Oftel Guidelines

CONTENTS

Introduction

ANNEX A – Guidelines to the regulation of the provision of conditional access for digital television services

Section 1: Introduction and background

Section 2: Licensing to consumer equipment manufacturers of Industrial Property Rights (IPRs)
for conditional access technology

Section 3: The obligation to offer technical conditional access services on a fair, reasonable
and non-discriminatory basis: terms and conditions other than prices

Section 4: The obligation to offer technical conditional access services on a fair, reasonable
and non-discriminatory basis: pricing issues

Section 5: Provision for transcontrol by cable operators

Section 6: Electronic programme guides

Section 7: Other Licence conditions

ANNEX B – Extract from Oftel’s Guidelines on the operation of the Fair Trading Condition

Introduction

1 The Guidelines set out in Annex A to this Statement are intended to lay down the broad principles of the regulation of conditional access services for digital television services. They set out how Oftel would propose to deal with anti-competitive behaviour in relation to the provision of conditional access services. They outline Oftel’s approach rather than giving a rulebook setting out the decisions which would apply in any particular circumstance. Detailed and prescriptive rules risk being overtaken by events and hindering market developments.

2 The Guidelines are now in force. They represent Oftel’s current view of the way it would interpret its responsibilities and exercise its discretion under current legislation. There are no definite plans to revise them by some specific date. Oftel is however committed to keeping them under review in the light of market developments and further information, and to issuing a revised version if it should appear necessary to do so.

3 These Guidelines do not form part of the Licence or the Regulations, and they do not affect the legal scope of either. The Director General cannot legally fetter his discretion in advance and therefore he retains the ability to depart from the Guidelines where the circumstances warrant it. The Guidelines are therefore not binding on the Director General. However, the Director General will take the Guidelines into account in applying the Licence and in his role in relation to the Regulations. He would normally expect to follow them and to give his reasons if he departed from them.

4 This document should be read in conjunction with:

5 The publication of this Statement and Guidelines follows the publication of the draft Guidelines issued for consultation in December 1996 – Conditional Access: Consultative document on draft Oftel guidelines. This Statement focuses on five sets of issues:

Independent subscriber management, independent subscriber authorisation and independent smart cards

6 This set of issues divided the respondents to the consultation sharply. BSkyB stressed the considerable operational difficulties which they believed would arise if broadcasters were permitted to issue smart cards which covered their own services, whether or not the cards also covered a wider range of services. They also argued that independent subscriber authorisation was possible only if they granted to broadcasters a licence to use their proprietary Intellectual Property Rights (IPR). They considered that this would pose a threat to the integrity of their conditional access system and, moreover, that it would be unreasonable to require them to license their IPR if they were unwilling to do so voluntarily. Finally, they pointed to their record of operating a conditional access system for several years on behalf of other broadcasters without any complaint about leakage of confidential subscriber information.

7 On the other hand, a number of broadcasters stressed the importance to their businesses of retaining control over commercially confidential information relating to their subscribers. They felt that a situation where such sensitive information was in the hands of a company associated with one of their competitors was inherently unsatisfactory; and that they could suffer significant commercial damage if the ‘Chinese walls’ or other behavioural safeguards failed. For these reasons, they felt it was essential for them to have the option to run their own subscriber authorisation systems. Most felt less strongly about the need to issue their own smart cards.

8 Oftel recognises that both points of view have weight. In reaching its preliminary conclusions, it has discussed these matters extensively with the above parties and also with other parties who have experience of running conditional access services.

9 There is clearly a strong incentive for a conditional access provider to convince its prospective clients that their concerns about leakage of commercially sensitive information are unfounded, in the light of whatever ‘Chinese walls’ and other safeguards (for example, the right of independent audit of the integrity of such walls) which it proposes to put in place. However, it is undeniable that no system of safeguards can guarantee 100% security. Moreover, Oftel is not persuaded that the genuine operational difficulties associated with multiple smart cards referred to by BSkyB are insuperable nor that there would be any material risk of failure of system integrity arising from independent subscriber authorisation. The experience of other operators of conditional access systems suggests otherwise.

10 The expense associated with independent smart cards (not only the direct cost of additional cards but also additional expense associated with more complex customer handling procedures) means that this is unlikely to be the preference of most broadcasters. However, Oftel is not convinced of BSkyB’s arguments that it is absolutely essential for a card capable of authorisation for all services to be in the set-top box at all times. In particular, there appear to be no serious operational objections to a scenario where a main card covers the full range of services while an independent card carries only a limited range of services and would under no circumstances be authorised for the full range.

11 Oftel believes that most broadcasters are, in practice, likely to favour the shared card. It does however consider that the option of an independent card should not be ruled out. Depending on the circumstances, Oftel might well consider that a conditional access operator who refused to offer this option was acting unreasonably.

12 In the context of a shared card, Oftel accepts that the difficulties in the way of providing for two or more centres to maintain databases of subscribers where each is entitled to arrange for the issue of new or replacement cards as necessary, appear considerable. On balance, this looks an unattractive option and a single card issuing centre seems preferable. If this were operated by a ‘trusted third party’, independent of any broadcaster, concerns about leakage of commercially sensitive information would be minimised.

13 Oftel does not accept that there are any overriding reasons (such as legitimate concerns about system integrity) for a conditional access provider to maintain a monopoly over subscriber authorisation services. To the extent that it is necessary to license IPR to allow another party to authorise subscribers for certain services, this should be possible without any question of placing commercial secrets in a vulnerable position. (A party licensed to provide subscriber authorisation services would not necessarily be a broadcaster – again it might be a ‘trusted third party’.) On the other hand, it does appear unreasonable to expect broadcasters to give up control over their commercially sensitive subscriber data.

