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17|10|07

Keynote Speech to the India Digital Networks Summit

David Currie, Chairman - Ofcom, Wednesday 17 October

Embracing Digital Convergence

Thank you for that introduction and thank you for inviting me to speak to you today.

In this era of global inter-dependency India matters to the UK more than ever. UK and Indian companies are investing in each others’ markets. Business leaders educated in India’s world-class universities are increasingly taking leading positions in UK-based companies. And as over the coming decade India matures into a mass communications market, its scale and dynamism will make its impact felt around the world.

This exchange of ideas, commerce and people makes it crucially important that we also take steps to understand each others’ institutions and traditions. And in the area where Ofcom operates, the world of regulatory policy for broadcast media and telecommunications, it is particularly important to discuss how we can adopt best practice in regulating for the future. Our observation would be that, as traditional barriers to commerce, such as tariffs and ownership restrictions, are removed, so the question of the quality and transparency of regulation comes into sharp focus when companies are assessing where to invest around the world. While it is inevitable, given our different market structures, histories and cultures, that we will sometimes arrive at different solutions, I think it important that we engage in dialogue.

It is a particularly fascinating time to be visiting India. This country is enjoying fast economic development which, if sustained as I am sure it will be, will put India among the biggest economies of the world. Internationally, technology moves fast but the sheer pace of that change in India is staggering to those of us looking in from the outside. This is particularly true for mobile where the market has grown exponentially. But it is not just the size of the Indian market that impresses us, but also the high level of innovation – for instance in mobile applications – and the rapid rate at which India is moving up the ‘value chain’ into areas such as online games creation.

Last year India became the second largest investor in the UK and there is growing interaction between the UK and India in telecoms and media:

• Vodafone – led by Indian Institute of Technology alumnus Arun Sarin - moved into the Indian mobile market in May of this year when it bought out Hutchison from its joint venture with Essar;
• The Bollywood ‘Oscars’ were held in Yorkshire in the north of England in June this year, reflecting the very strong cultural links to the sub-continent of that part of our country;
• And – a less happily story, the Ofcom adjudication on this year’s controversial ‘Celebrity Big Brother’ programme became a news story not just in the UK but across India.

My title today is “embracing digital convergence”, a challenge that is common to India and the UK. What I would like to do is outline how convergence is playing out in the UK, explain Ofcom’s provenance and our regulatory principles, and finally outline some of the challenges that digital convergence presents to us in broadcast, telecoms and spectrum.

Ofcom as the UK’s regulator for communications has responsibilities for regulating telecoms, broadcast standards and carriage (both television and radio), as well as for spectrum allocation and management. Importantly, note that our remit excludes the internet and the printed press.

Ofcom was born out of a debate which goes back to late 1990s when communications regulation in the UK was carried out by no fewer than five separate agencies. The creation of Ofcom was the UK Government’s response to the anticipated challenge of digital convergence. The Communications Act which gave Ofcom our powers charged us to serve the interests of citizens and consumers as the communications industry enters the digital age. We are a converged regulator and embracing convergence is at the heart of everything we do.

Importantly we are a statutory public corporation – like the BBC, independent of Government. Our people are public servants, but not civil servants. We are funded by a combination of a part of spectrum receipts, which we raise for Government, and a levy on telecoms companies and broadcasters, importantly we are not funded from central government taxation. I am appointed by the Government, but on a fixed term of office, and I can be removed only in certain tightly defined and exceptional circumstances. This gives us the necessary independence from Government required to take some hard decisions in the long-term interests of UK citizens and consumers. And this independence is also in the long run interests of Government, distancing it from decisions on media matters that without that distance could well prove highly controversial.

This combination of converged responsibilities and a strong, independent status mean that we are, we believe, well placed to tackle the twin challenges of globalisation and convergence which are changing our industries.

Globalisation presents great opportunities but also some important challenges for regulators. Increasingly open markets can attract investment from anywhere in the world. But investors in turn demand transparency of regulation, and look wherever possible to minimise regulatory risk. This does not mean an inevitable ‘race to the bottom’ for regulatory standards, but it does mean that we have to work hard to explain and justify our regulatory approach. If Ofcom, for instance, bears down hard in an unjustified way on internet TV content, there is every chance that providers of such content will relocate to another territory where the rules are less strict or more predictable.

