
Local access infrastructure is dominated by BT which had 33.9 million of the 41.7 million local access lines at the end of 2005. The main competitors are NTL and Telewest. In the city of Hull the incumbent operator is Kingston Communications. The increasing deployment of local loop unbundling will provide increased local access infrastructure competition in the near future[31].
 
Following the second stage of Ofcom's Telecoms Strategic Review, BT launched a new division named Openreach in January 2006. The purpose of Openreach is to ensure that the entire telecommunications industry has fair and equal access to the local access and backhaul networks.
 

 
BT announced its network upgrade project, named the twenty-first century network (21CN), during 2003. The £10 billion project will see BT deploy an advanced broadband network based on intelligent systems, Internet Protocol (IP), Session Initiation Protocol (SIP) and Multi-Protocol Label Switching (MPLS). The first areas to be migrated to the network will be Cardiff, Pontypridd and Bridgend in South Wales, where 350,000 customers are to be migrated, beginning in November 2006[32].
 
Cable & Wireless also announced plans in April 2005 for its own NGN. The operator plans to spend £190 million pounds over three years on building the new network[33].
 
Ofcom has launched an industry body that will focus on the technical and commercial arrangements for NGN development. The new body, NGN UK, will initially help companies develop an effective technical and commercial framework for interconnection between NGNs[34].
 
 
 
Wales
Scotland
England
Northern Ireland
UK
Total
Rural Population
22%
16%
13%
35%
12%
Older People
(aged 65 plus)
18%
16%
16%
14%
16%
Household Income
Under £11,500
43%
32%
26%
29%
27%
 
Table 2 – Profile of socio-economic groups in UK nations, Office of National Statistics and Business Geographic 'Urban Indicator', 2001
 
High levels of rural population, older inhabitants and low income households all provide barriers to basic ICT and, ultimately, broadband penetration levels. Wales, Scotland and Northern Ireland all have higher rural populations than England, with Wales and Northern Ireland having particularly high rural populations at 22% and 35% of their respective populations.
 
Wales also has particularly high numbers of households with an income of under £11,500 when compared to the other nations at 43% of all households and high numbers of people aged over 65 compared to the UK total. As such, Wales has the greatest socio-economic barriers to overcome out of the four UK nations with regards to broadband take-up.
 

 
Basic ICT penetration
In terms of ICT usage, the latest available figures show that in 2005 65% of households had a PC[35]. Furthermore, 56% of all households had access to the internet at the end of 2005. These figures are in line with the OECD, for both PC and internet penetration of households. Iceland has Europe's highest levels of PC penetration, at 86% of households, and internet penetration, at 81% of households[36].
 

Residential PC and internet penetration

Figure 1 - Residential PC and internet penetration, OECD Science, Technology and Industry: Scoreboard 2005
 
In an effort to increase the number of PC households the government introduced the Home Computing Initiative in 1999. The scheme enabled employers to provide laptops or PCs with a value up to £2,500 to employees free of income tax and National Insurance. The employer effectively loans the employee a computer for a 36-month period, with payments being taken from the employee's pay packet every month. However, the government announced in March 2006 that it was to end the tax exemption for the purchase of PCs[37].
 
According to the government, cost is not the only barrier to ICT take-up. Some individuals do not have the skills to use computers, even though they may want to get online and others do not see the relevance of the internet to their needs. However, trials aimed at closing the digital divide in disadvantaged areas suggest that these perceptions change when ICT technology is introduced into lives. As such, the government is committed to making it easier for all people to get access, whether individually or through community facilities, and through a number of devices (Computer, Digital TV, telephone, mobile devices, etc.)[38].
 
 

PC and internet take-up by nation

Figure 2 - PC and internet take-up by nation, Ofcom Communications Tracking Study, Q2/Q3 2005
 
On a regional level, according to Ofcom figures, PC and internet penetration are higher in England than in the other UK nations. The lower take-up of PCs and internet in Wales, Scotland and Northern Ireland may provide barriers for broadband growth in these areas[39].

