The huge telecommunications industry is sinking deeper into a sea of trouble . Hardly a day goes by without a report of a company in difficulty. Yet the communications bill does little or nothing about it.
The appointment of Lord Currie as chairman of Ofcom is a welcome step. He should make a root-and-branch examination of the whole situation.
Many of the difficulties are due to business misjudgments. But there can be no dispute that in Britain, the policy of "facilities-based competition" (FBC) - the construction of physical networks to duplicate that of BT - is a major factor. The cable industry is deeply racked by financial problems; no one knows what its future holds. The biggest single cause is the huge debts that the companies have had to incur to build their competing distribution networks.
It is claimed that the loss of economies of scale due to network duplication is more than offset by competitive pressure on costs and prices. I believe the reverse is true. Customer distribution circuits have always been notoriously under-utilised and duplicating them was bound to make matters worse. Further into the network, the loss of economies of scale decreases as the volume of traffic increases. But you have to get to very big volumes before it disappears.
The reduction in long distance prices since the introduction of competition is pointed to as evidence of its benefits. But they have been dropping steadily ever since the 19th century, including a 38% real reduction between 1973 and 1982. Local prices, too, have always dropped in real terms. The reason in both cases has been the constant advances in technology.
Practically all the present technologies - digitalisation, packet switching, optical fibre, satellite transmission and cellular radio originated under monopoly. The driving force behind them was the professionalism of the engineering community, which has received far too little credit. Engineers are taught unceasingly to seek ways of reducing costs.
Rather than accelerating, innovation in network technology in Britain actually slowed down after 1984. I believe this was due to the reluctance of the company boards to invest in new developments in the face of FBC. The financial health of the operators ultimately depends on their skill at the very expensive game of network R&D and investment. Even under monopoly this was fiendishly difficult. Add on the market share uncertainties of FBC and it becomes beyond the wit of man.
Britain fell behind on broadband because the industry had become a confused mosaic, with each operator pursuing its own short-term objectives and no one steering the overall result in the national interest.
FBC is an expensive luxury we can no longer afford. We should move to a structure based on provision of all services by competition but with the inland network as a regulated monopoly. BT should be a separated regulated subsidiary running its inland network, with an auditable duty to meet the needs of other service providers. It should negotiate the purchase of the inland assets of the network competitors.
Everyone would gain. BT group's cash flow and profit would increase. Competitors would be free to continue as service providers without their present financial burdens. The full momentum of network engineering could be restored. And BT could merge the present cable distribution networks with its own and greatly accelerate the creation of the countrywide broadband distribution system we so badly need.
· John Harper is a former managing director of BT's inland operations, and has been an adviser to Commons select committees on broadband
