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| CONDITIONAL ACCESS: CONSULTATIVE DOCUMENT ON DRAFT Oftel GUIDELINES | |
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CONSULTATION The initial consultation period will run until the 24 January 1996. There will then be a further period up to 7 February 1996 during which comments are invited on any submissions made to Oftel during the initial period. Comments are invited in particular on the questions highlighted in the text of the document. This consultation period is shorter than would normally be the case because Oftel is aware that plans are being made for the launch of digital services and market players will wish to understand how Oftel will regulate before finalising their investment plans. Written comments should be submitted to: Sandy Grom Oftel 50 Ludgate Hill London EC4M 7JJ Written comments will be made publicly available in Oftel's library except where respondents indicate that their response or parts of it are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly marked as such. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. As responses are to be photocopied respondents are requested not to spiral bind their submissions. Comments on this document can also be sent to Oftel on the Internet (if they are relatively short) by using the following e-mail address: press.office.oftel@gtnet.gov.uk Confidential responses should not be sent via the Internet. Recorded messages may be left on Oftel's Comments Hotline: 0645 600 660 (Calls charged at local rate) Resources permitting, Oftel would welcome the opportunity to discuss the document in more detail with any group which has a particular interest. CONTENTSForeword by Don Cruickshank Director General of TelecommunicationsBackground: Questions and Answers on Conditional Access IssuesConsultation PaperAnnex A: Draft GuidelinesFOREWORDThis document has two main purposes:
Oftel's policy is to encourage full, extensive and open discussion of any major new proposals. Such consultation is invaluable as a source of information and as a way of subjecting proposals to argument and scrutiny from the widest possible range of standpoints. Such consultation is an essential and integral part of Oftel's way of working in the traditional telecoms sector where Oftel has 12 years of experience. It is still more essential in this developing sector where everyone involved has little experience, where the market is moving swiftly and where many of the issues being posed are new. Oftel along with everyone else is on a learning curve. This document is intended to open a debate rather than to be the last word. It will be the first step in the process of dialogue with all the relevant interests including consumers, other regulators, manufacturers, broadcasters, conditional access and cable operators. This process will continue through the further refinement of the guidelines and the enforcement of the Licence and Regulations. It will inevitably continue up to and beyond the launch of digital services. These rules on conditional access are part of a systematic effort to ensure consistency of approach to the regulation of communications networks, whether they are wire or fibre-based or wireless, or broadcast or hybrids of these. The Regulations and Licence provide the framework for the regulation of conditional access for digital television services. However, 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. These rules need to be read in that light. Oftel's overall aim 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: 1. to ensure that control of conditional access technology is not used to distort, restrict or prevent competition in television and other content services . This is of particular relevance where a conditional access service provider is providing conditional access services to competitors (or would-be competitors) of an associated programming supply business; 2. to ensure that control of conditional access technology does not lead to consumer choice being artificially constrained, whether in relation to consumer equipment, the range of services available via that equipment or the packaging of those services; 3. to facilitate, so far as possible, consumers being able to access services on more than one delivery mechanism, or switch between delivery mechanisms, without having to incur unnecessary additional expense; 4. to facilitate consumer choice by ensuring ease of access to comprehensive information about the range of services available and ease of selection of those services; 5. to ensure that control of proprietary conditional access technology is not exploited anti-competitively eg by excessive pricing for the use of that technology. This document is about putting in place the framework in which effective competition and innovation can flourish; consumers can take advantage of the full range of possibilities for new products and services; and the UK economy can reap the benefits of a thriving communications sector - an area where it is already among the world leaders. I look forward to receiving your comments. CONSULTATION ON DRAFT GUIDELINES FOR CONDITIONAL ACCESSIntroduction 1 This document is Oftel's first draft of the guidelines. It is intended to lay out the broad principles and outlines of Oftel's approach rather than give a rulebook for what decisions would apply in every circumstance. Detailed and prescriptive rules risk being overtaken by events and hindering innovation. 2 The draft guidelines set out how Oftel would propose to deal with anti-competitive behaviour in relation to the provision of conditional access services. Oftel would expect to amend and add to the draft guidelines as necessary in the light of the comments received in the consultation exercise and market developments. 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 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. 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. 4 The guidelines should therefore be read in conjunction with:
(The SI and the Draft Class Licence are available on the DTI web site (www.dti.gov.uk ) under 'What's New?'.) Issues for discussion and consultation 5 Oftel is seeking comments on all aspects of the guidelines but there are a number of key issues where regulatory decisions could have an important bearing on the development of the market and where views from a wide range of standpoints would be especially welcome. These include:
These issues are discussed below in more detail. SUBSIDY AND OTHER PRICING ISSUES6 It is quite possible that the provider of the conditional access system would wish to subsidise the purchase of set top boxes in order to stimulate the market for digital broadcast services. If there are significant economies of scale in the production of set top boxes, or in the provision of services using set top boxes, there might be good economic reasons for the provision of such subsidies. Subsidised set top boxes might lead to a significantly faster take up of digital broadcast services, and if there were economies of scale in set top box production the result of subsidising the set top boxes could be to reduce rapidly the actual cost of set top boxes and make possible the mass penetration of the market. In these circumstances, it would be important that the arrangements for access to the conditional access system would not prohibit or make unlikely the subsidisation of set top boxes. 7 If subsidy of the set top box is to be permitted, or even encouraged, it is important to consider the way in which the costs of the subsidy could be recovered. Oftel regards it as particularly important that the arrangements for recovery of subsidy should not restrict or distort competition in the broadcast market. 8 There are a number of arrangements by which the costs of set top boxes could be recovered. Oftel is considering the merits and drawbacks of four alternative types of arrangement. 9 First, the subsidy could be regarded as a matter purely for the supplier of the conditional access system, which would have to make its own arrangements for the recovery of the subsidy. No contributions to the recovery of subsidy would be available from third party suppliers of broadcast material. This approach would have the merit of simplicity, since there would be no need to compute the appropriate contributions from other broadcasters. This arrangement would clearly fit with the principle of allowing open access. 10 However, the potential drawback is that it would place competing broadcasters in an advantageous position with respect to the broadcaster supplying the subsidy to the set top box. The latter's customers would be making contributions to the recovery of the subsidy, while the customers of competitors would be required to make no such contribution. The possibility that competitors in the broadcast market could 'free-ride' on its subsidised customer base might make the provider of the conditional access service reluctant to subsidise set top boxes in the first place. This could,if the market conditions were as outlined above, result in digital broadcasting taking off more slowly than might otherwise be the case. 11 The second option for recovery of subsidy is to introduce some form of competitive parity rule. This would provide that all broadcasters (and indeed other service providers) using the conditional access system would pay on a comparable basis towards the recovery of the set top box subsidy. Both the broadcasting arm of the conditional access system supplier and all other broadcasters using the system would on a comparable basis . This arrangement would have the merit that there would be no distortion in the broadcasting market, and there would be incentives to provide subsidies for set top boxes if this appeared to be economically sensible. 12 The difficulties with this type of arrangement would be the potential complexities that would be introduced. It would be necessary to compute how much contribution to subsidy recovery was payable in respect of any particular broadcaster or programme. Flat rate payments would be economically inefficient, particularly if the contributions were significant in relation to the prices of services. The imposition of a significant levy on a relatively low value (ie low priced) broadcast would be likely to make it uneconomic to provide. 13 It would perhaps be more appropriate to base the recovery of subsidy on the value of the programme (in terms of the willingness of people to pay for it) and the number of people watching it. This would suggest that some form of revenue-based levy might be an appropriate way of implementing the competitive parity rule. 14 It should be noted that, if the provider of the conditional access system had a position of dominance in the broadcasting market in the early years of digital broadcasting, a competitive parity rule might be dispensable. The ability of third party programme suppliers to undermine the subsidy and recovery arrangements might be insufficiently material to warrant the complexity of such rules. 15 The third possible way of recovering subsidy would be for the provider of the conditional access system to enter into a 'lock-in' contract with the customer. This would provide that the customer undertook to buy programming supplied by the provider of the conditional access system for some designated period. This would not preclude the possibility of also taking service from other suppliers. In the event that such contracts were entered into, there might be a case for adjusting the competitive parity rule for subsidy recovery. If a lock-in to programming were a condition of the customer receiving a subsidy for the set top box, customers would not be faced with the same choices that they would face in a competitive market. Their choices would be restricted to taking the programme service of the conditional access supplier's group, taking the service of the conditional access supplier plus other broadcast services, or nothing. The customer would not be able to choose to take the services of some other broadcast supplier only, and not the programme services of the conditional access supplier. In these circumstances, it would seem appropriate to adjust the competitive parity rule so that a smaller contribution to the subsidy recovery was payable by competitive broadcasters than by the broadcasting arm of the conditional access supplier. 16 A fourth possibility for subsidy recovery , which would not be compatible with the principle of open access, would be an arrangement involving 'lock-out'. This would be an arrangement whereby the customer signed an exclusive deal with the provider of conditional access services and was unable to take the services of any broadcast supplier for a specified period of time. Oftel's view is that this option should be rejected on principle. It is also difficult to see how such an approach could be consistent with the requirements for broadcasters to have access on fair reasonable and non-discriminatory terms. . Oftel would welcome views on:
Controlled common interface 17 Within the framework set out above, Oftel recognizes that where consumer equipment is subsidised there may be a legitimate case for 'locking' any common interface included in the equipment, if there are no other ways of avoiding a serious 'free rider' problem. This would mean that during the period in which the interface was locked it would be capable of working only with the conditional access module provided by the organisation subsidising the box. This approach has precedents in the mobile phone market where GSM phones may be locked for a period to one network operator. Such an approach might be helpful in facilitating the inclusion of the common interface as a general feature in set top boxes. Oftel's preliminary view is that, in principle, the locking of the common interfaces should be permissible provided that such locking is for a fixed period of time which is objectively justifiable in terms of the time needed to recoup any subsidy and where the set top box owner can 'unlock' the interface by buying out the residual value of the subsidy. (It should be noted that the locking of the interface would be solely for the purpose of preventing inclusion of another conditional access module and not for preventing connection of additional tuner modules through other sockets in the box). Oftel would welcome views on:
Pricing of conditional access services 18 An issue where Oftel would welcome further discussion is on whether the conditional access operator should be permitted to vary its prices depending on the nature of the demand for the final television (or other) service being delivered. 19 Conditional access services are likely to involve certain costs which can be directly attributed to the services being supplied to any particular broadcaster. There is also likely to be a substantial element of common costs. The issue here is how those common costs might be attributed as between broadcasters. 20 Although Oftel would expect pricing structures to follow approximately cost structures, there may be circumstances in which variations in prices to reflect the nature of the final service might be appropriate because it would enhance consumer welfare by increasing the range and variety of services available. For example: charging all premium channels the same fixed fee might have the effect of deterring altogether the launch of specialist channels aimed at niche audiences. This would reduce the overall size of the market and is unlikely to be in the interest of the customer. Oftel would therefore welcome views on whether recovery of common costs through variable mark-ups above incremental cost reflecting the nature of demand for the final product would be justifiable. ELECTRONIC PROGRAMME GUIDES21 Oftel will regulate Electronc Programme Guides (EPGs) insofar as they relate to the use of the conditional access system, while the Independent television Commission will be responsible for licensing the broadcast element. (The ITC is shortly to issue a draft Code of Practice on EPGs). EPGs are potentially an extremely powerful gateway controlling access to services and influencing consumers' choices. The EPG consists of three main elements:
21 A number of broadcasters and others have argued that a single EPG under the control of an organisation linked to a broadcaster could potentially have powerful anti-competitive effects, and that it would be extremely difficult if not impossible for the regulator to police. They have therefore argued that the regulatory framework should enable them to offer their own competing electronic programme guides. This would mean that there would be a number of competing EPGs linked to individual broadcasters and groups of broadcasters containing the details of the services offered by those broadcasters. 22 At one level this would solve a number of the regulatory issues posed by EPGs. However there would be considerable disadvantages from the standpoint of viewer if no one EPG offered comprehensive information on all the services available to them. This could in fact put 'minority' broadcasters at a disadvantage in that viewers might opt to stay within the range of services accessed through the 'majority' EPG. There could be a tendency for a concentration of services around the one EPG. Competing EPGs might therefore present disadvantages as well as advantages . 23 An alternative model might be possible if all service information were available in open formats and could be accessed by all EPGs (in the same way that information on programme schedules is available to newspapers and magazines). Under this model competing EPGs would be akin to 'search engines' on the World Wide Web. Oftel would welcome views on the technical commercial and regulatory issues raised in relation to these different models, and on whether, and to what extent, facilitating competing EPGs should itself be an objective of regulation. 24 A further issue concerns the likely impact of EPGs on the way in which viewers watch and choose television services. It seems likely that as increasing numbers of services become available EPGs which sort services in terms of type of programme will become increasingly important. Some commentators believe that this will ultimately replace the existing channels paradigm. 25 It would clearly not be appropriate for regulators to seek to halt this process if this is the way that the market develops. The regulatory rules will need to work with the grain of market and technological developments. The development of such search and sort facilities considerably extends the ability of viewers to find and access programmes of their choice. From a regulatory point of view the use of search and sort criteria which relate to the intrinsic nature of the programme material is arguably the most neutral and impartial way to present information to the viewer (although equally systems which learnt the viewers favourite channel preferences and displayed these first might be preferred by consumers and would be equally neutral). 