14 If the Director General considers that the additional costs experienced by a broadcaster in having to use the subscriber authorisation services of the conditional access provider coupled with concerns about control over commercially sensitive information could lead to a material distortion in competition, he will use the powers available to him to require the licensing of the necessary IPR or take other appropriate action.

Transcontrol

15 The section has been revised in the light of comments received during the consultation. It sets out the principles which Oftel will apply in considering whether a conditional access provider was co-operating with a cable operator to facilitate cost-effective transcontrol. It also contains an enlarged description of the information required to be available to the cable operator in order to allow it to process a satellite broadcast stream.

Pricing of conditional access services

16 One important issue raised in the consultation was the issue of pricing for conditional access services to broadcasters who needed to scramble free-to-air transmission in order, for example, to restrict broadcasts to one national territory.

17 The Guidelines set out the approach which Oftel would propose to take. This distinguishes between two elements:

18 In relation to the first of these, the Guidelines set out the view that there would appear to be circumstances in which free-to-air scrambled services and subscription services could have different underlying costs. Oftel would expect such underlying cost differences to be reflected in the pricing of conditional access services.

19 On the second of these elements, to the extent that free-to-air and subscription television services are in different markets, the Guidelines outline the scope for conditional access operators to depart from the normal approach of ‘equal mark-ups’ in allocating a greater share of common costs to subscription services.

20 Oftel would expect charges for technical conditional access services to free-to-air broadcasters to be on a non-discriminatory basis as between such broadcasters. Oftel recognises that certain broadcasters have public service obligations which have to be met. However, the terms of the Directive mean that there is relatively little scope to require a conditional access provider to make distinctions between different types of free-to-air broadcaster.

Subsidy and associated agreements between undertakings

21 The consultative document posed a number of questions about whether subsidies to set-top boxes should be recoverable through charges for conditional access. Three major messages emerged from the consultation:

22 Oftel has therefore extensively revised this section to outline the principles and approach to these issues which would be applied in any particular set of circumstances. Oftel’s objective is to ensure that the provision of subsidy does not restrict, distort or prevent competition in the relevant markets. However it recognises that there may be circumstances where there are substantial offsetting benefits to the consumer (in terms of improving the production or distribution of goods or promoting technical or economic progress). It is also concerned to ensure that any mechanisms for the recovery of subsidy are competitively neutral. The general approach Oftel proposes to adopt is based on the tests in Articles 85(1) and 85(3) of the Treaty of Rome (which are in turn incorporated in the Fair Trading Condition in the Class Licence for Conditional Access Services). Oftel’s view in any particular circumstances would be influenced by:

23 Oftel’s view on these will in turn hinge on an analysis of the relevant markets and of the position of the parties within that market. By way of illustration relevant markets which might be affected could include:

24 Co-operation and consultation with the Independent Television Commission (ITC) is also likely to be important in relation to the provision of subsidy for digital terrestrial television and any arrangements for its recovery from other broadcasters.

Electronic programme guides

25 The electronic programme guide (EPG) will be of great significance in the competition amongst service providers for customers. It will not be the only method by which viewers can scan different service offerings and choose one but it may well turn out to be the most important. In the absence of rules to the contrary, an EPG might be designed to give greater prominence to one group of services or to facilitate the selection of one group while making selection of another group considerably more difficult. Either of these effects would be likely to distort competition and would therefore be unacceptable.

26 Oftel is responsible for regulating EPGs in so far as their provision is provision of a conditional access service. It takes the firm view that this test is satisfied where the EPG is an important means by which authorised viewers obtain access to television services.

27 Because of the central part the EPG is likely to play in the process by which customers choose, select and purchase programmes, and because this process will be significantly determined by the way information is presented, ‘fair, reasonable and non-discriminatory’ access to this aspect of conditional access services will mean much more than just the price of any ‘listing’. It will also cover, inter alia, the ordering of the display of different programmes, the branding of pages within the EPG, the display of channel brands, the ease of ‘purchasing’ pay-per-view options, access to information on viewers’ use of pay-per-view and other services.

28 Oftel’s general approach, which it takes here as in other areas, is based on its experience that it is impossible to predict all the circumstances which might arise. Prescriptive rules risk being overtaken by market developments; guidelines should therefore set out the principles to be followed. They should not dictate how those should be met nor impose any single solution.

29 Oftel draws a number of main messages from the consultation:

Oftel–ITC co-operation

30 In some cases the same EPG will be covered by the regulatory regime of both the ITC and Oftel. It would be most unsatisfactory, from the point of view of an EPG provider, service provider or viewer, if Oftel and ITC were to exercise their legitimate regulatory discretion in mutually inconsistent ways, whether such decisions relate to the same or different EPGs. ITC and Oftel are committed to co-operation to avoid this.

31 In this context, the ITC and Oftel are working towards the publication of a joint statement, probably in the early summer. This would set out a common framework and common principles which both organisations would adopt in regulating EPGs. The feasibility of setting up a joint Oftel/ITC team to consider requests for comment on the compatibility of specific EPG designs with the regulatory regime, and to investigate complaints concerning anti-competitive behaviour, is being considered by both organisations. In the meantime, while this document cannot commit the ITC in any way, Oftel believes the principles set out in the Guidelines are consistent with the ITC’s current thinking.

Further comments

32 The Guidelines are now in force. Oftel intends to keep the Guidelines under review in the light of market developments and experience gained in applying the Guidelines. New information and evidence relating either to new developments or to the practical experience of the application of the Guidelines may be submitted to Oftel at any time.

