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Introduction and summary


Analysis of competition

Interactions in the value chain

DTT bids

BDB bid

DTN bid


Introduction and summary

1 The ITC has been given the task of awarding the commercial multiplex licences prior to the launch of digital terrestrial TV (DTT). There are two bids for the three whole multiplex licences available (multiplexes B, C and D), one by BDB, a consortium of BSkyB, Carlton and Granada and the other by DTN, wholly-owned by NTL.

2 The analysis in this paper concentrates in competition issues arising as a result of the licence awards. Oftel recognises that competition is only one, albeit an extremely important one, of the matters to be considered by the ITC.

3 The ITC has in the past made effective use of its regulatory powers in order to promote plurality, diversity and quality amongst free-to-air analogue terrestrial TV channels. For pay TV, there is now an opportunity to let commercial competition do much of the work which has had to be done in the past by the regulator. This is because there is enough spectrum (across the terrestrial, cable and satellite platforms) to allow vigorous competition in the supply of programming. Vigorous competition in supply may not of itself ensure plurality, diversity or quality within any one delivery platform. But it will provide an excellent starting point; and insofar as plurality, diversity and quality within digital terrestrial TV remains a government priority, the ITC's regulatory powers will remain available to correct any market defects.

4 It is clear from the DTT bids that in a digital world there will be less and less distinction between television, telecommunications and interactive services, with those controlling multiplexes increasingly wanting to supply a mixture of such services. It is also already clear that as we move into a world where consumers can make more individual choices about the programmes they watch or services they take:

(a) A player who is dominant in the supply of premium programming content, in particular sports and movie rights (which experience has shown consumers are particularly concerned to receive and willing to pay for), is in a very strong position; and

(b) If that player also owns or controls some or all of thetransmission networks for digital services, this dominance may be reinforced.

5 The OFT has already found BSkyB to be dominant in the wholesale market for premium programming content (particularly certain sports and movie rights). BSkyB also currently controls the satellite network for direct to the home (DTH) pay television in the UK. Given its control of premium programming content, it also controls a vital input into the cable companies transmission and programme activities.

6 Thus, there is a significant risk that BSkyB's dominance in premium programming content could be reinforced if it were also able to exercise significant influence over the digital terrestrial platform. It would be in a very strong position to negotiate exclusivity in new rights (over all platforms)as they become available; to demand a financial interest in such programming; or to secure some other consideration in exchange for carriage. If exclusivity was granted, BSkyB could guarantee access to viewers by all three platforms but at the expense of competition; if refused, it could probably not prevent access to satellite or cable viewers but would be able to prevent access to terrestrial viewers. This may well be a significant disadvantage for the development of digital terrestrial services.

7 This analysis leads Oftel to the view that if the BDB consortium is granted licences to operate DTT multiplexes B, C and D, one of the effects could well be to foreclose competition in UK premium programming across all platforms and to significantly weaken competition between transmission networks. This is because of the position of BSkyB in the consortium coupled with its present dominance in the supply of premium programming via satellite and cable. Neither other satellite broadcasters nor cable operators would be well positioned in practice to compete for rights to such programming because they would not be able to provide access to terrestrial viewers. And we regard it as unrealistic to suppose that there will be competition between consortium members for those rights.

8 The net effect, we believe, would be less, not more, competition in digital television. If, on the other hand, the ITC were to award the multiplex licences to the rival bidder DTN , DTN would be in a strong position to compete with BSkyB, or any other player, for premium programming transmission rights as they would also be able to offer access to terrestrial viewers and (through commercial deals as necessary)to satellite and cable viewers. The concerns (as regards the reinforcement of an existing dominant position in premium programming) outlined above in respect of the BDB bid would not apply to DTN. BSkyB would be expected to compete vigorously and genuine competition ought to develop.

9 Award of the licences to DTN would therefore enhance retail competition for viewers and make the bouquet of services offered on DTT distinct from that available via other delivery media. It should also lead to the injection of dynamism into the market. DTN's service offering would need to be distinctive, leading to a competitive response from BSkyB and others, leading in turn to new ideas from DTN; and so on. In contrast, it seems more likely that the BDB services would be seen as largely duplicating services already available via other delivery media.

10 For these reasons, therefore, it seems to Oftel that if the ITC's general duty to promote competition under section 2 of the 1990 Act (as amended) were considered in isolation from the other criteria to be taken into account in the award of multiplex licences, the DTN bid would be far ahead of the BDB bid. The same arguments also appear very relevant to the Commission's decision as to which bid is best "calculated to promote the development of digital television, otherwise than by satellite".

