The Business, Innovation and Skills Committee inquiry
into the digital economy
Evidence from BT
November 2015
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The Business, Innovation and Skills Committee inquiry into the digital economy
BT welcomes the Business, Innovation and Skills Committee inquiry into the digital
economy. We respond to this inquiry as a major UK network investor and provider,
contributing to the success of the UK’s digital and wider economy.
Please see below our responses to the Committee’s questions.
1. What are the major barriers to UK business success in the digital economy? What
steps could the Government take to help businesses to overcome these barriers?
Deploying the infrastructure that supports and drives an information and communications
technology (ICT)-based knowledge economy is key to economic growth. It is also one where
the UK compares very favourably with major economies across the EU and indeed the globe.
Whilst there is still more work to do in achieving a near ubiquitous superfast network, the
June 2015 EU Digital Agenda Scorecard shows superfast coverage in the UK now stands at
over 88% of premises, the highest of any of the big five EU economies and some 8% higher
than Germany, its nearest rival. There are also firm plans, funding and delivery contracts in
place to take this to 95% by 2017. The UK is therefore already well placed to realise the ICT
infrastructure the economy needs to remain competitive.
Digital communications is a British success story, and one that is no accident. For the past
five years, the UK has had the largest digital economy in the G20, by percentage of GDP. It
has been driven by massive investment, principally by BT, and the most competitive
broadband market in the world, with hundreds of competing retail service providers, as well
as competing infrastructure providers, working across large parts of the UK in both
consumer and business markets. This vibrantly competitive landscape, supported by
appropriate regulatory safeguards, has stimulated innovation, low pricing and take-up of
communications services.
Barriers to further success would include constant reviews of regulation, including calls for
fundamental alterations to the structure of BT, for example, and continuing uncertainty
over Brexit.
BT’s investment in fibre of over £3bn has so far ensured that our network covers well over
three-quarters of UK premises (24m). But we are not stopping there: we will aim for a new
universal minimum broadband speed of 5-10 Megabits per second (Mbps) for every home
and business, as long as Ofcom and the government make it commercially viable. And we
plan to extend fibre broadband coverage beyond government’s 95% of premises target
thanks to ‘success dividend’ clauses in contracts covering rollout co-funded by BT, Whitehall
and local councils. 10m homes and businesses will receive ultrafast broadband with speeds
of 300-500Mbps by end of 2020 through ‘G.Fast’ technology, building on the current fibre
network, with the majority of homes covered by 2025, and a 1Gbps service will be provided
for those that want even faster speeds. A new KPMG report, Delivering Britain’s Digital
Future (September 2015), values these BT pledges as worth a £20 - £30bn contribution to
UK economy as a whole.
BT’s fibre roll-out is predominantly for homes and SMEs. It is separate to the provision of
high-capacity broadband for larger businesses and some SMEs who may wish to have their
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own private broadband circuits (leased lines) through products such as ‘Ethernet’, which is
available everywhere in the UK. The issue, therefore, for many UK businesses is often not
technology or coverage, it is an economic one. Government has a role in helping ensure that
businesses appreciate the value of digital communications and the range of services
available to suit their needs beyond broadband aimed at homes and smaller businesses.
The government and industry both have roles to play in extending superfast broadband to
hard-to-reach places, so they can benefit too. It is for commercial parties to deploy
superfast broadband infrastructure as far as they can commercially. However, there are
limits to the extent to which superfast broadband can be deployed on a commercial basis by
industry alone, because the revenue and margin that can be earned are insufficient to
support a commercial business case for investment, particularly in the last 5%. The
government needs to continue to accept, as it has done to date, that it has a role to
promote investment, to help ensure the UK’s broadband infrastructure continues to be a
world leader with strong investment from industry. Specifically:
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industry’s role is to innovate and invest to roll out fibre commercially as far and as
fast as possible in order to meet market needs
there are social and general economic benefits to broadband infrastructure beyond
commercial objectives; government can invest subject to state-aid rules to ensure
the UK economy can capture these benefits as it has done under the BDUK rural
broadband programme, for example
government also has a role to ensure the investment environment, planning rules,
availability of power supply and other services, etc, are conducive to infrastructure
build
Ofcom also has a role is to ensure that regulation promotes long-term investment
and the interests of consumers and wider industry, promoting the competition
model best suited to these objectives.
