Key findings

3.1 The following section covers the key findings of our research and discusses some of the implications on the market sizing and market share calculations for the UK very-high-speed services markets.

3.2 The remainder of this report is structured as follows:

Section 3.1 covers services based on dark fibre

Section 3.2 discussed the distance that service providers would dig to connect a new service Section 3.3 covers the size of end user organisations that purchase very-high-speed services Section 3.4 covers end user organisations‘ requirements

Section 3.5 covers end user organisations‘ views on supply

3.1 Services based on dark fibre

Key finding: Evidence suggests that services based on dark fibre play an important role in the market for very-high-speed services.

3.3 As part of our interviews with end users of very-high-speed services, we asked about usage of dark fibre. Of the 11 organisations that currently use very-high-speed services, 3 (27%) use dark fibre in their network. For banks and datacentres in particular, dark fibre is an important component of their multi-site networks.

3.4 The three organisations using dark fibre-based services were:

[Respondent anonymised], which has a self-built high-capacity network based on dark fibre that connects its two head offices in London with two datacentres.

A major retail bank, which has a self-built dark fibre network connecting its offices in [detail removed] The location of its offices shows that this market is not localised in London.

[Respondent anonymised], a data centre provider which only has dark fibre to its sites (i.e. it does not purchase ‗lit‘ very-high-speed services), both of which are out of WECLA.

3.5 Of these three organisations, [respondent anonymised] and the major retail bank buy dark fibre directly from providers and manage their own networks. Organisations using [respondent anonymised]‘s datacentre both bought dark fibre through intermediaries, such as systems integrators, and directly. This is consistent with our view that users of very-high-speed services are very sophisticated and capable of bypassing traditional telecoms operators.

3.6 The inclusion of services based on dark fibre will have a significant impact on the calculations of overall market size and market shares. More than half of the total very-high-speed capacity of the

companies interviewed is provisioned over dark fibre (as shown in Figure 3.1). Estimates of market size could vary by as much as 50% depending on whether dark fibre-based supply is included. The assessment of BT‘s market share could similarly be affected by as much as 50% if dark fibre is included in the calculations; even from known users of dark fibre outside WECLA, BT‘s share would reduce by around 5%.

Figure 3.1: Total

3.7 Based on our research we believe that services based on dark fibre forms a significant part of the market for very-high-speed services outside WECLA and should be included in any assessment of market size and market share.

3.8 We would also expect the use of dark fibre as the basis of self build networks to have an impact on the number of 1Gbit/s circuits in the AISBO market both in WECLA and outside. These circuits are not counted under Ofcom‘s methodology.

3.2 Dig distances

Key finding: Evidence suggests that simple assumptions on the limits of dig distances may not correlate with the experience of end-user organisations.

3.9 The distance from an end user‘s site to a particular network node may not be a reliable indicator of network contestability. Contracts in this market are typically high value and so it can make economic sense for fibre providers to lay cable over long distances in order to capture that value, for a number of reasons:

2 Calculated by summing the total capacity of all >1Gbit/s circuits to all sites of the 11 organisations interviewed that had >1Gbits capacity. All circuits of 1Gbit/s and below are excluded.

0

Very-high-speed services often form part of a large, multi-sited contract. For example, the [respondent anonymised] has 1150 sites, of which only three are connected with very-high-speed services.

Very-high-speed services are supplied to organisations which place significant value on the connectivity (e.g. financial institutions, whose business operations are critically dependent on very-high-speed services). These organisations may be willing to pay additional initial costs to a supplier.

Contracts for provision of very-high-speed services typically have a longer duration than those for other kinds of (lower-speed) connectivity, e.g. five to seven years (or even longer for some dark fibre contracts). This allows operators to recover their fixed costs over an extended period.

3.10 An economic assessment based on dig distance may yield very different results depending on the type of end-user organisation or type of service considered.

3.11 From the 11 interviews with organisations that currently use very-high-speed services, 3 (27%) provided evidence demonstrating a very wide range of dig distances in practice:

to connect [respondent anonymised]‘s headquarters in [detail removed], [detail removed] laid new fibre over the last 500–600 metres

[Respondent anonymised] stated that having fibre laid over distances of between 500 metres and 2km was not unusual; the longest distance our interviewee was aware of was 5km

when developing its datacentre site at [detail removed], [respondent anonymised] reported that providers laid fibre over a distance of 2 miles to the nearest point of presence (PoP) in one direction, and 3 miles in the other direction.

3.12 Again, we had no prior knowledge of these organisations‘ network characteristics, including the distances from their sites to particular network nodes. We have no reason to believe that the organisations we interviewed are atypical.

3.13 While in its consultation document Ofcom examines this issue of dig distance, we have concerns over the methodology used. This is covered in more detail in Section 6.

3.3 Size of end-user organisations

Key finding: The size of an organisation alone does not seem to be a good proxy for demand for very-high-speed services, and it may become an even weaker proxy in the near future.

3.14 End-user organisations cannot be easily classified on the basis of number of employees. While it might be expected that large organisations (e.g. organisations with over 250 employees) would use

very-high-speed services, our research highlights some important counter examples, covering both small (e.g. organisations with fewer than 100 employees) and large organisations.

3.15 It is apparent that some small organisations use very-high-speed services: we estimate that 10–

20% of organisations that purchase very-high-speed services have fewer than 250 employees.

