BT Group response to BIS National Innovation Plan call for ideas. May 2016

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1 BT Group response to BIS National Innovation Plan call for ideas May

2 1 How best can our regulators drive innovation and make the UK the regulatory test bed capital of Europe? With rapidly converging fixed and mobile networks and a burgeoning range of communications services and products for consumers and businesses, telecoms is a dynamic, fast moving sector where demand and supply are framed by ongoing innovation. Virtuous circles exist whereby innovation and investment in the capabilities of communications networks creates opportunities for technical and creative innovation in hardware, software, applications and the way content is delivered and consumed which further fuels demand for higher capacity connectivity. But it is a sector where the design and pricing of network services is under ongoing scrutiny and often directly shaped by regulatory intervention. BT has extensive experience of how regulation can best support innovation and investment and the pitfalls that need to be avoided. In the most simple terms, for companies to commit to innovate and invest in developing and deploying new technologies they must work within a stable and predictable regulatory environment that provides confidence that they will be able to generate future cash flow sufficient to offset the costs incurred and risks faced. In relation to the sort of technological innovation and investment required to upgrade network connectivity capabilities, eg, to allow consumers and businesses to access superfast and, in the future, ultrafast broadband services, the risks can be significant. The precise timing and pace of growth in demand and consumer willingness to pay for higher speeds is an unknown. And in such a dynamic sector, there is a risk that innovative technical solutions viewed as the most economic today might be overtaken new technology tomorrow. Business cases supporting significant levels of innovation and investment in risky environments will be challenging. Faced with decisions about whether to invest, investors will want to at least face a fair bet where expectations are that any downside risks of failure are balanced by upside opportunities. But such fair bets can be undermined where there is a risk that a regulator may seek to constrain the returns that can be made and the cash flow that can be generated from the innovation and investment undertaken. Innovation and investment are best supported where regulatory forbearance is shown in relation to the provision of new and risky services that can often involve untried and untested technical solutions and high levels of committed investment ahead of identifiable demand and revenue. Forbearance in the face of innovation by a range of market players (whether established players or potentially disruptive new entrants) allows those players use their knowledge and skills in relation to future technology shifts/capabilities and key drivers of customer demand and satisfaction to make long-term strategic judgements about technology choices and the timing and nature of changes in the services they supply. Regulators should avoid second guessing the strategic choices of market players and avoid picking winners in rapidly evolving sectors; allowing regulatory freedoms is key. And it is critical that regulators provide long-term commitment to the principles behind such forbearance. The nature and degree of risks and uncertainties relating to any specific 2

3 innovation will change over time and there is a real risk that while regulators may avoid regulation on day one of any new innovations, they might still intervene prematurely to constrain future cash flows during the expected lifecycle of the relevant products supplied. This raises concerns that regulators will seek to cap revenues from successful innovations, ignoring the real downside risks faced at the point investors first committed funds to support the original innovation, ie, effectively limit the rewards that would-be investors could expect to earn on best case upside scenarios modelled ahead of the investment decision. Given the existence of worst case downside scenarios for any innovation in a risky environment, the potential for premature regulatory intervention would have the effect of reducing the expected lifetime value of any investment case. This serves to emphasise the importance of regulators making clear commitments to forbearance into the future and not undermining confidence in these commitments by actions that shift their regulatory approach over time. Unpredictable changes in policy, often driven by short-term issues, will have significant impacts on long-term strategic priorities to drive innovation and investment within a sector. Looking back over the last decade in the communications market, we would highlight the success of forbearance in supporting innovation and investment in the provision of superfast access services. Ofcom provided long-term certainty around its policy position in 2009 at the start of BT s roll-out of superfast broadband services in the UK. BT was able to embark on a programme to deploy new technology to transform UK access speeds, and the roll-out of this technology has now reached over 90% of UK premises and driven growth in average connectivity speeds delivered to UK consumers, as well as low prices compared with other world markets. But we now face decisions around a new wave of investment to roll-out ultrafast services to UK consumers. It is therefore vital that regulatory freedoms are maintained. In the face of ongoing change and uncertainty, premature and potentially deep interventions to push down prices and returns will, by design, reduce future cash flow opportunities and shift the risk/reward assessments that will underpin any decision to innovate in new technology. Incentives to innovate and invest in network connectivity can also, in BT s opinion, be impacted by regulators imposing too broad a range of supply obligations on network providers. Such obligations to provide a range of services within multiple points of the value chain are problematic: they represent the type of policy-shift that undermines long-term commitments to support innovation simply and serve to reduce the value of the investments infrastructure players have made and undermine future investment decisions and are not justified by reference to competition concerns. 2 How can we deliver real culture change within public procurement? The G-Cloud Framework is an example of how a public sector procurement approach can drive innovation, support the digitisation of public services and encourage SMEs to compete with larger organisations effectively. The framework supports the implementation of cloud services, and has enabled many SMEs to develop their businesses more effectively because 3