11 There are of course a number of actions which either the ITC or Oftel could take after the award of the multiplex licences to guard against distortion of competition in the content market or in other linked markets. For example, Oftel can deal with competition issues which arise from DTN's ownership by an organisation which operates cable LDO franchises; or with difficulties which might arise because a competitor is the dominant supplier of conditional access services. But Oftel's experience in regulating the market for telecommunications services suggests that the interests of vigorous and effective competition in provision of a range of services will be best served by a decision which promotes competitive supply of premium programming not by regulatory action concomitant on a decision which leads to the foreclosure of competition in supply.

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12 The current DTT bid is a specific example of a general phenomenon – the rapid development of new information services and the delivery of established services in new ways (eg video on demand, pay per view TV). Networks which have previously carried only broadcast programming (and limited additional services such as Teletext), will carry a wider rangeof services, including interactive services such as home shopping and banking.

13 This phenomenon is being driven by a number of factors: technological, economic and regulatory. The technological factors include digitalisation which leads to more efficient use of the spectrum and a diminution, if not an end, to traditional spectrum scarcity. This presents the opportunity to develop a genuinely competitive TV market.

14 However, this new marketplace contains several actual or potential bottlenecks, which offer opportunities for the leveraging of market power in one sector of the market into market power in another.

15 The emerging picture is complex and it is tempting to argue that only detailed regulation can prevent these anti-competitive practices. However, the experience in telecomms suggests that, where it is possible, regulation which encourages greater competition produces greater choice and value for the consumer than direct regulation of the output. In the broadcasting market this would translate into a diverse range of programmes and plurality of sources of information and opinion. Achieving this has always been at the heart of broadcasting policy in the UK. Regulation has been seen as the way to achieve them, as the potential for competition was necessarily limited by spectrum scarcity.

16 Under those circumstances direct regulation of broadcasting for diversity and plurality was almost certainly the best way of achieving the objectives. In future, there is an opportunity to let commercial competition do much of the work which has necessarily had to be done in the past by regulation. This is not to argue that competition removes the need for sector specific regulation. It is, however, to argue for the need for decisions aimed at producing greater competition and harnessing that competition to the broader policy objectives of diversity and plurality.

17 This is possible because there is enough spectrum across the terrestrial, cable and satellite platforms to allow vigorous competition in the supply of programming at both the wholesale and retail level. It is also because pay TV allows viewers to have a more direct commercial relationship with content providers through choices between, and direct payment for, programmes they watch. Whereas advertising-supported commercial television sold audiences to advertisers (with individuals within those audiences playing little direct role), pay TV sells programmes directly to viewers.

18 Thus choice is expanded in two ways; the diminution of spectrum scarcity allows for increased choice of services and the viewers can play a more influential role in choosing between these services. Such choices can only be fully exercised if viewers have genuine alternative sources of supply in both content and delivery medium. The DTT bids present a unique opportunity to ensure that such increased choice is maximised for viewers. And where increased choice and competition does not of itself ensure plurality, diversity or quality, the ITC's ongoing regulatory powers will remain available to correct any market defects.

19 Oftel's experience of regulating the telecommunications sector is that when competition is possible, its introduction has achieved far greater innovation, range of output and consumer focus than direct regulation could achieve. The example of the market for mobile telephones is instructive here. Rollout by Cellnet and Vodafone was driven by regulatory requirements and while competition played a part, the speed of development of that market increased greatly when One 2 One and Orange were licensed. Competition between service providers resulting in innovation would have been unlikely in either a duopolistic market or where there was regulated monopoly provision. Development of cable franchises also increased once cable companies were allowed to offer telephony in direct competition with BT and others. These examples demonstrate how competition can be harnessed to achieve public policy goals.

20 Oftel argues strongly that competition can have the same beneficial effects in broadcasting and that even a well regulated near monopoly is not the best way to achieve the objectives of plurality and diversity amongst pay TV services. It will not lead to the innovation in products and services that full competition will, and indeed may impede them.

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Analysis of competition

Market definitions

21 In order to determine if competitive supply is possible and to analyse how market power could be acquired and abused, it is necessary to put the analysis of competition in the context of a relevant market. Market definition attempts to group together products which are close demand-side substitutes. The different services likely to be provided over the DTT platform in particular, and digital broadcast platforms in general, are not generally substitutes for each other to any great extent. For example, on-line home shopping is not a very good substitute for Premier League Football. Thus the services delivered over these platforms will exist in anumber of different relevant markets.