While this will not translate into 10–20% of wavelengths, as larger organisations are much more likely to purchase more wavelengths than smaller organisations, the contribution of smaller organisations to the total market size should not be overlooked.

3.16 Datacentres provide an interesting example of smaller organisations that use very-high-speed services. These organisations, which typically employ fewer than 250 people, and often fewer than 50 people, are major consumers of very-high-speed services. This is relevant for datacentre-to-datacentre (or indeed IXP-to-IXP)³ connectivity, rather than connections between end-user organisations and datacentres or IXPs. Datacentres alone could contribute significantly to market share estimates, and this is further complicated by the fact that some datacentres‘ sites are connected using dark fibre.

3.17 In our survey we also identified a number of highly specialist companies with fewer than 250 employees that currently use very-high-speed services (e.g. advanced engineering firms). Ofcom‘s own primary research from Jigsaw suggests a similar finding, with 2% of organisations with 10–

100 employees buying MISBO services.

3.18 We expect that demand for very-high-speed services from smaller organisations will continue to increase. For example, the growth of digital distribution of media content may lead to small film and television companies requiring more very-high-speed services. This is likely to include a number of companies with fewer than 250 employees. One interviewee estimated that there are around 150 small production companies in the UK.

3.19 In our interviews, we discussed future demand for >1Gbit/s services with two small media companies:

[Respondent anonymised], a film production company of 60 employees, is in the process of expanding to a second site and will require a 10Gbit/s connection between its two sites. As a post-production company, [respondent anonymised] regularly handles files that are 3–4TB in size.

An independent television studio that currently employs around 40 people is considering options for very-high-speed services so that it can support live television broadcasts.

3.20 It is also apparent that some very large organisations do not use very-high-speed services:

[Respondent anonymised], which has 80 000 workstations, currently has no connections above 1Gbit/s.

3 Internet exchange point.

A division of [respondent anonymised] – a business process outsourcing (BPO) company – that delivers services to government clients stated that its clients currently have no requirement for very-high-speed services.

3.21 We therefore believe that organisation size is a weak proxy for an organisation‘s likely usage of very-high-speed services, and it may become an even weaker proxy in the near future.

3.4 End-user organisations’ requirements

Key finding: It is very difficult to generalise about the market for very-high-speed services, as the needs and behaviours of end-user organisations appear to vary significantly.

3.22 No obvious pattern emerged from our interviews in terms of usage, sector or organisation size.

Any standardised model of usage of very-high-speed services risks overlooking the realities of this market. This wide variation in end-user organisations is much more likely to be an issue in a niche market where volumes are of the order of 1000 compared with markets where volumes are orders of magnitude higher.

3.23 Demand for very-high-speed services appears to be highly dependent on the sub-sector to which the end-user organisation belongs. For example, of the 11 organisations interviewed that currently use very-high-speed services, at first sight [respondent anonymised] and [respondent anonymised]

appear to be very similar – both are in the finance sector and both employ around 3500 people across the UK. However, [respondent anonymised] has far greater connectivity requirements than [respondent anonymised]: the latter has a managed network with 4×10Gbit/s circuits, while [respondent anonymised] has a self-build network based on dark fibre with at least 16×10Gbit/s circuits, which it is considering upgrading.

3.24 Our research also indicates that demand for very-high-speed services does not necessarily cluster geographically in a predictable way. While there is some geographical clustering in particular sectors, such as finance and media, for other sectors where connectivity is important further factors often determine the location of sites, particularly for head offices. Very-high-speed services are often bought to connect the head office of a large organisation with one or two data centres and a disaster recovery site. The location of the head office tends to be dictated by historical or other reasons (e.g. political). For example:

[Respondent anonymised] (which is the owner of [detail removed]) uses >1Gbit/s services, but its main office is in [detail removed] for historical reasons

an integrator for one of the devolved regional administrations stated that the selection of its administration sites, and of sites for datacentres, was influenced by political reasons.

3.25 These findings suggest that some users of high-speed services are likely to be located outside London or indeed outside other major metropolitan areas. This geographical spread of demand does not necessarily mean that competitive network supply will be more limited in

non-metropolitan areas, as a fixed dig distance assumption may fail to capture the economics of the underlying contracts being used (as outlined earlier).

3.5 End-user organisations’ views on supply

Key finding: End-user organisations seem to be broadly satisfied with the current level of competition in the market.

3.26 Fifteen out of the 16 organisations surveyed currently using >1Gbit/s services were not planning to change supplier. We assume that the only organisation that was planning to change supplier believes there is sufficient choice in the market.

3.27 From the remaining 15 organisations using >1Gbit/s services, lack of choice was only cited by one organisation as a reason for not changing supplier. Low price rises and a tie to a long-term contract were cited as the main reasons for not changing provider.

Figure 3.2: Number of organisations stating each reason for not changing provider [Source: Analysys Mason, 2012]

3.28 The 17 organisations we interviewed also reported that, when issuing a Request for Proposal (RFP), they typically receive responses from at least four potential providers.

3.29 Our research findings therefore indicate that end-user organisations purchasing very-high-speed services understand the highly specialised nature of this market – they do not ask for, or expect, ten different options.

0 1 2 3 4 5 6 7 8 9

Hassle Not enough choice / no

alternative supplier Good contacts at existing company Historical link to existing company (s)

Long-term contract Price rise is small

Number of responses