 
 
At the end of December 2005, broadband lines were calculated to be around 9.5 million. This represents growth of around 3.3 million connections, or 52.5% during 2005[40]. Broadband connections accounted for 65.1% of all internet connections at the end of 2005[41].
Total broadband subscriptions by country
 
Figure 3 - Total broadband subscriptions by country, OECD, December 2005
 
The market growth compares favourably with the 33% growth reported across the OECD[42] and the 37% growth worldwide[43] for the same period; indicating that the market is still some distance from reaching saturation.
 

Broadband growth over 2005 and broadband penetration by population

Figure 4 - Broadband growth over 2005 and broadband penetration by population, OECD Broadband Statistics, December 2005
 
Analysys Research forecast that there will be around 12.3 million broadband connections by the end of 2006. This would equate to a population penetration rate of around 20.5 connections per 100 inhabitants.

 
Until recently, broadband adoption rates have lagged behind other countries for the following reasons:
 
  • Low availability of broadband technologies;
  • High broadband access prices compared with narrowband dial-up packages;
  • High penetration of dial-up narrowband access prior to broadband availability;
  • Strong competition from established alternative media, such as digital TV;
  • Lack of awareness of the benefits from using broadband;
  • Lack of broadband specific content and applications[44].
 
However, many of these issues have been dealt with and as a result the market has seen strong growth, allowing the UK to move into a healthier position in terms of broadband adoption compared to other countries in the OECD.

Broadband penetration by population

Figure 5 - Broadband penetration by population, OECD Broadband Statistics, December 2005
 
Figures from the OECD place the UK in thirteenth position in the OECD in terms of broadband penetration per head of population; with a take-up of 15.9% in December 2005. This figure places the UK ahead of the OECD as a whole, which had an average penetration of 13.6% of the population. Iceland, with a broadband penetration of 26.7% of the population, had the world's highest penetration, leading Korea (25.4%) and The Netherlands (25.3%). The lowest broadband penetration within the OECD was in Greece at 1.4 broadband connections per 100 inhabitants[45].
 
Broadband penetration by households
Figure 6 - Broadband penetration by households (top ten countries), World Broadband Statistics Q4 2005, Point Topic, December 2005
 
As regards broadband penetration per household, around 38% of households had a broadband connection in December 2005; this places the UK outside the top ten countries in the world. This is far lower than the household penetration in Korea, the highest in the world, which stood at around 78.5% of households at that time. The highest household penetration levels in Europe were in Monaco at 69% of all households, while The Netherlands and Denmark also score highly with 58% and 54% respectively[46].

 
In terms of the business market, there are around 4 million businesses in the UK; with small and medium sized enterprises (SMEs) accounting for over 99% of them. Latest figures in 2004 show that 87% of all enterprises with 10 or more full time employees had internet access. The figures also show that 44% of all enterprises with 10 or more full time employees used a broadband connection. Both figures are slightly below the OECD average[47].
Internet and broadband penetration of business
Figure 7 - Internet and broadband penetration of businesses, OECD Science, Technology and Industry: Scoreboard 2005
 
Broadband operator Bulldog has launched a new suite of products aimed at Small and Medium Enterprises (SMEs). The SME packages are targeted at business with up to fifty staff. Research carried out by Bulldog showed that 45% of businesses felt they could grow faster if they had access to the right information and communications technology at the right price and with the right support[48].

 
As regards broadband infrastructure, BT figures indicate that 99.9% of UK households and businesses are now served by exchanges that have been ADSL enabled and that more than 99.8% of all end-users connected to an enabled exchange can receive ADSL broadband services. As such, it is estimated that 99.7% of all UK households and businesses can receive ADSL broadband services. According to NTL Incorporated its network pass more than 12 million UK households and businesses (NTL networks pass around 7.7 million and Telewest pass around 4.7 million). Nearly all of these networks have now been upgraded for broadband services and as such, cable services are available to around 50% of UK households and 85% of UK businesses.
Estimated broadband coverage
Figure 8 - Estimated broadband coverage, Analysys Research, September 2005
 
On a regional level, broadband coverage in Wales, Scotland and Northern Ireland has caught up with coverage for the UK as a whole. All nations can now boast broadband coverage of over 99% of households and the government of Northern Ireland announced in January 2006 that it had become the first UK nation to reach 100% broadband coverage[49].
 