Cities and state aid
To achieve maximum superfast broadband penetration across the UK, EU State Aid rules for
cities must be challenged. BT’s investment and the government’s rural broadband funding
programme are currently aimed at ensuring that 95% of the UK is covered by fibre
broadband. However, many areas in the final 5% will be in cities.
Although medium and large businesses in cities are well served by broadband, with ultrafast high capacity services such as Ethernet, some inner-city areas have a low density of
residential population, as well as premises distant from exchanges and other technology
challenges making them commercially unviable. These areas are often those that are
significantly disadvantaged in other respects and would benefit greatly from superfast
broadband.
BT has committed £50m to extend fibre coverage in cities but the EU drew an artificial
town/city distinction and allows use of public funds in the city subject to particularly
burdensome access requirements, which discourage investment. The EU Commission should
be pressed by government to address this.
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Exploitation of infrastructure
Compared with other major nations, the UK also does very well on use and exploitation of
infrastructure with many UK consumers and businesses showing a willingness to adapt and
transform lifestyles and business practices to take advantage of the opportunities ICT
networks can deliver. However, there is much potential for further take-up to ensure the
economic benefits from the investment in infrastructure are fully realised; applications via
broadband offer so much more than simply email and websites.
The availability of ICT in many forms is an important driver of productivity and growth and
its value is not restricted to ICT industries. Firms that adapt their business models and
processes to take advantage of the benefits of high-speed ICT can realise benefits,
irrespective of their sector. However, industries and firms continue to show great
differences in the intensity of ICT use and in their ability to reap the productivity gains. Thus,
areas for policy intervention should focus not just on the availability of ICT but on ensuring
that businesses and consumers access and exploit technology to maximise the productivity
gains associated with its adoption and use. In particular, ensuring that the UK workforce has
the necessary digital skills is critical to UK businesses succeeding in the digital economy (see
question 6).
2. How effective are UK financial markets in supporting the digital economy? What
actions could the Government take to improve their effectiveness?
In the current environment, many equity investors are focused on identifying companies
that can produce sustainable revenue growth, something that is proving hard for a number
of industries to achieve. Debt is also seen as a relatively cheap form of financing at present.
To the extent that they can identify opportunities in the digital economy that will boost their
investment growth prospects, investors are generally supportive. However, the risk
associated with investment in digital businesses, and therefore the appetite for investment,
varies depending on where in the value chain the investment is focused. Investments in
networks (fibre, 4G etc) are seen as generally lower risk than in ‘over the top’ (OTT)
providers (businesses that provide entertainment and content via the internet who are not
ISPs, such as Netflix, Amazon Prime, etc), although the latter may be seen as offering greater
returns.
Investors are uncomfortable supporting investments they don’t understand or where it isn’t
clear how the investment will be monetised. The Internet of Things (IoT, where ‘noncomputing’ devices are connected to the internet, for example, to monitor their
performance) is seen as an interesting area although financial markets have some
nervousness around monetisation potential.
Barriers to entry are also important; businesses need to be able to demonstrate an enduring
advantage in order to get financial market support. For example, cloud-based services
supported by data centre infrastructure may be preferable to a pure service provider whose
business model might be more easily replicable.
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Certainty of regulation
Business needs certainty in order to thrive and the communications sector is no different.
During the course of the last parliament, a relatively stable regulatory environment was one
factor which enabled BT to decide to proceed with a £3bn investment in superfast
broadband, in spite of the recession. However, Ofcom needs to ensure a long-term
approach to crucial infrastructure investment. For example, BT won’t fully earn back its
current £3bn investment in fibre broadband and superfast services for 12 – 15 years. The
same kind of long-term commitment will be needed for covering the last 5% of premises,
ultrafast broadband and 5G. Ofcom should be encouraged by government to set regulations
for the long-term, rather than adjusting them too often.
An example of regulatory uncertainty causing investor concern can be seen in Ofcom’s
current Business Connectivity Market Review (BCMR). Openreach, the BT Group business,
which installs, services, supports and maintains the networks which link homes and
businesses in Britain to their communications providers' (CPs) networks, currently makes
leased lines used by larger businesses available to CPs on a wholesale basis, providing lines
and equipment. Ofcom wants Openreach to provide a ‘dark fibre’ (lines only) option. Ofcom
has suggested that the new dark fibre service would be attractive for CPs such as Vodafone
or Talk Talk, for example, to enable greater innovation and differentiation in the provision of
business connectivity.