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ANNEX A

Guidelines to the regulation of the provision of conditional access for digital television services

SECTION 1: INTRODUCTION AND BACKGROUND

A1 These Guidelines set out the principles and approach which the Director General of Telecommunications (‘the Director General’) will take in his role in regulating conditional access systems and technology. This includes, in particular, enforcing the conditions of the Conditional Access Services Class Licence issued under the Telecommunications Act 1984, together with enforcement of the relevant Regulations of the Advanced Television Standards Regulations 1996.

A2 This document has seven sections:

Status of these Guidelines

A3 These Guidelines do not form part of the Licence or the Regulations, and they do not affect the legal scope of either. The Director General will take the Guidelines into account in enforcing the Licence and in his role in relation to the Regulations. He would normally expect to follow them and to give his reasons if he departed from them. The Director General cannot legally fetter his discretion in advance and therefore he retains the ability to depart from the Guidelines where the circumstances warrant it. The Guidelines are therefore not binding on the Director General and will be reviewed from time to time as the market develops and experience is gained.

Aims and objectives

A4 Oftel’s goal is to secure the best deal for the consumer in terms of quality, choice and value for money. In this context Oftel has five key objectives:

The regulatory framework

A5 The current regulatory framework for conditional access has two main elements: the Advanced Television Standards Regulations 1996 and the Conditional Access Services Class Licence. These are discussed below.

A6 The scope of these provisions is determined by the scope of the enabling Directive (95/47/EC)on the use of standards for the transmission of television signals. The scope of the proposals is therefore limited to digital television services. The meaning of the words ‘television services’ is left undefined by the Directive. Digital technology means that the range and variety of services delivered by means of television receivers is likely to grow and that there are likely to be new and innovative forms of television service. Oftel’s view is that it should not interpret the meaning of these words in an unduly restrictive way.

A7 The Government has stated its view that conditional access for all digital broadcast services and services using switched telecommunications networks should be brought within a single unified framework with effect from 1 April 1999 – or earlier if a suitable opportunity can be found.

Application of the Regulations and Licence

A8 It should be noted that the Regulations and Licence apply to all conditional access operators irrespective of the means of transmission. They therefore apply equally, for example, to digital satellite, digital terrestrial and cable operators. However in none of these cases do the regulatory requirements on conditional access extend to requiring access to the underlying transmission network.

A9 Cable operators do not presently provide broadcasters with access to their networks. The obligation to offer technical conditional access services to broadcasters may not therefore have practical effect. However, cable operators holding public telecommunication operator licences are in addition subject to the extensive requirements of their main Telecommunications Act licences. It is proposed that these licences, along with all other significant individual licences, will also, in due course, include the Fair Trading Condition. Were a cable operator – either alone or together with others – to act in a way which had the object or effect of restricting, distorting or preventing competition in the market for the provision of television or other content services, these provisions would be relevant to the relationship between those cable operators and broadcasters or other service providers. In such circumstances, Oftel would, for example, expect to see the electronic programme guide (EPG) provided by that operator or group of operators reflect the principles and approach on competitive neutrality set out in these Guidelines.

A10 In addition, should a cable operator offer access to its network to a broadcaster and provide it with conditional access services for digital broadcasting (whether by choice or under any requirement), or offer services to another cable operator, it would become subject to the Conditional Access Services Class Licence (and the relevant Regulations).

A11 In the case of digital terrestrial television, the Class Licence will apply to any organisation which provides conditional access services to a multiplex operator (or broadcaster), except where the conditional access provider only provides services to itself or to a member of its own group.

Market dominance

A12 In enforcing the Licence Oftel will have regard to the market position of the operator. Market dominance is conventionally defined as the ability of a firm to act to an appreciable extent independently of its competitors and customers in terms of pricing and other decisions. Market dominance is not in itself prohibited – by the Licence or otherwise – rather it is the abuse of a dominant position which is prohibited.

A13 Behaviour (such as discriminatory pricing or refusal to supply) may not infringe the Fair Trading Condition if engaged in by a non-dominant undertaking, but may be an abuse when it is engaged in by a dominant undertaking.

A14 Oftel’s approach to establishing whether an undertaking is in a dominant position in respect of the supply of certain goods or services or to establish the impact of a restrictive agreement is described in paragraphs 22 to 33 of Oftel’s Guidelines on the operation of the Fair Trading Condition published in March 1997. For ease of reference these are given in Annex B. Key factors include:

Market definition

A15 Oftel would, if relevant, consider the issue of market definition and dominance in the context of the investigation of a specific complaint. The following is therefore given only as an illustration of Oftel’s approach.

A16 Conditional access is an intermediate good in that it is a necessary input for subscription television services (and may be required by free-to-air services as well). In considering issues of market dominance and competition it may also therefore be necessary to take into account the extent of vertical relationships between the conditional access supplier and an associated broadcaster or service provider.

A17 In considering an issue of possible dominance in a particular market Oftel is likely to take into account:

An overview of the Regulations and Class Licence

A18 The Regulations include requirements on:

A19 The key provision of the Licence concerning the supply of technical conditional access services to third parties is Condition 1 (Service obligation for operators of conditional access services to provide technical services) which sets out the requirement to offer technical conditional access services to digital television services on a fair, reasonable and non-discriminatory basis. This is intended to enable broadcasters to gain access to viewers through any population base of decoders which can receive their signal. Linked to this are a number of other conditions:

A20 The second key Licence condition is Condition 2 (Transcontrol requirements) on transcontrol which requires the conditional access operator to co-operate with the cable operator, including providing it with any necessary assistance and information, so that the cable operator is able to transcontrol and rebroadcast television services using its own conditional access system without incurring unnecessary or unreasonable expense.