However, while total broadband coverage in all the UK nations and regions has reached levels comparable to the UK as a whole, the coverage of technologies other than DSL varies significantly. Coverage of cable infrastructure is particularly low in Wales (25%) and Northern Ireland (33%) when compared to some regions in England, such as the West Midlands (63%) and London (55%).
 
 
East Midlands
East of England
London
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire & Humberside
Total
 
Table 3 - Proportion of households covered by broadband technologies by geographical region, Q3 2005, Ovum UK Broadband Status Report, January 2006

 
 
In terms of broadband services, in December 2005, the dominant technology was DSL; accounting for 61% of total broadband connections. Cable accounts for almost the entire remaining share with a 27% share of total broadband connections[50].
Western European broadband market by technology type
Figure 9 - Western European broadband market by technology type, Analysys Research, December 2005
 
 
The first ADSL services were introduced in July 2000, around a year later than the first cable broadband service. Despite this late start, DSL has become the dominant technology in the market after the number of DSL connections in the market overtook cable during 2003.
 
ADSL connections in the UK have typically provided maximum downstream speeds of 2Mbps. However, BT began commercial trials of 8Mbps ADSL connections in November 2005 with the intention of upgrading all of its ADSL connections to 8Mbps with a new 'ADSL Max' service during spring 2006. However, only customers close to the exchange will be able to receive the maximum 8Mbps speed offered by the new ADSL Max service; 42% of BT lines are estimated to support 6Mbps speeds while 78% of lines are capable of offering 4Mbps connections[51].
 
In terms of SDSL, BT suspended its roll-out in August 2005, admitting that a large number of its SDSL enabled exchanges do not have any SDSL subscribers. BT has enabled 750 exchanges for SDSL but had intended to make 800 of its exchanges capable of SDSL delivery. Of the 750 SDSL enabled exchanges, 19 are in Wales, 36 in Scotland and 24 are in Northern Ireland[52].
 
 
Local loop unbundling was made available in January 2001 in an attempt to introduce greater infrastructure competition into the market. However, LLU has had a very slow start compared to other Western European markets. Price reductions in late 2004 and mid-2005 have provided a boost to LLU which has resulted in numerous operators announcing extensive LLU roll-out plans. A further boost has come from a commitment from BT to stabilise the pricing of its bitstream products until there are 1.5 million unbundled lines to ensure that margins are preserved for unbundlers[53].
 
With regards to regulation, Ofcom revealed the new post of Independent Telecoms Adjudicator in July 2004. The post has been established to facilitate swift implementation of the necessary processes that enable competitors to gain access to the incumbent's local loop, and to find a prompt mediated resolution to working-level implementation disputes[54].

Unbundled DSL lines as a percentage of total DSL lines

Figure 10 - Unbundled DSL lines as a percentage of total DSL lines, ECTA, December 2005
 
Figures from ECTA show that 192,000 local loops were unbundled by the end of December 2005. This represents 2.7% of the DSLmarket; one of the lowest LLU shares of the DSL market in Western Europe[55].
 
While increasing competition and product differentiation in the areas where it is deployed, there is evidence to suggest that LLU is creating a new 'digital divide' in broadband markets where it is widely used. In France, which has the highest LLU share of the DSL market in Europe, LLU coverage has now reached around 50% of the population but further growth of coverage has slowed as operators have concentrated on the more lucrative urban areas. According to the French regulator, ARCEP, the majority of sites unbundled recently were for public networks launched by local governments. As such, it will be important to monitor the progress of LLU in the UK in order to ensure that a new 'digital divide' does not arise[56].
 