Equally, if we want to maintain international standards in areas of common interest – for instance, in preventing the dissemination of the most harmful forms of content, for instance that which promotes abuse of children or racial hatred – increasingly we regulators, and our governments, must co-operate much more effectively than in the past to find common approaches and solutions.

Convergence, an international phenomenon - where the storage, memory-power and interactivity of the PC meets the many to many peer group made possible by communications networks and meets the audio-visual creativity of the small screen - is bringing great benefits to consumers in terms of participation, innovation and range of service. But it brings new challenges: for example regulation designed for editorial purity in the one-to-many world of broadcasting struggles to cope in the anyone-to-anyone world of convergence. Broadcasters or operators may also flounder in a world with which they are now only partly familiar. We have recently seen a relatively low-technology example of this in the UK where there have been a series of cases, where customers participating via premium rate phone lines in TV competitions have been very unfairly treated. Where this behaviour abuse was long-lived and systematic, we have fined heavily, most recently by as much as £2mn.

Underlying such cases is convergence of different areas. As their revenues come increasingly from non-traditional sources, broadcasters, used to thinking about audiences and a tradition of “the show must go on”, are having to adapt to think in terms of customers and their fair treatment.

More generally, as convergence occurs in the UK, there is increasing competition between platforms. Increasingly what were adjacent platform markets are competing head on: DSL or fibre versus cable or satellite. Equally, previously distinct operators are also competing head to head. BSkyB, a broadcaster, is now in triple play and BT is offering an on-demand television service. We are grappling with how to regulate different platforms in this new environment where broadcasting and broadband are colliding.

The economic regulation of platforms may well need to evolve over time to recognise that there is now greater scope for competition, particularly in retail markets – and that gives increased scope to deregulate traditional providers. We have been able to remove retail price controls from BT, our incumbent telecoms provider. On the other hand, the process of convergence is bringing into focus the potential for new economic bottlenecks, such as key ‘must have’ content. Convergence also has the capacity to create confusion – and Ofcom has a role as the regulator to help consumers to be able to make well-informed comparisons between providers of increasingly complex bundles of services, and to switch easily between providers when they wish to do so.

In the UK, it has been without doubt the take-up of broadband – now delivered to over half of UK households – which has driven the development of converged services and devices impacting increasingly on broadcasting. This is at the heart of Ofcom’s purpose: the Communications Act requires us to “encourage the evolution of electronic media and communications networks to the greater benefit of all those who live in the UK”.

ULL – unbundling of the local loop - is at the heart of this. This aims to deliver the deepest, sustainable and effective infrastructure based competition for broadband. Necessary, given that significant further access based competition such as cable and wireless is unlikely in the UK in the medium term.

However, when Ofcom was created, broadband had been rolled out more slowly in the UK than in other comparable countries. BT was still a dominant player across many market segments. There was a culture of weak, fragmented competitors dependent on the regulatory drip-feed for their ongoing survival. But the plethora of regulatory interventions by Oftel (the predecessor telecoms regulator) into the business of BT had not enabled much serious competition to develop to challenge the vertically integrated BT – certainly we were well away from vibrant competition. So after Ofcom’s comprehensive Telecoms Strategic Review and much debate between Ofcom, BT and the rest of the sector, BT agreed in 2005 to create a separate business, Openreach, which is responsible for its bottleneck local loop access. Openreach is required to deliver equivalence of input: BT’s retail rival businesses should receive the same products, prices and terms as Openreach delivers to BT Retail.

The resulting reinvigoration of ULL has already had a dramatic effect on the UK market. Over 3 million lines have been unbundled and 100,000 more are being added every month. A drop in the ocean for a market the size of India, but very considerable in the UK context. This means that 80% of homes are served by an unbundled exchange with at least 1 ULL operator. There has also been a step change in investment and innovation: broadband headline speeds doubled in 2006 to an average of just under 5 Mbit/s.

A sign of the transformation is that a price war has commenced in which broadband is being offered in some cases ‘free’ as part of a bundle which also includes such traditional telephony and entertainment elements including broadcast. In addition the terrestrial broadcasters have embraced the internet as a new distribution platform. Channel 4, ITV and the BBC have all launched internet-based on-demand access to their content. We do face future challenges quite soon: Ofcom needs to work with BT and the industry to determine how to translate equivalence of input into the rapidly coming world of IP-based NGNs. Clarity on that is important to giving the ULL operators a strategy for migrating their businesses into this new environment. But I have no doubt that we will find the way to do this which enables effective and vibrant competition to continue in that new world.