Enforcement of the Regulations and Licence, and resolution of disputes

A21 There are three main mechanisms through which alleged breaches of the Regulations or Licence can be resolved. These are:

A22 The Director General may take enforcement action for the breach of a Licence condition using his powers under the Telecommunications Act. This enables him to make an order requiring the Licensee to remedy any breach of the Licence condition. The Director General may also apply, on his own initiative, to the courts for an injunction under the Regulations in the event of a breach of the duties relating to the licensing of IPRs to consumer equipment manufacturers, the offer of conditional access services, or the provision for transcontrol.

A23 It should be noted in this context that the final decision on the interpretation of the Regulations will lie with the courts. These Guidelines therefore cannot be taken as indicating how the courts would interpret the Regulations if asked to do so.

Role of the Independent Television Commission

A24 The abuse of a dominant position in conditional access services restricting, distorting or preventing competition is likely to affect the downstream markets of retail subscription and multichannel TV as well as the upstream markets of programme supply, programme production and acquisition of distribution rights. These issues are clearly relevant to the responsibilities of the Independent Television Commission and Oftel intends to consult fully with it where the enforcement of the Licence and any action taken under the Regulations may have implications in areas for which the ITC is responsible. In addition both the ITC and Oftel have responsibilities in relation to electronic programme guides. Oftel attaches great importance to ensuring co-operation in this area.

SECTION 2: LICENSING TO CONSUMER EQUIPMENT MANUFACTURERS OF INDUSTRIAL PROPERTY RIGHTS (IPRs) FOR CONDITIONAL ACCESS TECHNOLOGY

A25 The Advanced Television Standards Regulations 1996 set out rules on the licensing of Industrial Property Rights to the manufacturers of consumer equipment.

A26 There are two important elements to these rules. The first is that when the holder of Industrial Property Rights licenses those rights it must ensure that the licensing is done on fair, reasonable and non-discriminatory terms.

A27 This is intended to ensure that control of conditional access technology cannot be used to distort, restrict or prevent competition in the consumer equipment market.

A28 The second aspect of the Regulations is that in granting licences to use industrial property rights no restrictions can be applied that would prohibit, deter or discourage the manufacturer from including a common interface in consumer equipment (which would allow the equipment to be used with a different conditional access system) or circuitry for another conditional access system. (It should be noted in this context that Regulations 6 and 14 require that integrated digital television sets are fitted with an open interface socket permitting connection of peripherals including additional digital decoders.)

A29 In addition, Oftel would regard the provisions on licensing on non-discriminatory terms as applying where a manufacturer of consumer equipment wished to build equipment which had:

A30 If such a manufacturer were improperly refused a licence for the relevant technology, or the licence were offered on unfair, unreasonable or discriminatory terms, the Director General could apply to the court for an injunction. (The manufacturer could also itself apply to the courts for damages and other enforcement action.)

A31 If licensing were being carried out in a way which was restricting, distorting or preventing competition then action could be taken under UK and EC competition law as well as under the Regulations. In particular, the Director General could exercise his powers under the Fair Trading and Competition Acts in relation to commercial activities connected with telecommunication products and services.

SECTION 3: THE OBLIGATION TO OFFER TECHNICAL CONDITIONAL ACCESS SERVICES ON A FAIR, REASONABLE AND NON-DISCRIMINATORY BASIS: TERMS AND CONDITIONS OTHER THAN PRICES

A32 The Regulations contain a duty on conditional access operators to offer broadcasters technical services on a ‘fair, reasonable and non-discriminatory basis’. This obligation is also central to the Conditional Access Services Class Licence. The Licence also contains additional conditions which underpin this principal obligation or are necessary for enforcement purposes.

A33 It should be noted that the obligation for the supply of conditional access services applies to ‘technical services’. The term ‘technical conditional access services’ is used in this document. The term ‘technical services’ is left undefined in the Directive. The Class Licence defines a number of individual technical services but also includes within its definition ‘any other Conditional Access Service, or part of any of the above which is of a technical nature where failure to provide such a part means that the broadcaster’s digitally transmitted services could not be displayed to viewers’. Oftel would normally assume that the operation of a customer management centre for handling subscribers’ accounts is not a technical service.

A34 This section considers two aspects of this obligation:

(a) the interpretation of the obligation to offer service;

(b) Oftel’s view of what would constitute an unfair, unreasonable or discriminatory basis in relation to non-price terms and conditions.

The obligation to offer technical conditional access services

General

A35 There are a number of significant restrictions on the obligation in the Class Licence to offer technical conditional access services. The Licensee is not required to offer services where the Director General agrees that:

A36 Although the obligations to offer services arising under the Regulations and the Licence apply only to those who are producing and marketing conditional access services, these requirements will be known to those designing and installing such systems in advance of any launch. Oftel will expect conditional access operators to design their systems to take account of the requirements of the Regulations and the Class Licence. In considering whether a Licensee could be viewed as in breach of this condition the Director General will take into account what would have been reasonably practicable and foreseeable at the time the Licensee first knew of the obligations that would arise once service was provided. Thus if a conditional access operator had:

(a) failed to take into account these requirements in designing, for example:

the capacity or security features of its system; or

interfaces to it; or

other software which operates through the conditional access system; and

(b) as a result it was technically difficult or even impossible to offer conditional access services to others on a fair, reasonable and non-discriminatory basis;

the Director General would consider whether, nevertheless, the Licensee was in breach of its Licence obligations and should be required to modify the system at its own expense once the system became operational.