 
Declining LLU prices has led to numerous operators beginning or announcing plans to unbundle some of BT's exchanges.
 
Bulldog have unbundled more than 400 exchanges throughout the UK and expect to increase this to almost 600 by the end of August 2006. After undergoing trials, Bulldog will launch ADSL2+ services over its network during 2006. The services are expected to offer download speeds of up to 16Mbps.
 
Pay-TV operator BSkyB is emerging as a major player in the broadband market. Its purchase of broadband operator Easynet in October 2005 will allow it to potentially offer triple-play services. UKOnline (the ISP of Easynet) claim to have a network that reaches 4.4 million households across the UK and began offering 22Mbps services to these households using ADSL2+ technology in November 2005. Sky has announced that a Sky branded broadband service will be launched in the second half of 2006 and plans to have around 379 BT exchanges unbundled by the end of June 2006. This would mean that some 7.5m (30 per cent) of UK homes would be connected to a Sky-unbundled exchange. The operator is looking to increase coverage so that 70 per cent of UK homes can access its broadband service by the end of 2007.
 
Swedish ISP Be has started unbundling exchanges in the UK and plans to install its kit in more than 450 of BT's exchanges. Be offers 24Mbps services over its network using ADSL2+ technology.
 
AOL announced in January 2006 that it would invest £50 million in unbundling 300 exchanges in the UK, giving it access to around 20% of the population. If this first stage proves a success, AOL then intends to invest a further £70m to unbundle 1,000 more exchanges.
 
The Carphone Warehouse has announced plans to unbundle 1,018 exchanges throughout the UK by the end of July 2006. In April 2006 it announced that it would offer 'free' 8Mbps broadband to end-users living within its exchange areas. To take up the offer customers must subscribe to Carphone's TalkTalk fixed line phone service for £9.99 a month. A monthly line rental charge of £11.00 will also apply making a total cost of line rental, calls and broadband of £20.99 a month.
 
Furthermore, Wanadoo (now rebranded as Orange) has already unbundled 200 of BT's exchanges and 500 are planned by the end of the year, Tiscali had unbundled 241 exchanges by mid-March 2006 and Pipex has announced plans to unbundle 100 exchanges by the end of the year.
 
Other LLU operators with more limited coverage include Homechoice, Edge Telecom, Zen Internet and Node4
.
 
The cable sector is dominated by NTL and Telewest who have been the sole providers of cable modem services. The first services were launched in April 1999, giving cable an early advantage over DSL. However, the absence of a competitive alternative from other technologies meant that prices for these services were unattractive.
 
The cable sector has recently undergone consolidation after it was confirmed in October 2005 that the two operators were to merge, creating the second largest player in the UK telecommunications market. The merged entity has begun to focus on providing higher-bandwidth services. NTL announced in August 2005 that its standard speed would become 10Mbps within 18 months. Furthermore, a planned trial of VDSL2 would enable the operator to offer services with download speeds of up to 50Mbps and upload speeds of up to 25Mbps[57].
 
Despite having fairly extensive infrastructure, the cable sector is not subject to LLU regulations. NTL does however have wholesaling partnerships with AOL, Tesco.net and Wanadoo.
 
 
Fixed Wireless Access services are offered by a small number of operators, mainly to business customers. Analysys Research estimate that there were around 4,000 FWA connections at the end of 2005 which accounts for less than 0.1% of total broadband connections.
 
The emergence of WiMAX may see this increase. However, due to the maturity of the wireline market it is unlikely to have a significant impact. The only commercial WiMAX service in the market at the end of 2005 was from Telabria. The service, available only in Kent, offers symmetric connections of up to 10Mbps.
 
Another WiMAX player, Pipex, has announced plans to have several major cities covered by 2008.The new venture, Pipex Wireless, will be majority owned by Pipex but backed by Intel with a $25 million investment. The other Wimax licence is held by PCWW who have yet to announce plans for a service roll-out.
 
