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1.2.1 Convergence as a global trend

Ten or fifteen years ago, the construction of an international communications report would have been a reasonably straightforward affair. Nearly all of the main communications metrics were easily measurable, and reflected accurately the way in which consumers used services. We could have looked to the main PSTN fixed-line telephone network statistics (almost always the incumbent in each country) to examine the voice call patterns from consumers within the home. Analysis of the mobile operators (of which there were typically around two per geography) would have provided an accurate picture of the ways in which consumers used voice services when outside the home. The internet was still in its infancy and there was virtually no residential broadband service: we could therefore capture use of the internet by monitoring dial-up calls to internet service providers (again, the vast majority of this traffic would be carried by the incumbent fixed-line operator). And pay TV services were provided over a limited number of platforms with a small number of price points.

By 2006, however, the act of measuring and analysing consumer behaviour in the communications market has become far more complex. New sectors, products and services have sprung up; new operators have become established in all major sectors; both traditional and new services are being delivered to consumers over multiple platforms. This combination of new products, operators and delivery channels has combined to fuel the process known as convergence.

Convergence is a widely-used and wide-ranging phrase, and can take many forms:

• Device convergence allows consumers to access many different services from the same device, even if they are delivered over different platforms (an example might be a mobile phone with an integrated FM radio).
• Billing convergence means that consumers can receive many different services on the same bill and possibly deal with one customer support centre; this type of convergence also allows operators to offer bundled pricing of products, as a means to attract and retain multi-service customers (for example a combined cable TV/fixed-line bundle).
• Platform convergence is the most advanced – and fastest-growing – form of convergence. It enables consumers to access multiple products and services over a single platform, and often over one device, with a single operator relationship. Examples of this include voice over internet protocol (VoIP) telephony – both fixed and mobile – and TV over mobile devices.

Operators around the world are spending a lot of resource and effort in trialling and rolling out these new converged services, not only because they believe there is growing consumer demand but also because it can open windows for dynamic new operators to gain technology leadership and acquire customers from the traditional communications providers.

Figure 1.1 below charts the evolution of bundled communications services. The initial forms of cross-service bundles were provided over cable platforms. In the UK, the cable networks that were built in the early 1990s were among the first widespread networks to feature extensive fibre and both coaxial and twisted-pair copper connections to the customer. This meant that the UK cable operators were among the first in the world to be able to offer true bundles, comprising cable TV and fixed-line telephony.

In the mid 1990s, US and UK cable operators also began offering internet services over their cable networks, in conjunction with their existing cable TV offering. By 2002, incumbent fixed-line telephone operators began to offer DSL broadband internet alongside fixed voice. Then in 2005, some fixed-line operators started to offer mobile services in addition, using either their own networks or in conjunction with other mobile operators as Mobile Virtual Network Operators (MVNOs).

Figure 1.1: Evolution of bundled services across the world

Source: Ofcom

A step change in service bundling came in 2004 and 2005. As the traditional fixed-line operators in Europe opened their networks to service competitors in a generally deregulatory environment via local loop unbundling (LLU), new operators used these networks to offer consumers innovative bundled services. The pioneers of these new bundles (which included Fastweb in Italy and Free in France) were the first to offer TV via broadband, in addition to fixed-line voice and broadband internet – and all via the twisted copper cable that feeds into virtually every household in the developed world. This meant that multiple service delivery was available for the first time with relatively little additional investment required by either the operator or the consumer. In those countries where such services have gained market share, the incumbents have tended to respond with similar offers.

In addition to the totally new LLU operators, other communications providers with roots in different sectors have used unbundling to graft fixed-line, broadband and/or TV onto their traditional offerings. For example, in the UK mobile operator O2 acquired LLU player Be, putting it in a position to offer mobile/broadband/fixed bundled services, and the satellite TV operator BSkyB purchased LLU provider Easynet, which could allow it to expand its product offering, and also to bundling broadband services.

Of the major countries that we have analysed for this report, the UK demonstrated the most advanced availability and take-up of bundled services, with almost 35% penetration, owing largely to the head start enjoyed by the cable operators, and supplemented by DSL/voice bundles over the fixed-line network. France and Italy followed, due to the success of new LLU operators. In France, for example, around 1.8 million households (over 7% of all households) took combined Internet Protocol TV (IPTV), broadband and voice services from Free by mid-2006, and in Italy, Fastweb had around 800,000 IPTV/broadband customers by the same time. In Germany and Japan, bundling has yet to make such a significant impact.

