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02|06|05

OECD Roundtable on Convergence, 2 June 2005

DTI Conference Centre, 1 Victoria Street, London, SW1H 0ET

Stephen A. Carter, Chief Executive, Ofcom

Introduction

Good morning ladies and gentlemen. Welcome to London and to this conference on convergence and converged regulation. I should start by thanking the Department for Trade and Industry for co-hosting this conference alongside Ofcom and for providing the conference facilities.

As OECD colleagues we face a common sense of excitement at the possibilities that convergence offers for innovation, enhanced consumer choice and expanded information, education and entertainment that electronic content brings to enrich our lives as citizens. But convergence also brings a common set of challenges. Addressed in part under the theme ‘convergent regulation’. It is, for me, put simply, what is the answer to this question:

“How can public policy – and public policy makers: legislators, governments and regulators – keep pace with the rapid changes in technology and market developments?” True of any market but acute in technology markets, where speed to market and change operate sometimes at exponential rates.

The Pace of Convergence

A conference of this sort would have been very fashionable six or seven years ago, indeed I think I spoke at a few, when the promise of convergence was thick in the air; and venture capitalists were queuing knee deep to thrust money at anyone, what someone described to me yesterday as the go-go years. In the disillusionment following the TMT bust there were many voices saying that convergence had been over-hyped and would in practice be a long time a-coming – the stop-stop period.

As so often with technological development, the initial phase is filled with false starts and it is slower to take off than its prophets foretell. But then, later, it takes off exponentially and becomes a mass market faster than public policy-makers and others expect. So it has been with convergence. As we meet today it is already, in most OECD markets a reality; and one we must come to terms with and harness rather than get in the way of – the stopped now let’s go period.

Each OECD market is ahead of others in some aspects of convergence but behind in others. Though I observe that all governments of whatever political persuasion have in common a dread of slipping down the league table whatever the league table. The UK is no different; but let me illustrate my point with a few historical figures from our market.

In digital television most projections in 2000 expected the UK market today to be at about 7 million digital households. In fact the number is twice that, going over the 60% mark earlier this year.

In broadband, linear growth between 1998 and 2001 – 3,000 to 4,000 households a week – would have put the UK today on 1 million households. Today there are over 6 million broadband homes growing at 60,000 a week; with a blended average speed of 1mb plus and falling prices. Within a year the blended average speed will be video-capable.

In digital radio, in 2003 there were only 100,000 sets in the UK market. Today there are almost 1.5 million dedicated sets with many millions more people listening to digital radio via the digital TV set, through broadband or over module.

Today the PVR is still a minority pastime. But before the end of the decade, on-demand content, whether through bandwidth or storage, will be the reality for the majority of households in OECD countries. That will play merry hell with the economics of traditional broadcasting and of mass advertising.

Voice over IP is already available in most medium and larger businesses. From 16 million global users at the beginning of this year there will be 200 million VOIP consumers by 2008 – less than a generation after the last plug and jack exchange at Bryant Pond, Maine was de-commissioned. Already it raises public policy issues, such as effective access to the emergency services and the place of VOIP in universal service.

VOIP is as far a cry as one can get from Alexander Graham Bell’s first telephone where the distance the signal travelled depended on how loudly you shouted down the telephone. VOIP is effectively distance-independent. Just as storage and bandwidth will play havoc with traditional broadcasting economics, so distance-independent voice traffic will undermine the carefully constructed cat’s cradle of domestic and international costs and tariffs. There will be a great deal of arbitrage and possibly more than a few anomalies before a new settlement emerges for the IP age.

The third major growth area is in hand-held devices and entertainment. We are already increasingly nomadic in our use of communications. With over one mobile handset for every man, woman and child in the UK. As 3G and its successors become widespread throughout OECD economies, service-specific content will give way to the broadband cornucopia.

Issues of Convergence

In essence, convergence is the product of the transition from analogue to digital where all forms of content – be it voice, text, pictures, figures, audio and visual – are undifferentiated bits of data. Digital expands capacity hugely even over today’s infrastructure fibre speeds over copper. As next generation access networks come on stream our capacity for information and communication is limited only by our imagination and on a country by country, or region by region, basis, the estimate that we can help create for investment and innovation.

The transition to digital is most obvious in television, bringing with it high definition and interactivity: and where, increasingly the user rather than the broadcaster is in control. Many OECD countries are now planning for full digital switchover. Berlin has already gone all digital and the USA, the UK, Scandinavian countries and Italy already have or are setting firm dates for the transition. The motives for switchover – or rather the priority given to each varies from country to country. But somewhere in each country’s mix is the release of the spectrum currently used for analogue – a considerable amount of bandwidth at some of the most usable frequencies in the radio spectrum.