A37 In addition, under the provisions of the Regulations, the conditional access operator is also required, in advance of starting to provide services to broadcasters, to co-operate with broadcasters so that the broadcaster is in a position to obtain technical conditional access services on a fair, reasonable and non-discriminatory basis immediately services are first offered to broadcasters. Oftel will carefully monitor the negotiations in the run up to the launch of digital television services. The Director General will take appropriate action under the Regulations if it appears to him that the conditional access operator is not co-operating with third-party broadcasters who have requested co-operation, and they are thus disadvantaged in preparing for the launch of their own services. The Director General takes the view that withholding of co-operation and information can lead to serious adverse effects and will therefore give priority to ensuring that swift action is taken.

A38 The obligation to offer services under the Class Licence would be interpreted by Oftel to include making any offer on a timely basis. The offer of service should, therefore, be made fully and promptly and in writing on receipt of a request from a third party. Any subsequent variation in the terms of the offer should similarly be made in writing. Persistent delay in offering service may be taken as evidence of refusal to supply or undue discrimination, or both.

A39 The obligation to offer carries with it an implicit obligation to use all reasonable endeavours to conclude a contract for service to the reasonable satisfaction of both sides. In considering whether there is a breach of Licence, it will be for the Director General to determine whether all reasonable endeavours have been made.

A40 Thus the offer to supply should set out all relevant terms and conditions necessary to enable a broadcaster to plan the launch of its services. At a minimum these are likely to include:

(a) prices;

(b) the dates by which the service would be available;

(c) the dates by which any relevant equipment and/or components will be made available;

(d) information on the performance capabilities and available functions supported by the conditional access system including related functions of the application programme interface (API) of the set-top box and electronic programme guide (EPG);

(e) details of any relevant interfaces;

(f) the policy for the replacement of cards, if this is necessary, for security reasons.

A41 In Oftel’s view the requirement to offer technical services on a fair, reasonable and non-discriminatory basis implies that a broadcaster should not be put at a competitive disadvantage by using the conditional access operator’s services. This applies especially where an associated business of the conditional access operator is competing with the broadcaster in a downstream market.

A42 Examples of circumstances where the broadcaster would, in Oftel’s view, be placed at a competitive disadvantage in such circumstances include the following:

Put another way, the third-party broadcaster sharing a conditional access system should, if it so wishes, have the maximum practicable operational independence of the conditional access operator and any programming supply or packaging business related to it.

A44 In Oftel’s view, in making technical services available to third-party broadcasters, the conditional access operator should make provision so that such broadcasters can, if they so wish, be able to do one or more of the following without incurring unnecessary or undue expense, delay or difficulty:

A45 In line with this approach therefore, the Licensee would be regarded as being in breach of the obligation to offer technical conditional access services on a fair, reasonable and non-discriminatory basis if it:

Independent subscriber authorisation

A46 In line with the view that third-party broadcasters should be able to use the conditional access system while retaining the maximum operational autonomy, Oftel would in principle take the view that the obligation to offer technical conditional access services on a fair, reasonable and non-discriminatory basis includes the ability to be able to authorise and de-authorise subscribers independently. At the same time Oftel recognises that there are issues concerning the licensing of IPRs.

A47 Oftel does not accept that there are any overriding reasons (such as legitimate concerns about system integrity) for a conditional access provider to maintain a monopoly over subscriber authorisation services. To the extent that it is necessary to license IPR to allow another party to authorise subscribers for certain services, this should be possible without any question of placing commercial secrets in a vulnerable position. On the other hand, it does appear unreasonable to expect broadcasters to give up control over their commercially sensitive subscriber data.

A48 A party licensed to provide subscriber authorisation services would not necessarily be a broadcaster – it might be a ‘trusted third party’.

A49 If the Director General considers that there would otherwise be a material distortion in competition, and no other action would be effective, he will use the powers available to him to secure the licensing of the necessary IPR. Condition 9 (Intellectual Property) sets out specific conditions under which IPRs under the control of the Licensee should be made available to others. The Director General also has powers under the Fair Trading Act 1973 and under the Competition Act 1980 to act where a refusal to supply (including a refusal to supply things other than services) by a dominant operator is distorting, restricting or preventing competition in a downstream market.

A50 This may, as appropriate, require the conditional access operator to ensure that the design of the system provides for the management of the authorisation data held by the smart cards so that subscribers may choose whichever combination of providers’ services they wish to take – and so facilitate independent subscriber authorisation.

A51 In the context of a shared card, Oftel accepts that the difficulties in the way of providing for two or more centres to maintain databases of subscribers (where each is entitled to arrange for the issue of new or replacement cards as necessary) appear considerable. On balance, this looks a very unattractive option and a single card issuing centre seems preferable. If this were operated by a ‘trusted third party’, independent of any broadcaster, concerns about leakage of commercially sensitive information would be minimised.

Multiple smart cards

A52 Following submissions on the draft Guidelines Oftel’s view is that multiple smart cards have a number of disadvantages from the point of view of the consumer. From the broadcasters’ and conditional access providers’ point of view they may also have significant operational disadvantages. These mean that an independent smart card might not be a viable alternative for most third-party broadcasters. Oftel’s view is that the provision of multiple smart cards would be very much a second-best alternative to properly-designed arrangements for card-sharing. Oftel would not however wish to preclude this as an option where broadcasters felt that this was viable.

Provision for pay-per-view

A53 Where the conditional access system contains facilities supporting pay-per-view and impulse pay-per-view Oftel would expect comparable suitable facilities to be made available to third-party broadcasters.