BT believes that Ofcom’s proposals will discourage investment while any innovation benefits
are speculative and highly uncertain. There are already several players competing to offer
such services over independently operated fibre networks. The effect of the proposals will
be to reduce incentives to build fibre networks, stifling infrastructure competition. Take up
of dark fibre will be driven by ‘downstream’ operators using price differentials created by
regulation without gain to CPs serving business customers directly. At least initially this will
have most impact on very high bandwidth services, supply of which is already competitive.
Regulating even more levels of the supply chain will therefore create little, if any benefit,
over existing regulation and products. There will also be inevitable disruption as the
proposed regulation takes effect, with CPs looking to re-arrange thousands of existing
circuits, which could cause unacceptable delays in provision of service to customers for an
extended period, causing unnecessary stress in existing operations processes for circuit
provision and repair.
It is not just BT that is concerned about the damaging effects these proposals will have on
the continued investment in fibre networks and technologies. Members of the
Infrastructure Investors Group (IIG), which include Virgin Media and Cityfibre, companies
who have made significant investments in building fibre networks, say that their rollouts
and planned investments demonstrate the existing model is working. They are investing
significant amounts of capital to build out fibre networks; they want a clear, open and
competitive market to continue to encourage this type of long-term investment in the UK,
to the benefit of all.
Consolidation
Ofcom should also be encouraged to support consolidation that promotes investment and
competition. The industry has been formed by mergers and acquisitions, to which the
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competition authorities and Ofcom have shown they’re open-minded. Carphone
Warehouse acquired Opal Telecom to form TalkTalk (which went on to acquire One.Tel, AOL
UK, Tiscali - which had acquired Pipex and Homechoice/VNL). And last year Dixons Retail
merged with Carphone Warehouse to marry technology with hardware. NTL and Telewest
merged to form Virgin Media. Vodafone acquired Cable and Wireless which had itself
acquired Thus and Energis. The pressure for consolidation is inevitably continuing. Mergers
which do not harm competition are needed to ensure the next leap forward in investment
and should be supported.
Direct actions the government could take to improve the effectiveness of investments in the
digital economy could include:
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ensuring that regulatory environments are supportive to long-term investments,
particularly for the key communications infrastructure
addressing EU state-aid rules to support further private investment in urban and
remaining rural areas
removing bottle-necks, for example, planning restrictions for infrastructure works
continuing to provide funding alongside private companies to encourage network
investment in rural areas
proactively delivering an IoT or smart city vision, establishing a clear framework in
which potential suppliers could bid to provide services.
3. What lessons can be learned from the Government’s support of tech start-ups and
other measures targeted at the digital economy? How is this developing around
the regions and nations of the United Kingdom?
The government’s support for tech start-ups focused on the digital economy are welcome.
However, ‘digital’ underpins the future success of all sectors of the economy and as such
the government must drive digital support as a key theme across all of the private, public
and third sectors. Only by exploiting digital across all of our economy will the full potential
of digital be achieved.
The translation of digital innovation and entrepreneurship into world-leading companies is a
critical challenge for the UK digital economy. In addition to the creation of new tech startups, it is widely recognised that there needs to be increased focus on supporting successful
high-growth companies that have the potential to ‘scale-up’ and take the world-stage.
The Scale-Up Report (Sherry Coutu, November 2014) identifies the key barriers facing highgrowth companies with the potential to scale-up. The report states clearly that access to
sufficient talent to staff their business is the priority, followed by leadership skills necessary
to grow a company many times faster than “normal.” Finance is not in itself the primary
issue. However, the short-term investment mind-set that is prevalent in the UK does lead to
companies turning to investors in the US and Asia for follow-on funding. This in turn means
the UK can lose out not only on the financial gains of successful companies, but the skills
and experience that might be re-cycled into new companies.
BT believes that national initiatives (eg, to address skills and finance) must be
complemented by regional programmes that proactively build upon the UK’s strategic R&D
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assets. For example, BT’s Adastral Park, Suffolk, is a world-renowned research centre with
recent achievements including world-firsts in quantum communications (quantum key
distribution over deployed fibre), high-capacity optical-fibre transmissions (largest ever
optical ‘super-channel’) and the demonstration of the fastest G.FAST copper broadband
speeds in the world (5Gbps). Adastral Park is also home to over 70 start-up companies as
well as R&D teams from companies such as Huawei, Cisco and Intel.