This approach based on equivalence of input creates a telecoms environment in which there is considerable scope for new entry, and as a consequence new ideas and new technologies have much more scope to enter the market in a timely way and to the benefit of consumers and citizens. And since we offer no barriers to inward foreign direct investment, these opportunities for entry are open to all players around the world – hence rumours of Google’s interest in the UK market. The UK does not worry about foreign control; what we are concerned to ensure is a plurality of provision and voice, and an open, competitive market is a key element in delivering that.

Finally may I touch on the area which is the most radical aspect of what Ofcom is doing and the one with the greatest potential long term economic benefit to the UK - management of the radio spectrum. This is a vital question for policy makers around the world, and I know that is a live issue here in India.

Many of the new platforms that have emerged over the last decade are wireless in one form or another. Households in the UK with a mobile connection outnumbered households with a fixed connection for the first time in 2006, not an obvious outcome given the ubiquitous coverage of the fixed line network in the UK in contrast to India.

In the UK a large majority of mobile handsets now have internet capability so wireless internet usage is increasing: around 30% of the UK’s adult population access news and information from the net by wireless. And, for any given piece of available spectrum there are many different applications vying for access.

Spectrum is an important economic resource for a future generation of convergent applications and services. In the UK, uses of the spectrum are worth over 3% of UK GDP (£37bn) – and demand is growing at 10-20% per annum. There is severe scarcity in some parts of the spectrum – above all in most valuable lower frequencies. And since spectrum is so crucial for the most innovative and dynamic sectors of our economy, the numbers I have quoted almost certainly understate the true importance of spectrum to our economy and its innovation and dynamism in the UK.

Historically, most (almost 95%) of the UK radio spectrum has been subject to a ‘command and control’ approach where the authorities specify precisely how spectrum is used. This has certainly limited the efficient use of spectrum by precluding the possibility of spectrum sharing by different applications, and has also meant that spectrum has remained under-utilised and sometimes unused. Our aim is to move, over the next few years, to a market-led approach, with 70% of spectrum priced in the marketplace, tradeable and available for use for any purpose and with any technology, subject to minimum but necessary restrictions to prevent harmful interference.

As part of this, we have announced a major programme of spectrum auctions. In each case the auctions will be open to all companies, regardless of nationality, and licences will be granted that allow flexible use, freedom of choice of technology and the right to trade spectrum. We are also looking to liberalise the 2G licences held by our mobile companies so that the spectrum can be used for services other than voice and SMS such as high speed mobile broadband using 3G. The combination of spectrum release, spectrum pricing¸ spectrum liberalisation and spectrum trading will mean that spectrum, this hugely valuable but often underestimated asset, will be available for new businesses and applications, to the benefit of UK innovation and growth.

Our programme of spectrum release is also helped by two things which I should highlight. Today the first part of the UK has had its analogue terrestrial television signal switched off - the start of our programme to switch off altogether by 2012 the analogue television signal thereby releasing a very substantial block of prime spectrum. We are currently consulting on how we should use the released spectrum. We have identified a wide variety of plausible uses including mobile TV, high definition TV, mobile broadband and satellite. The spectrum could be used for any of these or for uses that we don’t even know about now. Faced with this uncertainty and range of options, we are inclined towards a market-based approach of auction to determine the subsequent use of this spectrum: we are still open to argument and listening hard, but without compelling analysis and hard evidence we are hesitant to put a regulator’s decision ahead of a market-driven process.

The second helpful factor is that spectrum for many uses is already priced. Our emergency services, our intelligence and defense services (but not yet our broadcasters) all pay for their use of spectrum. This means that they value the spectrum and use it efficiently, which has facilitated a gradual but important release of spectrum from the Ministry of Defense for civilian use.

The combination of increased spectrum supply, liberalisation of use, and trading of spectrum should provide a considerable boost to economic growth and innovation in the UK. Together with ULL and equivalence of access in the world of NGNs, we intend this to provide a benign environment for technology-based communications businesses to thrive. And not just from the UK, but all around the world.

Thank you for the opportunity to speak to you today. Having spoken passionately about the UK experience and approach, permit me a final cautionary coda. If one looks around the world and studies different markets and economies in detail, the more it is clear that ‘one size does not fit all. But it can be very instructive to compare and learn from each other about what has worked or not worked in our respective countries – that is why I and my colleagues are here. I hope that my insights on UK experience can be of some value to your work and I look forward to hearing your comments and answering your questions.

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