Verification and validation services

A54 Oftel would expect verification and validation services enabling third-party broadcasters to incorporate software functions to be made available on a fair, reasonable and non-discriminatory basis so that, in particular, third-party broadcasters have the same opportunity to offer services and features supported by the set-top box as are available to broadcasters linked to the conditional access operator. Access to a description of the API command set would also be required to support this obligation.

Linked services

A55 As described above the obligation to supply technical services arises in relation to each technical service individually. The fair and reasonable obligation implies that such services are not to be bundled with services which those making the request do not want. For the avoidance of doubt the Licence also contains a condition (Condition 4) that specifically prohibits certain types of linked sales. A Licensee is likely to be regarded as being in breach of this condition if it:

Non-price terms and conditions: unfair and unreasonable basis

A56 Not only must the offer be made using reasonable timescales and reasonable processes, it must not contain unreasonable or unfair terms. In particular, where the operator of the conditional access system is also in competition (in, for example, the television services market) with the party requesting technical conditional access services, then the terms offered for the technical conditional access service requested must not contain any requirements that could distort competition in the downstream market. In these circumstances the following are examples of terms, or behaviour, which are likely to be regarded as in breach of the requirement to offer services on a fair, reasonable and non-discriminatory basis:

(a) requiring the third party to make available details of its business not required for the provision of service;

(b) requiring the third party to join the channel bouquet of a company associated with the Licensee;

(c) requiring the third party to make available details of its subscribers;

(d) refusal to supply information necessary for the offer of service to be taken up where that information is already available to the Licensee or members of its group;

(e) refusal to supply information on viewing patterns in respect of the broadcaster’s own services where the data is held by the Licensee, or overall viewing patterns where similar data is made available to members of the Licensee’s group;

(g) placing requirements or restrictions which have the effect of making it unnecessarily difficult for the third party to undertake any technical conditional access service for itself or obtain such a service from a source other than the Licensee.

Non-price terms and conditions: interpretation of ‘non-discriminatory basis’

A57 In addition to the fair and reasonable test there is an obligation to offer conditional access services on a non-discriminatory basis. This obligation arises in particular in relation to discrimination between provision to the Licensee (or member of its group) for its own use and toany other third party as well as in relation to discrimination in the terms of supply to two different third parties.

A58 Oftel’s view is that it would be inappropriate to interpret ‘non-discriminatory basis’ as necessarily requiring that identical terms and conditions are offered to all broadcasters. Indeed there might be examples where such an interpretation would have the effect of restricting competition and the variety of services available to the consumer. Oftel’s view is that the basis would be discriminatory where variations in terms and conditions could not be objectively justified, and have an adverse effect on the terms of competition in the downstream market for television services. This would particularly apply where there was discrimination against competitors with any business associated with the Licensee.

A59 The Licensee may be viewed to be in breach of this condition if it makes technical conditional access service available to third parties on terms which are materially worse than those available in respect of television channels or other services:

This applies in particular to:

SECTION 4: OBLIGATION TO OFFER TECHNICAL CONDITIONAL ACCESS SERVICES ON A FAIR, REASONABLE AND NON-DISCRIMINATORY BASIS: PRICING ISSUES

A60 Oftel’s view is that prices for technical conditional access services should so far as possible be set through the normal processes of commercial negotiations. In the event of a complaint over the pricing of technical conditional access services Oftel will consider whether the method used in setting those prices satisfies the criteria of fair, reasonable and non-discriminatory. A number of approaches to pricing may satisfy this test.

A61 The approach Oftel is likely to take to the evaluation of the prices offered will have two distinct elements:

Offer prices will need to satisfy both elements.

A62 Oftel does not see this process as leading to a unique set of fair and reasonable prices. However, Oftel would expect sets of prices that would fall within the definition of fair and reasonable to have the following characteristics:

A63 In evaluating the reasonableness or fairness of pricing structures, Oftel will bear in mind the price structures that would be likely to emerge if the provider of conditional access services operates independently of a supplier of content services.

Free-to-air broadcasts

A64 All set-top boxes are required to receive broadcasts of unscrambled ‘free-to-air’ services (provided that, where the equipment is rented, the renter is in compliance with the rental agreement). However, in certain circumstances (eg to restrict broadcasts to one national territory) free-to-air broadcasters may need to make their broadcasts in scrambled form. In such circumstances they will require technical conditional access services.

A65 Given that such services would normally be available automatically to all viewers with the appropriate equipment in a given national territory, Oftel would expect the direct variable costs of at least some of the conditional access services required (eg subscriber authorisation services) to be considerably less than those involved in providing subscription services where subscribers would need to be authorised individually. There would therefore appear to be circumstances in which free-to-air scrambled services and subscription services could have different underlying costs. Oftel would expect such underlying cost differences to be reflected in the pricing of conditional access services. To the extent that free-to-air and subscription television services are in different markets, price differentials over and above these differences in direct costs may also be acceptable (subject to individual floors and ceilings) – for example in the apportionment of common costs (see below).

A66 Oftel would expect charges for technical conditional access services to such free-to-air broadcasters to be on a non-discriminatory basis as between such broadcasters.

Allocation of common costs

A67 The provision of technical conditional access services as a whole will have many specific costs associated with it that are easily identifiable, measurable and attributable to the activities of specific broadcasters. These costs will clearly fall to be recovered from the charges for the provision of technical conditional access services to those broadcasters.

A68 In addition there are likely to be common costs not directly attributable to any individual set of activities. Oftel would, in principle, take the view that the recovery of common costs from the different services that use the conditional access system is, subject to the considerations below, primarily a matter for the provider of those services. Although there are distributions of common costs that would not meet the fair, reasonable and non-discriminatory tests there is no unique allocation of costs implied by this requirement.