22 In addition, the different services will have different degrees of substitutability from alternative delivery mechanisms. For example, broadcasts of films might be in the same market as video rentals, while interactive services such as on-line home shopping might be considered to be in the same market as currently available catalogue home shopping services or, indeed, just going to the shops. A strict market definition exercise would involve considering the position of each service separately. But it is possible to conduct some analysis of the competition issues by the identification of common market characteristics, without defining the markets into which every individual potential service using the DTT platform might fall. In particular, the higher the substitutability for a service by different distribution channels, the broader would be the market in which that service was considered to be offered; and, in general, the less significant would be the acquisition of control over a distribution channel into that market such as one or more of the digital broadcast platforms. For the purpose of considering the markets in which services offered over these platforms operate, it might be helpful to use three broad qualitative measures of substitutability: very little substitutability, some degree of substitutability or a high degree of substitutability by other products. It is then possible to consider groups of services according to these categories of substitutability.

23 Some of the innovative new services which might use the DTT or other digital broadcast platforms, such as home banking or home shopping, are likely to be substitutable to a considerable degree by other services. A single supplier of on-line home banking or home shopping or other such services is unlikely to be a matter of concern, at least in the short term. For that reason, the market for such services is not considered further in this paper. However, the power of digital delivery platforms is such that the degree of substitutability from other delivery mechanisms for many interactive services may shrink rather rapidly as these services are increasingly delivered via digital broadband platforms. Should this happen, it may be appropriate to revisit the definition of the relevant market for those services and perhaps to regard the delivery of these interactive services via digital broadband platforms as markets in their own right. In this case, the markets might have similar characteristics to that for pay TV, discussed below.

24 Pay TV services fall generally in the category of little or limited substitutability. Premium content Pay TV services such as Premier League Football probably have very limited degrees of substitutability, while services such as classic film channels are potentially substitutable to someextent by video rentals. On balance, although services within this definition may not be close substitutes for each other (eg Premier League football is unlikely to be a close substitute for the latest romantic film) they share enough common market characteristics to allow them to be grouped together for the purpose of the analysis of the impact on competition of the award of the DTT multiplex licences. What this means in policy terms is that if there were a single supplier of Pay TV, particularly of premium content, it would be likely to be a matter of some concern.

25 Before identifying pay TV as a relevant market, however, it is necessary to establish that it is distinct from the market for free to air TV paid for indirectly, either advertising supported or via licence fee. Oftel believes it is right to make this distinction. While not suggesting that these two markets are unrelated, the distinction recognises the importance of the different barriers to entry and different characteristics of the two markets. If the relevant market were `all TV', the free to air TV would act as a competitive constraint on pay TV; however, this happens only to a limited extent for several reasons.

26 Pay TV, particularly in the form of pay-per-view, differs from free to air TV in that consumers' valuation of programme services can be expressed directly in the price paid to the service provider. Pay TV is better able to exploit the willingness of consumers to pay for services they value, in a way which is denied to advertising supported TV. While the latter can deliver large audiences for particular content, it has no means to exploit the willingness of individuals within that audience to pay fees for particular content. In other words it cannot capture viewers' intensity of preference for watching a particular channel. This in turn means that pay TV channels, even though they have a relatively low share of the total audience for TV in the UK, can successfully bid for premium content rights in competition with free to air stations with larger audiences. Once pay TV has secured premium content rights on an exclusive basis therefore, free TV is no longer a complete substitute for viewers. If they want access to certain content they will have to subscribe to pay TV.

27 There are other differences between pay and free to air TV. Terrestrial free to air TV broadcasting is constrained by spectrum limitations. Capacity does not represent such a barrier for digital cable or satellite systems. In addition, free to air TV currently has strong public service programme requirements. These factors mean that free to air TV carries variety of programmes, including sport, movies, soap opera,drama, and news. In contrast, pay TV is able to dedicate multiple channels to specialist programming such as sport or films. These channels are thus very different from the general free to air channels. For the dedicated sports fan the fact that some sport is available on terrestrial TV is unlikely to be an effective substitute for a specialist channel. Thus there is little demand side substitution (though there may be some). And as free to air TV services cannot match pay TV with equivalent products because of capacity constraints, licence requirements and their inability to charge customers for particular channels, it is not a supply side substitute for pay TV.

28 These differences led the Office of Fair Trading (December 1996) to conclude that while free to air TV could exert some competitive constraint on pay TV it was not in the same market. Oftel agrees. It is also likely that DG IV takes the same view. For the remainder of the paper, pay TV is taken as the relevant market for the competition analysis.