4 they can provide a range of services or just one, therefore removing barriers to entry. BT supports the G-Cloud approach and actively participates in competitions on the framework. This strategy to break up large Government IT contracts into smaller lots has delivered considerable savings. One of the key opportunities from this approach is for the public sector to build in-house capability to procure and manage services. However, this public procurement move towards disaggregation and commoditisation of components now seems to be contrary to industry trends. For example, vendors have made substantial investments to build global industry solutions. This trend is at odds with the current public sector practice of procuring technology components, breaking contracts up into smaller lots and creating a more diverse supply chain. Larger suppliers have been growing capabilities by acquisition and investment, eg, Accenture acquiring big data capabilities. We would like to see more early engagement with suppliers so that the Government can benefit from the innovation that suppliers can provide, and continue with this change in culture. BT is in the fortunate position of being both a strategic supplier to the Government and also providers of services to a great number of small businesses: we have around 1.2 million SME customers, 63% of our suppliers in the UK are SMEs. SMEs are at the heart of our open innovation model and we have a stake in ensuring that small businesses are given the support and mentoring they need to grow and to be successful. The internet has opened up new opportunities businesses have been started from a kitchen table with a great idea, a laptop and a broadband connection. We want to help these businesses to grow, and to encourage new innovators to come forward. For the past two years, BT has run a competition for SMEs, looking for big ideas which could transform public services. This year s winner is See.Sense from Northern Ireland, an SME which has developed an intelligent and connected bike light. Packed with sensors, the light will flash faster and brighter if the cyclist is in danger and syncs with an app to record data on road surfaces, potholes, near misses and air quality. There are early stage discussions about providing the lights to 300 bikes as part of a city bike scheme. BT recognises the role of SMEs in driving innovation and we seek to support them as well as learn from them. BT supports the policy of encouraging more SMEs to do business with the Government and they play a vital part in our own supply chain. 3 How can we ensure that we put the UK at the forefront of open data opportunities? The Government s drive to open data is essential to drive greater efficiency and we fully support its continued efforts to make Government data as accessible as possible. 4 Where can we maximise the opportunities for innovation, as we deliver high-quality infrastructure that unlocks broad economic opportunities? Today, broadband is central to the UK s daily lives, with 39 million or 75% of all adults now going online daily, 17 million more than in We now spend more time using media and communications each day than we do sleeping, with UK internet usage per capita higher than in any other large EU member state. In a short period of time, we have become a 4

5 nation of social media sharers, internet shoppers, smartphone and tablet users, and entertainment-streamers with few peers globally. This transformation in connectivity has provided a profoundly positive boost across the whole of the UK economy such that today: UK egdp (that part of the economy driven by the internet) stands at 180bn or 10% of overall GDP, forming a greater proportion than in any other G20 country1. ecommerce ( per head) is vastly higher than any other nation2 (70% more than US). The UK economy has been rated the most digitally-ready among major EU nations3. So digital communications infrastructure is a British success story, and one that is no accident. It has been driven by massive investment 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. BT has played a vital role in this success by investing nearly 25bn in capital expenditure in the UK over the last 10 years billion of that money has gone to Openreach, the functionally separate business within BT Group in charge of maintaining and developing the network of copper and fibre that connects homes and businesses to local telephone exchanges. Since the formation of Openreach in 2005, regulatory undertakings agreed with Ofcom have opened up the network to the whole industry on equal terms, ensuring that every communications provider ( CP ), indeed the whole country, benefits from our investments in it. This is a network that is used on open and equal terms by over 500 CPs providing high-quality services supporting the UK transformation described above. BT, our industry and our nation have reason to be proud. The UK today is generally held-up as a model to the world, delivering speeds capable of supporting the most advanced online applications, and available to the vast majority of the population through affordable high-quality infrastructure. But there is more to do to ensure the UK remains at the forefront of the digital economy. We believe the UK has an even brighter future ahead and can maintain its lead over other peer nations, but only if we collectively focus on the right issues and take the right decisions in creating the right regulatory environment to support investment and service improvement to drive the UK s growth as a leading digital economy. It is hard to predict what future services will be and what demands they will place on the network. It is, however, possible and indeed essential to prepare for future demand based on what we see as emerging trends and patterns in use and consumption of the services we offer. Over the next decade, the enormous growth in demand for communications networks and services will continue. BT has seen circa 40% compound annual growth in data on its networks for many years. Currently, BT is seeing growth in demand for data per user, which 5