In terms of public wireless hotspots, the UK is one of the world's leaders. Analysys Research estimate that there were around 9,000 public access hotspots at the end of 2005. BBWO estimate that more than 500 of these are situated within Wales.

 
There are currently no initiatives for the provision of residential fibre connections. However, a number of operators provide fibre connections to businesses. Analysys Research estimates that there were around 44,000 connections at the end of 2005.
 
 
Analysys Research estimates that there were around 3,000 satellite broadband connections at the end of 2005.
 
 
In terms of operators, the UK telecommunications market is currently dominated by two major players: BT (DSL) and the merged NTL/Telewest group (Cable). BT is dominant in the DSL market due to there being little competition thus far from LLU operators; BT lines accounted for 96.5% of all wholesale DSL lines in December 2005. This equates to 71% of all wholesale broadband connections. NTL connections accounted for 16.6% of all wholesale lines and Telewest connections accounted for 10.2% of all wholesale lines at the end of 2005[58]. This gives the combined group a 27% share of the wholesale market.

Wholesale and retail shares of Western European incumbent operators

Figure 11 - Wholesale and retail shares of Western European incumbent operators, Analysys Research, December 2005
 
As LLU operators increase their coverage it is expected that BT's share of the wholesale DSL market will erode somewhat over the near future.
 
 
There are more than 300 retail ISPs in the UK which is very high in comparison to other Western European markets. This high level of retail competition has resulted in BT having the lowest incumbent share of the DSL retail market in Western Europe; in December 2005, BT subscriptions accounted for just 32% of the DSL retail market. This equates to 24% of the total broadband retail market[59].

 
 
A wholesale line rental product was introduced to the market in July 2002 after Oftel proposed such a service in order to introduce continued competition in the fixed telephony market. BT lowered its WLR charges following a ruling from Ofcom in November 2005. BT's residential WLR product was reduced to £8.39 from £8.74 and its business WLR product was reduced to £9.17 from £9.95. According to Analysys Research there were 2.3 million WLR connections at the end of 2005.
 
 
In order to combat the threat of fixed-mobile substitution, BT launched a new handset that can operate as a fixed-line and a mobile device. The new service, BT Fusion, was launched in mid-2005 and uses a short-range wireless network to connect to the fixed-line network via a base station in the home or business. BT announced in February 2006 that it had 13,000 customers signed up to the service.
 
There are no retail NDSL services in the market as yet. However, with mobile-only households accounting for 8% of all households, such services may be required to stimulate take-up of broadband in this sector[60]. With a greater number of mobile-only households in Wales, Scotland and Northern Ireland than in England, this issue is of greater importance to the smaller nations than for the UK as a whole.
 
The UK has very little cross-ownership between major fixed-line and mobile operators, in fact BT is the only incumbent in Western Europe without a mobile licence. This allows mobile operators to price aggressively without the fear of cannibalising fixed-line revenues. The cost advantages of 3G may yet create a price war among mobile operators which could lead to an increased rate of fixed–mobile substitution. However, BT is counting on BT Fusion to fight back against the threat of fixed-mobile substitution by diverting mobile calls back onto the fixed network[61].
 
 
 
 
As price competition intensifies in the broadband market operators are becoming increasingly aware of the need to differentiate their services to attract new customers and to drive ARPU (average revenue per user). The higher bandwidths achievable by using ADSL2+ has allowed operators to offer differentiation through higher speed services, however, focus is moving towards differentiation through content delivery, particularly via IPTV and VOD.
 
BT signed a content deal with the children's programmer Cartoon Network as part of its preparation for launching BT Vision, an Internet Protocol TV (IPTV) service, in the second half of 2006. Other content agreements that BT already has in place include BBC Worldwide, Paramount, Warner Music Group, Endemol and National Geographic.
 
Homechoice has built a customer base of 45,000 in the London area for its IPTV service. The operator is looking to expand its footprint through LLU and hopes to reach 10 million households by the end of 2006.
 
