'

Eye2Eye: John Pluthero talks to ZDNet Part II

In part one, John Pluthero talked about the battle for unmetered narrowband access in the UK. In part two he completes those comments and tells ZDNet's Richard Barry why BT is holding Britain up on broadband

Part 1

Gordon Brown wants the price of getting online to drop by 50 percent by 2002. Is that feasible? How much do you think access will cost in a couple of years?

I reckon by 2002 narrowband/dial up... there will rarely be separate pricing. You will buy a telephony package that says, 'Here is your national call rate, your local and Internet rates.' And that's what you will pay. There will be lots of different [telephony] packages and you could construct them in all sorts of ways. So, you could have one saying, 'if you spend £15/month in total on the Net, all your voice calls will be free.'

But there's a pure legacy issue here: if you, through local loop unbundling, can own that billing/marketing relationship over the last mile, and take the traffic straight out of the local exchange you can put it on a modern network which costs a fraction of BT's network. I mean Energis' fibre optic network is second to none and always comes top in the ratings and yet they operate at a fraction of BT's costs.

So by 2002, I think, effectively narrowband Internet access will be free because it will be rolled into telephony.

OK, for the record, when would you like to see the local loop unbundled?

Tomorrow.

But you said to create a situation where low cost Net access was a reality now, would cause serious engineering issues. It could bring down the network.

If you look at BT's products it has been very price competitive where it has been up against genuine competition. The local loop, it has no competition and BT's prices are not competitive by world standards. The moment you introduce local loop unbundling, and this is one of the reasons they don't like ADSL because it's the equivalent of unbundling, the price of domestic telephony in the UK will fall substantially.

Not only will prices fall but there will be different types of packages for people.

So you could say: 'Buy the single guy data package...'

The bachelor package!

Yeah!

I mean you could have one built around Internet access, one built around voice which would be great for a large family with loads of teenagers and so on. There will be choice and price reduction, but it won't happen without local loop unbundling.

All BT will be doing is giving up profits but they can't do that because they have shareholders.

And that's the real issue isn't it?

Yes.

Tell me about broadband... specifically what's going on with BT and ADSL

On ADSL, there is no doubt that it is commercial reasons preventing BT from rolling it out because they make so much money from lease lines, Home Highway and they know ADSL will wipe those out. They have no interest in doing that until they have to and what makes them have to is cable modems and competing ADSL products. Now if Cable and Wireless and ntl could get it together and roll out their [ADSL] products, then you would see BT roll out ADSL pretty fast

Freeserve's High Speed ADSL service costs £50, but Gartner's Adam Daum says that's too high.

Yes, he's right. It is. But BT charge us for the wholesale product...

How much?

£35 for the trial and I think that's where they'll start the national rollout charges. That's excluding VAT.

We then have some hosting costs for serving broadband, something like £5 or £8 per customer per month because you have a lot of heavy kit requirement on broadband. When you put those together and add VAT you get a touch over £50.

So, £49.99 as a retail price is actually zero margin, it's minus one percent or something. So that is where our costs come out today, but BT will reduce those costs through time as bulk kit comes out and Cable and Wireless and the others come in. Hosting costs will also come down as well.

But there is going to be a break point and I think it will be a bit higher than you think. I reckon £14.99 is a mass market price for a 512k line.

Now BT know that if they price their service at £20 people will have another £4 or £5 to pay on hosting costs, so say £25... One of us will subsidise that by £10 a month to get to £14.99 to really drive the market.

You know BT could be bringing its prices down and saying, 'The network is scaling well everything is alright' and then someone subsidises it and the thing just takes off! That's what BT will be concerned about.

At £10 a month? Well that's the kind of level where the big players like ourselves, would have to think about whether we wanted to do that. When you're talking about subsidising £20 a month you're suddenly talking about £240-£250 per year subsidies and you could offer narrowband telephony for that. If you are going to spend £20 a month on a customer you would rather offer them narrowband telephony and you'd have their loyalty forever.

Prices will come down but how quickly it's hard to say.

We're in the middle of our budgeting at the moment and we've had to say how many ADSL customers are we going to have in a year's time.

Probably not that many if Gartner is correct. So £14.99 is, you predict, a mass market price, but when are we going to see this price hit the market?

I don't think you'll see £14.99 for at least a year. I would be surprised if you haven't seen it within two. I suppose 18 months...

And how important is it for Freeserve to get to that price point for that service?

We led the market by getting rid of subscriptions, we've been working on an unmetered proposition on narrowband for a year and we want to be the first with these great access deals. We obviously want to get there as quickly as we can.

But the whole industry in Britain is what's being jeopardised and we are the last country in Europe to roll out ADSL. Frankly that is a huge blemish on BT's part... it's a disgrace and it just means it takes longer for the industry and the country to get to broadband.

And let's be clear on this, with ordinary unmetered narrowband dial-up, there are huge network issues for the engineers because you're using the whole voice network. With ADSL, you've got your boxes on your twisted copper pair, and basically once you are in the local exchange all of that is taken off to an IP network. Now these fat 10-40 MB pipes... let's say these are used much more than you'd expect the old notions of contention ratios on narrowband do not apply here. So if I try and get through and I'm the 10,000 th customer, trying to use that fat pipe -- where really a 512k pipe is designed for 5000 customers -- I'm not going to get a busy tone. What will happen is I won't get 512k. Instead it will drop down and I'll get on at 256k or 125k.

So there is no notion of a network falling over. The notion is of poorer performance, but you don't have this catastrophic binary impact of either getting a dial tone or not. So on ADSL there is much less logic to suggest low pricing is dreadful. You can get there much quicker with it than you can with unmetered across the voice network.

So BT could get there quicker if it wanted to?

Well yeah. Put it this way: every other country in Europe is getting it except us.

So why is it that BT is creating barriers to using the Internet when Tony Blair, Patricia Hewitt (e-minister) and seemingly every other allegedly switched on member of the government is saying we should be online. From what you are saying, BT can do it. It can do it now. Perhaps equally important is why did BT's CEO Peter Bonfield claim recently that those who cannot afford to pay to go online should visit a library or school to do so when clearly it is within BT's power to bring access to all now?

For him [Bonfield] to say those kind of things is a disgrace frankly. How can you hold those sort of thoughts and be a commercial organisation in the face of evidence from the rest of the world that the people who seize the day and have the courage to execute these things are reaping enormous rewards.

Why are they standing in the way of ADSL? It's because of their lease line and Home Highway business which only they can do. It's a straight forward: eats into a profit stream they have and their profit streams are under attack and that's a problem for them.

Why are they not doing it on narrowband? Because they don't lead the market. They know that if they go this route, Freeserve and others will execute better. We have a better brand we will market it better, we will just add more and more market share and they will be left further and further behind.

They are not doing it because they are scared.

In the final part three of this exclusive Eye2Eye interview, Pluthero continues to look at the broadband market and also gives his view on Oftel. He talks about the discussions he has had with Tony Blair about the role of British Telecom and its Watchdog.

Live Friday at 2pm only on ZDNet UK News.

Take me back to part 1

Guy Kewney thinks BT is simply making excuses. Go to AnchorDesk UK for his opinion and the news comment.