Whilst our achievements are the result of extensive collaboration between BT and UK
universities and industry there is a clear opportunity to develop further to provide colocated training that ensures that graduates and post-doctoral students have the skills
necessary to work in both corporations and high-growth scale-up companies. Specifically, BT
believes the government should:
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identify those UK R&D centres that are of strategic importance within their
industries and the academic community
invest in co-located academic training centres that enable universities to draw upon
the experience of industry expertise
support the creation and re-location of high-growth companies such that they have
direct access to talent and the sector ecosystem.
4. Does the UK’s Intellectual Property regulatory regime provide effective protection
for the digital economy and sufficient scope for innovation and competition?
We believe that the UK’s regulatory regime for Intellectual Property does provide effective
protection for the digital economy and sufficient scope for innovation and competition. In
general it provides a reasonable balance between the interests of rights holders and users,
although it is regrettable that the private copying exception failed. The recent extension of
copyright term for sound recordings is also to be regretted.
5. What actions could the Government take to foster the development of potentially
disruptive technologies? Are further safeguards warranted to help existing
businesses adapt to the impact of these technologies on their traditional business
models?
The government must reinforce its commitment to investing in science. The UK’s world-class
achievements in academic and industrial research lie at the heart of new technological
breakthroughs and to continue to maintain its record, the government must recognise that,
at less than 0.2% of GDP, the UK is now well behind countries such as Germany, China and
the USA in its level of investment in engineering and physical sciences. It is essential to
reverse this trend through the next Spending Review. In addition, government should
continue to support industrial research whilst ensuring that measures such as the R&D tax
credit and Patent Box are sufficiently targeted to ensure reinvestment into research.
Enabling existing businesses to adapt and gain advantage from disruptive technologies is
essential to ensuring the UK economy remains innovative and competitive. Organisations
such as InnovateUK and the Catapults should explicitly recognise the need to support
established businesses alongside the creation of new businesses. Corporates in particular
provide an essential lens onto the needs and opportunities for UK industry, for small
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businesses as well as large; the needs of large corporates often represent new opportunities
for start-up businesses, and in the case of BT, providing a world-class digital infrastructure
directly translates to growth opportunities for the UK overall.
6. What actions could the Government take to ensure the availability of a workforce
with the skills to support businesses in the digital economy?
Ensuring the UK has a well-educated and highly skilled workforce relative to the rest of the
world is vital to ensuring it remains well positioned in an increasingly competitive global
environment. Indeed, given the pace of skills development and education in other parts of
the world, the UK will need to invest significantly in education and workforce skill
development to retain its current position.
In defining the types of skills necessary for success, workers across the wider economy will
need to possess strong analytical, critical thinking and communications skills, while being
highly adaptive as technology-driven innovation continues to reshape all sectors. Moreover,
as all sectors increasingly become technology driven, virtually all will need to have a basic
competence across a broad set of common digital skills (use of communications devices and
software, internet navigation, social media, etc) if they are to be fully effective in their
chosen vocation.
Technical roles will require the broad competencies mentioned above but with further and
deeper emphasis on specific digital skill sets depending on the nature of their technical role
and sector of the economy they participate in.
From BT’s point of view, skilling future workers in cyber security, digital media, data science
and specialised diagnostic skills, will enable us to remain not only competitive but at the
forefront of customer and business global requirements. We hope the government will
consider how education can provide these skills that are becoming more vital to the UK.
Convergence
Skills that can support converging markets and technologies are increasingly important.
Developing and skilling a technical workforce to evolve with the converging markets, ie,
mobility, digital and TV, amongst others, will create more opportunity for new products and
new markets. Convergence is starting to dictate the skillsets now required from a new type
of skilled workforce, which understand the fundamentals of convergence and potential
resultant products and services.
Historically, skillsets have been developed in isolation, for example, a highly skilled technical
engineer who has knowledge and capability in software engineering, but has not been
encouraged to expand their skills into wider digital applications, such as internet TV,
remains in a silo allowing valuable skills and knowledge to be underutilised. This is now
being recognised by the technology sector and it is starting to be addressed through
initiatives such as Trailblazers, a government and industry initiative to reform
apprenticeships, and industrial partnerships, where employers are taking a far more
proactive role in developing these digital skills further. Using this learning, industry should
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be encouraged to collaborate with educational establishments to ensure there is a shared
understanding of needs.