While other operators are launching IPTV services, Kingston Communications has announced that it will be cancelling its IPTV service, launched in 2000, in early April 2006 due to poor levels of adoption. Subscriber numbers have fallen from a high of around 10,000 to just 4,000 towards the end of 2005.
 
 
BT launched a residential VoIP service towards the end of 2003 labelled BT Broadband Talk. The service is inclusive with a BT broadband connection and packages are available from £2.99 with other providers. A VoIP service for SMEs was launched in January 2006 named BT Business Broadband Voice and packages are available from £5 per month. BT claimed to have 300,000 retail VoIP customers in February 2006[62].
 
Furthermore, Wanadoo launched a VoIP service for £4 per month in March 2005 and Tesco launched a VoIP service in January 2006.
 
 
NTL and Telewest have both launched VOD services. NTL's service is expected to be available to all of its digital TV subscribers by the end of September 2006. Telewest's VOD roll-out is complete with all digital subscribers receiving the "Teleport" service[63].
 
The pay-TV broadcaster BSkyB rolled-out Sky by broadband, a VoD service. The service has an initial library of 200 titles, which BSkyB plans to expand to over 1000, while users can also download highlights of sports matches. Sky by broadband is available free to Sky Digital subscribers. Sky reported later in February that 52 000 customers had registered for the service in the first three weeks while 70 000 movies were downloaded in the same period.
 
AOL launched a video on demand (VoD) service for PCs. The AOL Film Downloads service allows registered users to download full length films to their PC with prices beginning at £2.99 per film. Films can be kept for up to seven days although once viewing has begun this period is reduced to 24 hours.
 
 
The triple-play market has developed late compared to much of Europe. The leading triple-play operator is NTL. According to NTL figures, triple-play penetration of on-net customers had reached 29% at the end of 2005. Furthermore, Telewest had a triple-play penetration of 37% of its customers. The new merged group therefore had around 1.3 million triple-play subscribers at the end of 2005.
 
Competition in the area is emerging from BT, Orange/Wanadoo and BSkyB, who are all expected to launch their own packages towards the end of 2006. BSkyB's purchase of broadband ISP Easynet will allow it to offer broadband and telephony services to its pay-TV subscribers. With around 7.8 million TV subscribers, a strong content portfolio and a strong brand it is in a position where it may become a major triple-play player very quickly.
 
France Telecom, the parent company of Orange and Wanadoo, seems set to enter the triple-play market after the introduction of a package in France. Its converged services will be launched under the Orange brand.
 
BT has been looking at ways of differentiating itself in the UK broadband market rather than remaining just an internet access provider. The operator created a new division called BT Entertainment within its retail arm, in November 2004, to focus on driving value-added broadband services.  An agreement with Microsoft, in June 2005, to use the company's IPTV software platform to deliver broadcast services has brought BT a step closer to becoming a triple-play provider.
 
In a bid to retain its position as a leading player, NTL is looking towards extending its bundled offering. It had a bid for MVNO (Mobile Virtual Network Operator) Virgin Mobile rejected in December 2005. However it is expected that a deal will go through during 2006 which would allow the cable operator to extend its triple-play offering to a quad-play package including a mobile service.
 
 
 
Oftel and Ofcom published a joint decision on the wholesale broadband access market in December 2003. Its findings were that the national wholesale broadband market was distinct from the dial-up internet access market and that BT had SMP (Significant Market Power). As a result the regulators proposed regulatory obligations upon BT, including a requirement for the provision of network access on reasonable request. The regulators also proposed that BT be required to offer Datastream wholesale access products to retail ISPs on a retail-minus basis (i.e. access prices are set on the basis of the end-user or retail prices of the corresponding final services. The discount off retail prices is usually set as a fixed percentage of the retail price)[64]. Ofcom proposed that the wholesale migration charge from BT's IPStream wholesale products be cut from £50 to £11 per user in April 2004. This change was implemented voluntarily by BT.
 