The development of gateways to the viewer

29 In addition to the differences noted above, pay TV differs from the free to air TV market in combining both content and controllable transmission paths. Content can be delivered via individual transactions through which the viewer expresses direct preferences, thus opening up the possibility of the competitive supply of content. Fundamental to this is the mechanism of controllable transmission paths, which are crucial to broadcasters in the pay TV market. Control is both the ability to stop a viewer having access to content for which he has not paid and the ability to prevent a content owner having access to a network.

30 The strategic importance of controlling the gateway to the customers in the pay TV market cannot be overestimated. Free to air broadcasters have traditionally been in the business of supplying content (both by creating it in-house and by buying in rights) and transmitting it, usually over their own networks. There has been no control over viewers' access to that content (other than by the rather crude method of fining or imprisoning viewers who do not pay the licence fee).The pay TV market is different in this respect because it has very sophisticated control mechanisms available to it. This allows the content, particularly premium content, which is acquired by broadcasters in the pay TV market to be used much more effectively (in terms of the exploitation of its economic value) and, potentially, to be used in ways which are anti-competitive.

31 A major change from the free to air market is the emergence of firms who have market power in both content and command over controlled gateways to the viewer.

32 Pay TV services will often be produced or delivered in a way that fundamentally changes the relationships between the elements of content, control and transmission compared to the existing models of both free to air TV and telecommunications. Traditional free to air broadcasters have been owners of a particular transmission path (usually a particular frequency range) and have had commercial interests in content. However, they have not had a relationship with their viewers that has enabled them to bill them directly for such content. In telecommunications the control functions have all been embedded inside the network, and owned by the transmission system operator. Although telecommunications companies have been able to bill their customers direct they traditionally have not been in the business of being able to supply broadcast type services and so have not had any commercial interests in content. To supply pay TV services requires access to content, transmission and control so does not necessarily follow either of these models. These services are not telecomms or broadcasting as we have known them.

33 Specifically, the control system is becoming independent of the network (eg Conditional Access systems) at both the technical and ownership level, and broadcasters may not own the transmission paths they wish to use (eg recent sale of the BBC's transmission system).

34 In addition, the regulatory models that are applied to the activity of supplying pay TV (ie directly paid for content) vary depending on whether the control function is being added to a traditional broadcast activity or if content is being added to a traditional telecommunications activity.

35 These changing relationships and pattern of control mean that anti-competitive behaviour can move from one section of the market to another as necessary and indeed may take place in unexpected sections of the market, which were previously unproblematic as they were not critical points of scarcity or market power. It also means that competition may be able to operate differently in the new market compared to the old, because of the different characteristics – including functionality available through the control system and the reduction (or even absence) of capacity scarcity in the digital broadband networks.

36 However, if there is to be competition in the supply of pay TV, and viewers are able to exercise effective choice, then there must either be competitive supply of the three elements necessary or non-discriminatoryaccess to the one or more elements that are not subject to competitive supply.

The importance of premium content

37 Content, and specifically premium content, is the most significant competitive battleground for broadcasters. Content in general has traditionally been taken to refer to programme content (films, soaps and so on), but as noted above, will increasingly encompass transactions (where these are partly or wholly provided over broadcasting networks). Despite the competitive importance of content for broadcasters in the free-to-air market, limited bandwidth and the inability of the broadcaster to either exclude viewers or to price his content according to the viewers' valuation of it, has hitherto ensured that the market for content has been very imperfect and whatever content had been acquired by broadcasters would be available to the majority of viewers. Thus, before pay TV was practical, there had been no need on competition or public policy grounds, for restrictions on the sale of exclusive rights to such content. However the advent of pay TV has significantly changed this market and supply dynamic.

38 Although the market for content rights is still driven by the purchaser's ability to reach final customers through the transmission system, there is now a crucial distinction between broadcasters who can price according to the customers valuation of the content (pay TV) and those who cannot (free to air TV). Hence advertising-supported TV has sought rather crudely to maximise the number of viewers. The dynamics of this competition alter however when broadcasters are also in the control business, as they are in pay TV, and can extract their revenues direct from the viewer, through the capabilities of the control system. Here, both `reach' (number of potential viewers) and the value of the content to the audience are of fundamental importance in determining what the broadcaster is willing to pay to content producers. In addition, the ability to charge customers the actual value they place on the content depends critically on whether or not customers have alternative suppliers of that (or substitutable) product and the price of that alternative. Hence the critical importance of exclusivity of premium content which, in a number of cases, such as top sporting events, have no close substitutes.