A69 In arriving at a distribution of common costs, Oftel would expect the provider of conditional access services to adopt a distribution that was independent of any interests it may have as a broadcaster – the distribution should be objectively justifiable. Relevant considerations would include (this is not an exhaustive list):

A70 In practice, this is likely to mean that free-to-air broadcasters should not be expected to contribute more to the recovery of common costs than they would if those costs were shared out in proportion to the relative size of the incremental costs of each activity sharing those costs (ie no more than an ‘equal mark-up’). This may particularly be so in the case of broadcasters with a public service obligation.

A71 Oftel would normally expect pricing structures to follow cost structures and for an allocation of common costs to be made along the lines suggested above. However Oftel would not exclude, a priori, the possibility that circumstances might arise in which common costs were allocated in line with the retail value of the service being offered. In such circumstances Oftel might judge other methods of allocating common costs to be reasonable.

Treatment of fixed costs

A72 A related issue is the impact the uncertainty of demand for conditional access services has on the actual costs of provision of units of conditional access service. Many of the costs of setting up the infrastructure for the provision of conditional access services (including the costs of the customers’ set-top boxes) might be fixed irrespective of the use that is subsequently made of those services. The actual cost of provision of a particular conditional access service might, therefore, depend on the total use made of the conditional access system, and this may not be known at the time the offer to provide services is being made. Variations in the level of demand are likely to have a significant impact on the unit costs. Oftel considers that it would be appropriate to take into account the risk that predictions of demand may turn out to be wrong (in either direction).

Timing of recovery of costs

A73 A further related issue is that of the recovery of costs through time, where these costs are front loaded and/or costs are not proportional to demand in any one year. Both characteristics are likely to apply to conditional access systems.

A74 Oftel would approach this issue by looking at the reasonableness of prices through time, as well as at any particular time. Rather than requiring costs and revenues to balance in each year, the framework for such analysis is likely to be based on the calculation of the net present value (NPV) of the provision of conditional access services as a project. Thus the assessment of the reasonableness of prices would depend on the prices to be charged over the whole project period.

A75 If it were appropriate to consider any subsidy of the set-top box as a legitimate cost of the provision of conditional access services, then the approach outlined above to accounting losses in particular periods could be an appropriate way of incorporating such costs in the evaluation of conditional access prices.

Allowable input costs

A76 In addition to assessing whether the prices charged for conditional access services properly reflect the underlying costs Oftel will also be concerned to ensure that those costs are not excessive. Particular attention is likely to be given to ensuring the reasonableness of:

A77 Where inputs are purchased from related companies and/or a single supplier is a monopoly supplier (eg because it is the only supplier with the relevant IPR) then these input costs need to be evaluated to assess whether they are fair and reasonable. Oftel would assess the reasonableness of input costs against the costs likely to be incurred by an independent, efficient conditional access operator purchasing these inputs in a competitive market.

Cost of capital

A78 In assessing the fairness, or otherwise, of the pricing of conditional access services, Oftel will need to take into account the cost of capital. In addition, in view of the likely start-up nature of the business of supplying conditional access services (at least in the early years of the investment) Oftel will need to take into account the possibility that any investment may fail to make a return at all.

A79 In arriving at an appropriate cost of capital Oftel would apply the same methodology it has developed for such evaluations in the telephony market. Thus the appropriate cost of capital would be calculated with reference to a number of factors including the risk-free rate of return, the level of systemic risk incurred by investors in the conditional access business, the returns available from comparable investments, the debt-to-equity ratio. For a fuller explanation of Oftel’s approach see Oftel’s consultative documents and statement on the pricing of telecommunications services (Pricing of Telecommunications Services from 1997, December 1995, March 1996, June 1996).

A80 However, in calculating an appropriate price for the supply of conditional access services it may also be appropriate to take into account the likelihood of the relevant cost of capital not being earned in practice on the investment made. Oftel’s usual approach to estimating the cost of capital is to use the Capital Asset Pricing Model (CAPM) among other techniques. In a CAPM-based approach, rewards to investors are related to the systemic risk they bear by virtue of investing in the stock market as a whole. Specific risks of investing in particular stocks or projects are not rewarded since it is assumed that, because investors are able to diversify their holdings among a number of investments, they do not need to take on these risks. However, while a CAPM approach would not build in any return for the bearing of specific risk, cost-based prices would be set so that the expected value of return was equal to the cost of capital. That is, account would be taken of the uncertainty of outcomes, rather than the price being set to generate a return equal to the cost of capital in one business plan scenario. Some adjustment may therefore be necessary so that the expected return on investment, taking into account the probability of different outcomes, matches the cost of capital required by investors.

SUBSIDY, RESTRICTIVE AGREEMENTS AND ACCESS CHARGES

Issues

A81 Oftel is aware that a number of potential operators of digital services are considering providing subsidy for consumer equipment in order to speed the take-up of their services. (Indeed under the Broadcasting Act 1996, proposals for assisting the acquisition of equipment for reception of digital terrestial television services are one of the matters the ITC will take into account in considering bids for multiplex licences.) Potential operators of digital services may seek to recoup some of that investment through charges to third-party broadcasters and other providers of digital services. This may have implications for competition in the relevant markets (including markets for telecommunication services and equipment). Conditional access providers may also seek to recover subsidy payments through charges to third parties for conditional access services.

A82 The provision of subsidy, and associated agreements, raises a number of issues:

General principles

A83 The answers to these questions are likely to vary depending on the circumstances of the case. Oftel would approach any proposal by considering its impact on competition and the interests of consumers. Its approach would be informed by an analysis of:

A84 The proposals for subsidy and associated agreements between undertakings would be considered against two alternative sets of tests.