Whether it will be used for dvbh, mobile radio more high definition or a mix of these, has yet to be decided but what is clear is that it will provide a significant amount more of the raw material which helps fuel the communications revolution.

In telecommunications, the transition from analogue, switched networks to digital, IP-based networks gets less public attention but, significantly, requires many times the capital investment. A point I will return to in a moment.

A number of the issues which convergence is throwing up for regulators and public policy-makers is already clear.

Firstly, different pipes which have traditionally been regulated differently and for different purposes are increasingly overlapping content. How in future should they, and the content that they carry, be regulated? Regulations and legislations profess to want to see a level playing field. But should it be regulated up to the highest common factor or regulated down to the lowest common denominator? This is a genuine conundrum.

For the time being the answer in traditional broadcasting remains relatively straightforward. The content comes unbidden to people’s homes; and they have a reasonable expectation that regulation will protect them – and more importantly their children from coming unexpectedly across that which harms or offends. But what of IPTV? Hybrids of broadcast and broadband delivered content? And what of content delivered to mobile, hand-held devices used by children and young people wholly unsupervised by their parents.

The European Union – in revising the TV Without Frontiers Directive – is making some tentative steps towards answering those questions. I am not sure that they are yet right or have yet addressed either the deniability or the practicability of seeking to extend some of the broadcasting rules into the IP space.

For its part, Ofcom is working with various elements of the converging content and distribution chain to see whether industry can come together around a more uniform system of content classification; in order that consumers themselves can make more informed choices around the content that they wish to receive, regardless of the device or platform over which they receive it.

Convergence is also altering the funding models for electronic content. The days where the majority of content was funded by the 30 second centre-break advertisement on a linear broadcast are going if not gone in most OECD countries. In the UK subscription overtook advertising as the main revenue driver in 2003.

But advertising – as well as being a public good, in helping markets to work effectively, also contributes to social good by funding content free-to-air, available to rich and poor alike. As we move from the linear schedule to the on-demand world advertisers will have to evolve their techniques in new and clever ways to catch the consumer’s attention. As regulators, we need to ensure that the rules evolve to give them the freedom to do so against the principle that consumers have the right to know where they are being advertised to as opposed to being informed, educated or entertained.

The second big set of challenges is around the investment in digital infrastructure, both in core and access networks. The grass always looks greener on the other side of the fence. But it seems to me that amongst the East Asian players there is an alignment of regulation, public policy and political will which provides a real focus around the importance of infrastructure and of consistency of regulatory obligation on the different pipes.

In contrast, Western economies are much more bound by checks and balances; with the inherent tendency towards piecemeal solutions to individual problems, often accompanied by a search for solutions based on “why can’t it be like it used to be?” That is evident, when I was in America recently, with the outbreak of concern over standards of decency in content and the extension of those standards from traditional network broadcasting to newer platforms and media. Seen here in the UK too in an unwillingness to face up to the inevitable consequences of digital and of fragmenting audiences for the traditional arrangements which sustained commercial public service broadcasting. There is a wider lesson: if, collectively, public policy is unwilling to accept the consequences – good and bad – which flow from convergence then it is unlikely that it will produce holistic solutions which harness the good and mitigate the bad. Combine this with a degree of technophobia and slow policy-making and you have a potentially dangerous cocktail where the cheaper labour markets combine with the new infrastructure and technology markets to leave the western economies not balanced by their checks and balances but limited by them.

To give credit where it is due, I believe that the European Union’s telecommunications directives were a thoughtful and intelligent attempt to provide a coherent framework for the delivery systems of convergence. Yet – three years on – their implementation is far from complete in several European markets. And they are also coming under stress from market and technology developments not foreseen and catered for in their drafting: how to deal with VoIP from a consumer perspective; the regime for interconnecting next generation IP networks; the treatment of nomadic technologies like Wi-Max that blur the hitherto neat distinctions between fixed and mobile and control by governance and process that cuts across specific SMP markets. This illustrates how in even a well-considered regulatory framework, public policy-making struggles to keep pace with market development.

The third challenge is in wireless spectrum. International coordination remains necessary, particularly for those of us OECD members with a lot of close neighbours. And market-led standards, such as the CDMA family, can provide manufacturers with the certainty to invest in volume production. But the pace of change in wireless technology is now such that the traditional public policy model of command and control, with international standards setting conferences every decade or so, simply can no longer cope. That is why the UK, in common with a number of OECD colleagues, is going down the road of market mechanisms; trading, auctions and liberalisation of use to allow wireless to develop as the hand-maiden of convergence. As concepts, these are, perhaps unsurprisingly more popular with innovators and new entrants than they are with the incumbents.