Furthermore, Ofcom published its LLU prices in December 2004. It instructed that prices for shared access connection and annual rental be set at £34.86 and £15.60, respectively. These represent decreases of around 70% compared to BT's prices prior to the review. Ofcom also recommended that the cost of a fully unbundled transferred connection and new connection should be set at £34.86 and £168.38, respectively, representing cuts of 60% and 30% on the precious price levels. The price reductions came into force at the start of 2005. Ofcom set a price ceiling of £81.69 per year for the rental of a fully unbundled local loop in November 2005[65].
 
 
In terms of pricing, the cost of basic 'first generation' broadband packages has decreased significantly since the launch of services in 2001, falling from a high of around EUR67 per month for a 0.5Mbps service in 2001, to around EUR20 per month for a 0.5Mbps service.  While prices have decreased steadily since the launch of the first services, the recent trend in the market has been for prices to remain static while the bandwidths of the services have increased. As such, a 2Mbps service cost around EUR27 per month for in 2005. As a result, prices for 2005 are similar to other Western European markets; in The Netherlands and France similar services cost around EUR25-30 per month.
 
Residential 'second generation' broadband services[1] were not widely available in the market at the end of 2005. However, BT had begun commercial trials of its 8Mbps ADSL 'Max' service which was due to be launched in early 2006. In December 2005, 8-10Mbps services were available in some parts of the country, through LLU and cable networks, costing around EUR30-55 per month. These prices are similar to comparable services in France which cost around EUR30-40. However, 'second generation' services are available for as little as EUR15 per month in some unbundled exchange areas of France[66].
 

 
After a slow start the UK broadband market is becoming an increasingly developed broadband market when compared to some of Western Europe's major nations (such as France and Germany). This has come about as a result of a number of barriers to broadband growth being overcome;
 
  • broadband coverage has increased and is now more extensive than in any country in the G7 and in Western Europe, with availability now only fractionally short of being ubiquitous;
  • increased competition in the broadband market has decreased the difference in price between broadband services and dial-up;
  • marketing initiatives have increased the awareness of the benefits that can be achieved through the use of broadband; and
  • broadband specific content is increasing through the launch of VoIP, VOD and IPTV services.
 
Broadband penetration levels are ahead of the OECD average at 15.9 connections per 100 inhabitants at the end of 2005. This equates to around 38 connections per 100 households which is some way short of reaching tele-density levels; Analysys Research estimate that there were 90 fixed-lines per 100 households at the end of 2005. This suggests that there is plenty of scope for further broadband growth in the market.
 
Government intervention has helped drive the broadband market through the support and stimulation of the virtuous circle of supply and demand. This has been particularly evident in the initiatives run by the Devolved Administrations and Regional Development Agencies. However, much of the progress has been achieved through market forces as the key players in the telecommunications market have all made broadband central to their strategies.
 
On a regional level Wales, Scotland and Northern Ireland all have greater barriers to overcome than England. Basic ICT penetration is lower in these nations than in England and they also have greater socio-economic barriers, such as lower GDP per capita and greater rural populations.
 
The advent of BT's Next Generation Network and the increasing use of LLU are likely to introduce greater differentiation of products to the market as well as creating greater scope for converged services and more advanced content delivery in the near future. The changing focus towards higher bandwidths and content delivery is evidenced by the increasing use of ADSL2+ by LLU operators, the introduction of ADSL Max services and the launches or planned launches of VOD and IPTV services.
 
BSkyB's purchase of LLU operator Easynet will accelerate operators' triple-play deployments as they try to combat the threat of this new competitor. Furthermore, the merger of the two cable operators, NTL and Telewest, and NTL's potential purchase of Virgin Mobile could see the emergence of a quadruple player, further increasing the product differentiation in the market.
 
In 2005, with high broadband availability and mobile take-up, and above average broadband penetration, the telecommunications market in the UK is becoming increasingly advanced. There are a number of operators, providing a range of services with an increased focus on higher bandwidths and content delivery.


References

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