A85 The first test would be to consider whether the proposed subsidy and/or associated agreements would have the object or effect of restricting, distorting or preventing competition.

A86 If there were an adverse effect on competition, the proposers would need to demonstrate that it met the second test. This would require them to demonstrate that the proposed arrangements:

A87 This approach is modelled on the approach taken to agreements between undertakings under Article 85(3) of the Treaty of Rome and that taken in the Fair Trading Condition. Factors which could be relevant here include:

A88 In making an assessment of any proposals, Oftel would be concerned that, where the recovery of subsidy was permitted, this should be done in a way which was competitively neutral. If any charge for the recovery of any subsidy were to be made then it too would need to be made on a fair, reasonable and non-discriminatory basis across all conditional access services, including those of the Licensee and any associated business.

Provision of subsidy

A89 The provision of subsidy is not in itself sufficient to be regarded as anti-competitive. However, it would need to be demonstrated that either

A90 By way of illustration, relevant markets which might be affected could include:

Agreements between undertakings

A91 These tests would also apply to agreements between undertakings linked to the payment of subsidy.

A92 In assessing the impact on competition Oftel would be likely to consider, in particular, any product specification in order to assess the potential implications for competition in:

A93 Oftel’s view would be influenced by the extent to which the provision of subsidy would be made in a way which facilitated, rather than restricted, consumer choice in relation to the functions of the box and the range of services available through it. The more that the set-top box was a genuinely open platform the less likelihood there would be of adverse effects on competition.

Exclusive access

A94 The same tests would apply to proposals for agreements which gave the parties exclusive access to a platform. Oftel’s preliminary view is that, where a dominant operator (or operators) is party to an exclusive agreement prohibiting access by broadcasters or other third-party service providers, this would prima facie open up the possibility of the elimination or substantial diminution of competition. Oftel would not preclude the possibility that such arrangements between non-dominant undertakings might be permissible but it would be for the proposers of any arrangements to demonstrate that there was no adverse impact on competition or choice for consumers.

A95 Oftel would have regard to the duration of such arrangements in assessing their impact on competition.

Contractual arrangements with customers

A96 In its analysis of the potential effects on competition of any arrangements Oftel would take into account the extent of any barriers to entry deriving from the nature and duration of any contractual obligations on consumers which had the effect of obliging them to purchase certain services or preventing them from receiving third-party services.

Recovery of subsidy from third parties

A97 Subsidy recovery from third parties would need to be justified on the grounds that the ability of the party providing the subsidy to recover the subsidy from its own customers would be substantially undermined by subsequent market entry and that the threat of such market entry was significant enough to deter investment.

A98 Oftel’s approach to whether subsidy might be recoverable from third parties would be based on its competition analysis. It would be necessary to look at the specific circumstances of any proposal. Oftel’s general view is that recovery of subsidy from third parties would be most likely to be acceptable where it was demonstrated that there was (or would be) effective competition in the relevant market.

A99 The case for recovery of subsidy from third parties would be likely to be most convincing where it could be shown that:

A100 Market definition and the extent to which third parties were offering rival or complementary products to the subsidy provider will also be relevant in assessing the case for recovery of subsidy from third parties, or particular types of third party.

Market definitions

A101 In any given set of circumstances the provider of the subsidy may be competing with third parties in more than one market. It might therefore be necessary to consider the effects across a number of markets. This might imply different approaches to the recovery of subsidy from third parties depending on the market in which they operated (eg subscription television, online services, paid-for content services, free-to-air television).

Amount of subsidy to be recovered

A102 It would be necessary to demonstrate that the total amount of subsidy to be recovered from third parties was proportionate and was not being recovered from elsewhere.

A103 The existence of ‘lock-in’ agreements with customers would also be relevant to an assessment of the extent to which subsidy should be recoverable from third parties. Oftel’s preliminary view is that the greater the extent to which the customer was required to take services from the provider of the subsidy, the greater the proportion of the subsidy which would be deemed to be recovered from the provision of those services. In practice, this would be likely to mean that where the purchaser of the subsidised set-top box was required to take any service as a condition of receipt of the subsidised box then payments made by third-party suppliers for the use of the set-top box would include a less than proportionate contribution to the recovery of the subsidy.

A104 Issues may also arise in looking at the appropriate costs that might be included in the calculation of any subsidy. The principle Oftel would adopt is that only costs directly associated with the use of the box as a generic means of gaining access to digital services should be attributed to the cost of the box. Costs for the promotion of any particular final product would be unlikely to be appropriate for inclusion.

A105 Oftel’s initial view is that the amount of any subsidy should be measured as the cash transfer between the subsidiser and consumer equipment manufacturers or retailers. The subsidy would be measured on a year-by-year basis (ie the total subsidy provided in each year should be calculated separately) and the subsidy in each year should be depreciated. Proposers would need to set out their proposals on the life and depreciation profile of the subsidy. Oftel’s view is that the depreciation should be on a straightforward and transparent basis (for example straight line depreciation). Oftel’s initial view is that it would be reasonable to assume an asset life of around five years.

Method of recovery of subsidy

A106 Possible methods of recovery might include the payment of a lump sum or transaction-based charges. Oftel’s views on the appropriateness of these methods would depend on the particular circumstances of the case. Oftel would be concerned that the method chosen should not itself constitute a barrier to entry.

SECTION 5: PROVISION FOR TRANSCONTROL BY CABLE OPERATORS

A107 Cable operators may receive programming and other services for rebroadcast as required to their own subsc