Incumbency and consolidation is the fourth challenge. The cost of new infrastructure build is such that many Governments and competition authorities are tempted to sup - albeit with a long spoon - with incumbents as those most likely to build it. And convergence in technology and the market encourages consolidation in ownership: the ability to bundle content , broadband and voice with wired and wireless delivery systems to steal a march on competitors and be the gateway to the consumer. Those who said over the years that access and gateways are more important in an age of convergence are being proved right.

Whereas, in the pre-convergence age, an incumbent could control a part of the value chain, in convergence more gateways at more points in the value chain can fall under a single incumbent ownership. This raises two conundrums. Firstly, how, as regulators and legislators should we deal with incumbency? On the one hand we should not start from the premise that they are bad businesses. On the other, probably only the American market is big enough to risk an approach that allows four incumbents – five if one other company gains control of the Digital Rights Management gateway- to be only the game in town right across the convergence field and that competition, innovation and other good things will flow from those incumbents fighting it out. Secondly, how to allow the converged platform owners reasonable control over their own platforms which they have invested in and built while at the same time allowing for device innovation or new entrants who may want things from those platforms that would benefit consumers but which may not be in the platform owners’ wider interests to give?

The final agenda issue I would like to raise is universal service. In the past this has been relatively straightforward: plain old telephone service and some form of broadcast television and radio. That may well still be the position today but tomorrow’s market offers a wider perspective: mobile access as of right? Broadband? If so at what speed- or, more relevantly for what services? VoIP? Digital television? And if so how is it paid for and by whom? Rightly, it is democratically elected governments that determine the ‘what’; the boundary of universal service; but it is often left to regulators to determine the ‘how’. In this room we have people from several different traditions of Universal Service - at least as to the ‘how’. It will be fruitful to compare notes. The only comment I would make is that legislators need to be careful not to approach every major innovation in convergence from the start point of ‘what will this mean for the disadvantaged? Will it extend the digital divide?’ For that way, one starts from a lowest common denominator position and with an inbuilt bias against the market and its ability, through innovation, to seek out the pound in the pocket of, for those of you who have heard me speak before, my metaphorical Great Aunt Bronwen in her remote Welsh valley to give her the services she needs.

May I finish with a few words on what it feels like to be a converged regulator grappling with these issues. Firstly, the legislative framework. The UK’s Communications Act is a fairly thick document and I would certainly not recommend it as light airport lounge reading. But our legislators have, in the main, done a good job. It combines flexibility, a clear overarching set of direction: in effect, the injunction to be an effective steward of the transition from analogue to digital in the interest of the consumer and the citizen, together with a recognition of the importance of investment and innovation; with a clear separation of powers between democratically elected government and an independent regulator; and importantly one that - unusually for most public sector organisation - gives the regulator a very large degree of operational freedom.

Do I believe that a converged regulator is better than that which went before: five overlapping and sometimes feuding organisations? I would, of course, say ‘yes’. But I believe that most of our stakeholders would too. Why?

Firstly because of economies of scale. In a converged age many of the issues facing the communications issue transcend the old boundaries and therefore need a converged response. This is certainly true in competition law and economics, where Ofcom is a competition authority alongside the UK’s OFT. Linked to that is an ability to deal with incumbency on a scale that - albeit smaller - is more evenly matched to the regulatory affairs departments of the main incumbents, in knowledge, experience and in talent and motivation.

Secondly, in spectrum, where hitherto, as in many OECD countries, management of the spectrum was divided up into baronies: a bit for communications; a bit for science or social use; a bit for defence and the public services and a bit for broadcasting. As a single converged regulator, Ofcom has the domestic role of managing all of the civilian spectrum; for setting the mechanisms for overall spectrum management; and internationally for negotiating on the allocation of all of the spectrum. We can, quite rightly, be directed by Government on big allocation matters. But such Directions require to be approved by both Houses of Parliament. They are thus a tool for infrequent use. Instead, what convergent regulation gives us is a good, cooperative relationship with Government and the ability to articulate a coherent and converged position across all uses of the spectrum internationally.

Thirdly, there is simply the serendipity of convergence. Ideas which work in one part of the forest can take root in another – especially when those ideas can be had on the same floor of the same building within one regulator which has the traditional functions of wireline, wireless, broadcasting and broadband mixed together in the same teams.

And it is drawing on those advantages of convergence, that we have set out our policy stall. The four key priorities we have tackled so far have been:

All of these, we believe, will up the pace of the transition to digital in ways that serve the consumer and citizen.

As I said at the outset, welcome to London and thank you for coming. No man is an island; and those of us here who are regulators are against monopolies. That includes monopolies of wisdom. I hope that in this address of welcome, I have sketched out a few of the issues which collectively we can tease out over the next couple of days, drawing in friendship on our collective knowledge and shared experience.


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