Key enablers of convergence

A number of critical enablers have driven the growth of convergence products and services over the past year. These include the following:

• Falling costs of distribution: the prices of broadband and mobile connectivity have both fallen significantly since 2005. In broadband, the drop has been particularly dramatic, while downlink access speeds have risen concurrently, meaning that consumers are getting a richer broadband experience for less money.
• Increased penetration of broadband: the number of consumers with broadband connections (especially connections above 2Mbit/s) has grown rapidly over the past two years. In many major world economies, well over 40% of consumers have both a mobile subscription and access to broadband.
• Falling cost and physical size of storage capacity: hard disk technology has evolved rapidly, meaning that digital storage has become ever more compact and exponentially cheaper. For example, consumers can now obtain 2GB hard disk USB key fobs, and Apple’s new iPod digital music players store up to 80GB of content in a device no larger than a cigarette packet.
• Lower barriers to entry for operators: Innovation in convergence has undoubtedly been stimulated by the increasing ease of market entry for new operators. It is now relatively simple for any operator to not only have an internet presence, but also to act as an internet service provider (via either LLU or a bit-stream product), and to offer mobile services through either an MVNO operation or mobile partnership.
• Digitisation: an increasing range of services and content (for example TV, radio, telephone calls, photographs, music etc.) are now routinely stored digitally and transported digitally using packet-based networks. To the components involved such as storage and transport media, user terminals and network equipment, all such digital signals look the same. This allows for increasing levels of platform substitution or consolidation at a technical level – an important driver of convergence.

All of these factors have helped stimulate investment in new products and services, which in turn have helped drive take-up and adoption of converged applications. Another enabler could be the introduction of ‘home hub’ products and services, whereby operators provide a domestic centralised communications device able to manage a mixture of TV, broadband and telephony services. This hub can typically connect to multiple devices, including PCs, TVs, PVRs, games consoles and mobile handsets, thereby enabling consumers to access and store digital media seamlessly, wherever they are in the home.

Examples of new convergence services

A number of innovative convergence products and services have been introduced since 2005. The predominant current examples of convergent services include:

• TV over broadband: This encompasses both the IPTV model of packaged, encoded provision of digital TV services using the DSL platform (e.g. Free in France, or Homechoice in UK), and also the placing of TV content online by broadcasters, for viewing over any broadband connection. Examples of this include Channel 4 in the UK, which simulcasts all of its proprietary content online, or ABC in the US, which offers online versions of many of its most popular shows.
• TV over mobile: During 2005 and 2006, most major mobile operators with 3G spectrum introduced TV services over their networks. Users typically subscribe to a package of TV programming (which increasingly includes ‘live’ scheduled programming) for a monthly charge, with caps on usage. While the use of 3G spectrum for TV is both technically and commercially feasible, many operators are examining the possibility of using other areas of spectrum and other broadcast-based technologies to deliver TV to customers over multi-mode devices. In the UK, O2 has trialled TV using the DVB-H platform and spectrum, with its trial customers using a dual-mode GSM/DVB-H handset. Virgin Mobile has recently launched a mobile handset in the UK which receives broadcast TV using DAB spectrum.
• Fixed-mobile convergence: Many telecoms operators have either trialled or commercially introduced fixed-mobile convergence services during 2005 and 2006. These services typically use a dual-platform handset combining a regular GSM mobile phone with another, shorter range, wireless technology. Most of the time, the handset uses GSM, with the short range wireless used to route calls via a customer’s broadband connection while at home or in the office, potentially saving them money. Bluetooth is one option for the second wireless connection, as used by BT Fusion in the UK. WiFi is the other option as used by the Orange Unique service, launched in France and the UK in 2006. As well as the home/office case, WiFi-based solutions could also be used to bypass the GSM network when in range of public WiFi hotspots, which are becoming ever more numerous in most countries.
• Unified software platforms and applications across multiple platforms: Software and applications developers are currently investing heavily in multi-platform operability solutions; these enable consumers to move seamlessly between different devices or access technologies with a single identity and sign-on, and common applications. An example of this form of convergence is Microsoft’s Windows Live environment, which allows users to access the msn platform, email, instant messaging, and, in the near future, TV and other content services, over multiple devices (home computer, mobile device, TV) with a single identity.