Convergence doesn’t only affect those in industry; those making policy also need to
understand the concept of convergence and the dynamics of converged markets. This must
be addressed in order that the right industry frameworks are developed.
Creating a culture of ‘tech literacy’
As a major player in the UK tech sector, BT wants to see the UK’s digital economy thrive but
there is already a skills shortage that will affect future productivity and competitiveness. Our
potential as a country can’t be fulfilled unless young people are ‘tech literate’. Every child
needs to be able to access and use everyday technology, be confident with the concepts of
how it works and embrace its impact in shaping society. Our economy won’t generate just
more specialist tech jobs; almost every job in the future will have some elements of tech.
Lifting levels of UK tech literacy must start with children at primary school. The introduction
of the new computing curriculum last year was an important first step. However, BT’s
research amongst pupils and teachers across the UK suggests that many teachers still lack
the confidence to teach computing, and in a way that inspires children. BT has picked up
the baton from government on the Barefoot computing programme to train 15,000
teachers to teach the computing curriculum, to reach 400,000 pupils in the 2015/16
academic year. We would welcome government support of these efforts as we extend new
training opportunities to all primary schools across the UK by making primary schools more
aware of Barefoot resources and workshop training opportunities.
BT recently convened 90 senior stakeholders from across UK technology, business,
education, parenting and government to discuss solutions to accelerating tech literacy. The
findings will be published in a forthcoming report. A message from the event is that while
schools are highly managed by standards, there are no minimum standards around good
practice in the use of technology in delivering learning outcomes so schools need support to
identify what is needed, is effective for them and makes efficient use of budgets.
Our intention is to help remove the barriers that stop schools from making best use of
technology both in enhancing learning outcomes across the curriculum and improving
school life. We would welcome the opportunity to work with DfE to help give schools a
clear and nationally consistent picture of what ‘good’ looks like for connectivity and access
to technology and how they can achieve it and collaborate in developing independent
guidance that sets out the options and establishes clear minimum standards necessary to
deliver the curriculum.
Employers can play a role in ensuring the school curriculum addresses the future needs of
the economy. Delegates at a recent BT crowdsourcing tech literacy event proposed ways
that government could help ensure the education system supports businesses in the digital
economy:
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bringing major employers together with educationalists to develop a curriculum that
better addresses the tech needs and employment opportunities across all industries
joining up strategy across the government (DfE, DCMS, BIS, Cabinet Office) to
contribute to building a coherent vision for the digital economy, the education to
support it, and the role of the private sector in highlighting priority areas. Crossdepartment work of the Digital Economy Unit was commended as an example of this
Supporting efforts to bridge the gap between school and work, for example, by
encouraging employers into school and giving children, at an earlier age, greater
exposure to future employers.
Immigration
The Migration Advisory Committee is considering new measures to reduce migrant labour.
We understand the government’s efforts to control migration. We also understand the
importance of ensuring that the UK’s immigration system works for resident workers, as
well as employers. However, we are concerned that severely cutting back Tier 2 (the route
for skilled workers from outside the European Economic Area who have an offer of skilled
employment in the UK) as signaled in the Committee’s July 2015 call for evidence, would
have the opposite effect. For example, an area that will be particularly affected in BT will be
temporarily transferred skilled workers from our offices overseas to roles in the digital part
of our business, especially from low cost-of-living countries like India.
We bring in our employees from India in particular because we are unable to find British
nationals with the skills we require. Increasing minimum salary thresholds for these roles
(over and above what we would pay a suitable UK applicant) may price out these individuals
and along with the other proposed measures to reduce the ability to bring these individuals
to the UK may have a damaging impact on our business resulting in projects relocating
overseas from the UK or being unable to go ahead.
We believe the Tier 2 route cannot be looked at in isolation, as the efforts to control
migration have a much broader scope and should have a strong focus on plans to address
illegal work and manage overall migration issues.
We should have the ability to bring in highly specialised experts for knowledge transfer and
development of capabilities in the UK. The impact on the economy if we can’t would be
fewer individuals contributing to taxes and national insurance, and fewer jobs available.
We would be happy to discuss these issues further. Further enquiries can be directed to
David Pincott, head of political research, policy & briefing, BT Group
(0207 356 6585/david.pincott@bt.com)
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