6 has already doubled since 2012, rise by 62% a year. We confidently forecast, as many industry analysts do, that this growth will continue. Our central expectation is that average data volume demand per user will continue to grow at a rate of about 50% a year for the next decade. Despite this growth in demand, revenues in communications markets have been in steady decline, both in fixed and mobile. This is due to a combination of technology change, regulatory intervention and competition constraining business models and monetisation. We expect these pressures to continue. The challenge for the industry, and therefore for the regulator, is how to ensure that the investments necessary to meet customer needs can be made by commercially viable business cases funded from market pricing models, driving further innovation and efficiencies. In addition to the challenge of ever-growing demand, looking forward we believe there will also be a need for ubiquitous use of wireless for connecting devices, along with growth in cloud-based applications, intense competition and ever-higher expectations of service. The regulatory framework needs to evolve to facilitate these key trends, in particular to ensure: genuine value for customers that encompasses price, performance and quality expectations a supportive investment environment that delivers for the customer a level playing field of regulation across fixed, mobile and pay TV competition that continues to drive markets, enabling deregulation to let markets drive outcomes investment to ensure delivery of the service quality customers need. 5 Where can the UK work alongside the private sector to create the deepest pool of innovation finance in Europe? Private-sector funding for innovation is motivated by a clear purpose and belief that there is a route to delivering value from investments. Moreover, the long-term prospects for spinouts, from academia or industry, are increased where there is clear understanding of the customer requirements and challenges faced in a market. Consequently, the foundation for improving the investment performance of R&D in the UK lies in a strong collaborative ecosystem involving large industry, smaller businesses and academia. In recent years there has been insufficient engagement with large industry to determine the significant innovation challenges and opportunities for the UK. Large industry is often the route to market for small businesses, either as direct customers or as partners. A more balanced view that supports long-term collaborative initiatives between industry and academia will provide the re-enforcing environment necessary for increased innovation investment. 6

7 6 What do we need to do to get maximum benefit to the UK economy from challenger businesses? Identifying the right technologies and sectors to focus on requires a stable dialogue with large industry that focuses on the long-term opportunities and challenges for the UK rather than the current-day commercial and political priorities. The telecommunications industry is changing from predominantly hardware and manufacturing to software and commodity computing. Developments such as Software Defined Network (SDN) and Network Functions Virtualisation (NfV) are now well established within the industry and being driven forward initially by BT and operators around the world. These initiatives now have the full commitment of telecommunications vendors. However, they still represent a change in their business model, ie, software. The UK has been at the forefront of NfV and SDN and we believe there is now real opportunity for new UK companies to enter the telecoms supply market and challenge dominant vendors in the industry. 7 How can we ensure that the UK s inventiveness and creativity capitalises on our strong intellectual property system to generate growth and further innovation? The Patent Box and R&D Tax Credits are effective means of promoting the development of intellectual property and do figure on balance sheets. However, the value of the IP depends on the relevance to the business at a particular time and the ability to realise that value. Since BT s research patents can take up to 15 years to realise their value, and it is difficult to predict which ones will have any value at all, it is problematic to value them in advance; where BT licenses non-strategic patents their value is determined by the market at the time of licensing. Consequently it is the attempt to value IP by universities that forms one of the main barriers to exploitation and commercialisation. Some tech-transfer offices appear to be incentivised according to revenue rather than the transfer of that IP into industry. With the introduction of Impact into the Research Excellence Framework, universities now have an ideal incentive to focus on the long-term value of their research rather than short-term revenue. Is there anything else the UK could need to do to create the best possible framework for innovation? The UK is in a unique position with a national digital communications strategy that is driving the telecoms industry and being followed by other countries around the world. The UK benefits from the best digital communications infrastructure amongst the big five European economies with higher levels of availability, take up and use coupled with low prices driven by effective competition and a digital economy that already accounts for 10% of the UK s GDP (The highest e-gdp share of any G20 economy). Despite this it is well known that the UK is not achieving the full impact from its world-class scientific research base. We believe that there is a strategic opportunity to increase the innovation impact in the UK by establishing a national telecoms innovation facility that enables academic and industrial partners to research and co-develop cutting edge communication network technologies, applications and services. 7

8 BT Adastral Park is our global engineering headquarters and boasts the UK s largest technology R&D centre alongside our national broadband operations centre and national network test & integration facility. It also hosts over 80 technology companies including the leading telecoms suppliers. A national telecommunications innovation centre that builds upon our (and our industrial partners) extensive network of university engagements will provide an environment that will promote open collaboration and sharing of ideas with the back-drop of an operational environment that means innovative ideas have a realistic chance of commercial deployment. Thereby enabling the best ideas to scale rapidly and providing businesses and private finance with the confidence to invest in UK R&D and startups with the potential to compete in the global market. We would be happy to discuss these issues further. Further enquiries can be directed to David Pincott, Head of Political Research, Policy and Briefing, BT Group plc Tel: / david.pincott@bt.com 8