Evidence suggests that the convergence of content and services, particularly when delivered over a broadband internet platform, has to some extent altered consumer behaviours towards ‘traditional’ platforms and delivery mechanisms. For example, the research we commissioned for this publication shows that significant numbers of broadband-enabled consumers indicated that they watched less television via their normal TV sets since they acquired an internet connection (Figure 1.2). In Italy, this figure was the highest at 41%, with only 11% saying that they watched more ‘traditional’ TV. In the UK, 33% said they watched less TV, while only 6% said they had increased their viewing.

Figure 1.2: Changes in offline TV viewing since first using the internet
% adults with broadband at home

Since you started using the internet, which if any of the following activities do you believe you undertake more or less often OFFLINE? Watching television

Source: Ofcom research, fieldwork carried out by Synovate in October 2006

Similarly, our research showed that the delivery of news, sport and feature content over the internet was having an impact on readership of national newspapers (Figure 1.3). Between 23% (Italy) and 30% (Germany) respondents said that they read national newspapers less since going online, with only small numbers saying they read more.

Figure 1.3: Changes in national newspaper readership since first using the internet
% adults with broadband at home

Since you started using the internet, which if any of the following activities do you believe you undertake more or less often OFFLINE? Reading a national newspaper.

Source: Ofcom research, fieldwork carried out by Synovate in October 2006

1.2.2 Young adults are leading the march towards convergence

Our international consumer research also confirms a trend reported in the UK 2006 Communications Market Report; that young people in many other countries are at the vanguard of new communications behaviours and activities. According to our international online survey of broadband users, the internet is becoming a mainstream platform for media consumption among the young, who demonstrate much higher levels of engagement with different types of online content than older age groups.

Figure 1.4 shows that, while the proportion who have downloaded or watched music videos online generally ranges between 40% and 55% in the countries surveyed, usage rises to 67%-87% for broadband users in the 18-24 age group.

Generational gaps in online music video use were highest in the US, the UK and France, all showing take-up by 18-24 year olds of at least 30 percentage points higher than the average across all age groups.

Figure 1.4: Watching music videos online
Have you ever watched or downloaded music videos to your PC?

% adults with broadband at home

Source: Ofcom research, fieldwork carried out by Synovate in October 2006
Note: in Japan and China, broadband users surveyed were 18-54 years old

Whereas the high level of music video downloading among the youngest age group is unsurprising, as this is the primary target audience for the genre, a similar pattern can also be seen with television content; as age increases, again, reported usage decreases (Figure 1.5). While, in most countries, 30% - 40% of broadband users report having watched TV clips or whole TV programmes via their PCs, this rises to half or over for 18-24 year olds in all countries except France, where consumption among the broadband population as a whole is also relatively low. China again stands out, with a much higher proportion of broadband users downloading TV content than other countries.

Figure 1.5: Watching TV programmes online
Have you ever watched or downloaded clips from TV programmes or whole TV programmes via your PC?

% adults with broadband at home

Source: Ofcom research, fieldwork carried out by Synovate in October 2006
Note: in Japan and China, broadband users surveyed were 18-54 years old

The appetite for digital content among young adults is not limited to traditional media formats; it extends to material produced by fellow internet users, where the generational differences are even more noticeable (Figure 1.6). Our findings suggest that user-generated video content is especially popular with young people in the US, China, Germany and Italy, where around two thirds of 18-24 year old broadband users surveyed reported downloading videos made by other people. This compares with averages for the total broadband population of 43% in the US, 40% in Germany and 41% in Italy.

Figure 1.6: Watching user-generated content online
Have you ever watched or downloaded videos made by other people via your PC?

% adults with broadband at home

Source: Ofcom research, fieldwork carried out by Synovate in October 2006
Note: in Japan and China, broadband users surveyed were 18-54 years old

Online news is something of an exception to the patterns observed in our survey. Although in most countries a slightly higher proportion of 18-24 year olds reported watching or downloading news clips via their broadband connection than all broadband users, the differences between age groups are not as pronounced as for other types of video content (Figure 1.7). Our findings indicate that, breaking this trend, in France and China a higher proportion of older users report having watched or downloaded news clips than 18-24 year olds. In the UK, the take-up of online news by broadband users in the youngest age group matches that of the overall user base.