26 At the same time the building and safeguarding of brands will continue to be an important issue for broadcasters - and if anything within the new environment its importance will be heightened. The viewer may also select certain programmes on the basis of familiarity with the type of programming shown by a certain type of broadcaster. This has a number of implications: there will clearly be a tension between the branding of the EPG and the individual broadcasters brands. At its most extreme, if the EPG were branded with the name of a linked broadcaster but other broadcasters' services listed in the EPG were not, then this might easily give viewers the impression that all programmes on the EPG were provided by the owner of the EPG brand. This would clearly place other broadcasters at a competitive disadvantage. 27 A further issue requiring consideration and on which submissions would be welcome is the provision for EPGs for 'free-to-air' (both encrypted and unencrypted services). This would be of relevance where subscribers had chosen not to renew their subscriptions for paid services but still required an EPG for easily accessing free-to-air services. Oftel would welcome views on the way that EPGs are likely to develop and the competition issues that are likely to be raised. PROVISION FOR STANDALONE SMARTCARDS AND INDEPENDENT SUBSCRIBER AUTHORISATIONSmartcards 28 Oftel recognises that from the point of view of the consumer their may be some inconvenience in having more than one smartcard - eg having to change smartcards when changing channel. However, the Scandinavian pay-TV market has developed in this way with alternative smartcards as well as service providers sharing cards - the problem of changing cards has been overcome by equipping boxes with more than one card reader. 29 Oftel therefore takes the view that, in principle, if broadcasters wish to offer their own smart cards they should not be prevented from doing so. Whether this becomes a significant way of operating in the UK market will depend on whether conditional access operators put in place adequate systems and safeguards to enable rival broadcasters to share cards without fearing that they will be placed at a competitive disadvantage if they do so. Oftel would welcome views on the practical and coordination issues involved both in the operation of more than one smart card or the sharing of a single card by competing broadcasters. Independent subscriber authorisation 30 Oftel believes that there are valid concerns among broadcasters about the potential for abuse if subscriber authorisation services have to be supplied by a conditional access operator linked to a broadcaster. Oftel takes the view that broadcasters should not be required to hand over details of their subscribers in order to use the conditional access system. At the same time Oftel recognises the legitimate concerns of conditional access operators that they should not be forced to disclose the encryption algorithms which are central to their businesses. 31 Oftel has suggested one possible approach which would involve the broadcaster sending messages to the conditional access operator's system specifying the number of the card and the services that subscriber would be entitled to receive. The conditional access operator would then translate these into messages which would be understood by the set top box and encrypt these for onward transmission. This would require the provision of an interface by the conditional access operator and appropriate coordination arrangements for numbering and the issue of new cards. Licensing of intellectual property rights 32 There is clearly a need to strike an appropriate balance between the rights of the holders of IPR to exploit that IPR and to protect their investment in it, and the need to prevent significant distortion of competition. The general approach to striking this balance, in telecommunications and other contexts, has been to provide powers to act where there is significant distortion of competition, rather than providing for automatic licensing of IPR ahead of the market developing. 33 In the first instance, Oftel would seek to secure arrangements for subscriber authorisation and for issue and dispatch of smartcards which protected the interests of the broadcaster whilst not requiring the licensing of IPR. However, the market may develop rapidly and the conditional access licence therefore provides Oftel with powers to take swift action at the first signs of any abuse significantly preventing, restricting or distorting competition. 34 The Director General could also exercise his powers in relation to telecommunications services under the Fair Trading and Competition Acts. Oftel would welcome views on whether such an arrangement would meet the concerns about the need for independent subscriber authorisation. It would also welcome views on the operational issues involved in this model. ENSURING SUFFICIENT CAPACITY FOR THE DEVELOPMENT OF FUTURE SERVICES35 One issue which has already been raised with Oftel in relation to conditional access is the capacity of the system. A conditional access operator may design a system which for one reason or another did not adequately cater for future demands. Oftel has no wish to become involved in market management. However, Oftel's view is that, if possible, it would be better to avoid such problems occurring in the first place, rather than to have to seek rectification afterwards through, for example, enforcement action under the class licence, or to have to regulate access under conditions of scarcity. Oftel would therefore welcome views on:
36 Oftel would also need to consider the implications for pricing and, in extreme circumstances, rationing capacity, if capacity constraints were to emerge where it was difficult to adapt or modify the system. Oftel's preliminary view is that any such measure would need to be applied in a non-discriminatory way - this would include non-discrimination as between existing services using the system and new services seeking to gain access. Oftel would welcome comments on this issue. Background: Questions and Answers on Conditional Access IssuesConsultation PaperAnnex A: Draft Guidelines
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