The findings suggest news to be a more uniform online genre, equally consumed by different age groups. This may be, at least in part, explained by the fact that news is present on most ISP portals and homepages likely to serve as browser starting pages – it is easier to ‘bump into’ online than other content types and so may be habitually used by broadband users of different ages. In addition, older people may be generally more interested in news than other genres and therefore make greater efforts to seek it online.

Figure 1.7: Watching news programmes online
Have you ever watched or downloaded news clips via your PC?

% adults with broadband at home

Source: Ofcom research, fieldwork carried out by Synovate in October 2006
Note: in Japan and China, broadband users surveyed were 18-55 years old

When plotting the use of different types of video content accessed by 18-24 year old broadband users, it becomes clear that music downloads are by far the most popular type of online video genre for this age group (Figure 1.8). Perhaps unexpectedly, user-generated content rates second in the US, Italy, Germany and France, where it is more popular than online television viewing among young adults. These findings may suggest that, while the internet does offer an opportunity for traditional TV market players to maintain their reach within this age group, content produced by ordinary people is a serious competitor for online attention.

Figure 1.8: Use of online media content by 18 – 24 year olds
Have you ever watched or downloaded any of the following via your PC?

% 18-24 year olds with broadband at home

Source: Ofcom research, fieldwork carried out by Synovate in October 2006

Young adults are not only enthusiastic users of online content, they appear much more likely to share the files they own or acquire content from other users via file-sharing communities. Such communities are based on ‘peer-to-peer’ (P2P) applications, which allow users to search other members’ hard discs for files and download them to their own computers via a broadband connection, eliminating the need for a central server for storing and distributing content. P2P networks have been a subject of controversy in recent years, with many commentators suggesting that the ease of unauthorised file-sharing over such networks poses a threat to traditional content distribution models.

Our survey shows that almost every other broadband user in the 18-24 age group in the US is a member of a file-sharing community, compared to one in five for all age groups (Figure 1.9). In the UK, nearly twice as many 18-24 year old broadband users participate in such communities as those in the 25-44 age group. Interestingly, the usage gaps between age groups are lowest in China, Japan and Italy - countries where overall file-sharing is comparatively high.

Figure 1.9: Membership of file-sharing (P2P) communities
Are you a member of an online community or network designed specifically to allow you to download other people's files, and allow them to download yours?

% adults with broadband at home

Source: Ofcom research, fieldwork carried out by Synovate in October 2006
Note: in Japan and China, broadband users surveyed were 18-54 years old

Our 2006 UK Communications Market research on young people in the UK has highlighted the growing role of the internet as an integral part of the social fabric for many young adults today, with the majority using it as a tool for interacting with peers and meeting new people via online communities, often referred to as ‘social networking’. Our international survey of broadband users indicates a similar trend in many other countries. Figure 1.10 below shows that in all countries other than China, many more 18-24 year olds have used websites as a means of keeping in touch with people than is the case for the overall population. Germany had the highest level of use among this age group, at 77%, followed by Italy and France with almost seven in ten.

Figure 1.10: Use of websites to keep in touch with people
Have you ever used sites where you can chat with people you know or contact people you have lost touch with?

% adults with broadband at home

Source: Ofcom research, fieldwork carried out by Synovate in October 2006
Note: in Japan and China, broadband users surveyed were 18-54 years old

Similarly, young broadband users are much more likely to meet people online than users in other age groups (Figure 1.11). Italy, again, shows a very high level of use, with nearly nine in ten 18-24 year olds reporting having used websites to meet new people, compared to half of the general population. Getting to know people online is also common among German broadband users in the youngest age group, with 79% claiming to have used such websites, compared to a 58% average across all age groups.

Figure 1.11: Use of websites to meet new people
Have you ever used sites where you can meet and chat to new people?

% adults with broadband at home

Source: Ofcom research, fieldwork carried out by Synovate in October 2006
Note: in Japan and China, broadband users surveyed were 18-54 years old

• 1.3 The UK in context

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