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Interactions in the value chain

39 The ability to deny content producers' access to particular customers is a powerful bargaining counter for owners of transmission and control networks. And customers will pay for high bandwidthnetworks only where this gives them access to valuable content. This puts content producers in a relatively powerful bargaining position and leads to the often repeated mantra that content is king. However, the outcome of this bargaining process may depend on the relative concentration or fragmentation of content producers compared to network and control system owners. If producers are small, as many independent producers are, they are unlikely to be able to demand access to transmission or control systems. Producers of premium `branded' content will be able to secure access and moreover will be able to sell a large amount of less valuable content provided it is bundled together with some `must have' content.

40 The dynamics of this new market place are rather different from the one where there was limited bandwidth and no direct means of charging the customer. In order that the customer is able to enjoy the best combination of choice, quality, diversity and value for money, it is necessary that there should be an absence of dominance in both content and delivery mechanisms, as discussed below.

41 In the situation where the content is valuable and non substitutable (eg Premier League football) the owners of the reproduction/public showing rights are in a strong economic position if faced with competing delivery mechanisms which are capable of charging customers directly to watch. Under these circumstances it would be expected that as a result of the competition between routes to the customer the original rights owner will be able to reap the rewards of the price customers are willing to pay. However, if faced with a monopoly route to market the outcome is uncertain, and will depend on how critical that content is to the customers' decision to purchase access to the delivery mechanism at all. Thus, content that drives the capital spending decision of customers to purchase access to the delivery mechanism at all will be in a strong position to receive most of the revenue customers have paid over for access to that content. However, for less critical content, and especially for content that is highly substitutable, the balance of power will tip towards the controller of the monopoly route to market.

42 It is possible therefore, that the owner of a monopoly route to market faced with a competitive supply of content would be able to bid down the price of content to its costs (which may be low) even if it is, in fact, of high value to customers. Competitive supply of content combined with competitive supply of routes to market will put the customer back in a position of economic power. Content prices will tend towards cost, as will the cost of the use of the delivery mechanism, resulting in low prices for customers. Table 1 summarises the likely outcome of this competitive dynamic.

TABLE 1 Prices paid by customers and who retains the revenue

  Monopoly route to market Competitive routes to market
Monopoly, critical content1 High2
content supplier likely to retain
most revenue
Content supplier will definitely
retain most revenue
Monopoly, non critical content High
Route owner likely to retain most
Content supplier likely to retain
most revenue
Competitive content High
Route owner will retain most
Even when content
valuable to customer

1"Critical content" is premium content that drives customers' acquisition of the means to access a particular platform – it is often premium sports programming.

2"High" in relation to price means that customers are likely to pay a price close to their valuation of the content ie. There will be little consumer surplus,

3"Low" in relation to price means that customers will pay a price close to the production/reproduction costs of the content. There is likely to be considerable consumer surplus.

43 Incremental customers for content are highly profitable as the marginal costs of servicing an additional consumer are very low (or even zero). Once premium content has been secured the ability to resell it over different transmission networks, if this provides access to additional potential customers, is itself economically powerful for the rights owner. Therefore, where few customers are on more than one route to market, the existence of a single gateway to part of the market may, in practice, negate the effects of multiple routes to other parts of the market. BSkyB with its effective monopoly interests in analogue DTH, is already powerful in the supply of programming to cable, providing over half of English language cable programming in 1996. If, in addition, it can sell the same rights over DTT, it will be in a uniquely powerful position when bargaining with content producers, even if the digital DTH route to market is competitive. BSkyB is likely to be the only means to be able to access all potential viewers via satellite dishes, cable and ordinary aerials.

44 It is this linking of access to content with ownership of the network or control bottlenecks, which allows such powerful market positions to be adopted and maintained. Dominance in content alone may not be self-sustaining. A dominant position in transmission or control is difficult to sustain without access to premium content. However, a dominant position in both premium content and transmission or control is very likely to be self sustaining.

45 Having said this, not all transmission and control systems are equal. Some systems allow content producers to have independent access to the transmission system even if this system is controlled by a rival content owner. The closed or open nature of the network is crucial. There are primarily three delivery mechanisms for pay TV on the near horizon: satellite direct-to-home, cable, and DTT. The characteristics of each are considered below.

46 Access to analogue satellite transponder capacity is possible but requires a new entrant to buy-out a sitting tenant. This is made more difficult – as the OFT report of the review of pay-TV market has noted – by the lack of an effective secondary market. The move to digital transmission opens up much greater capacity, and thus increases the chances of capacity available for competitive entry (although this depends in part on how much of the new capacity is taken by existing operators). Regulation of conditional access systems for digital television ensures that the control functions are also available for such new entrants.

47 Apart from the limited `must carry' rules, no programme provider has automatic rights of access to cable systems but until recently the major problem faced by cable companies was how to fill the available analogue capacity. As the number of new channels has increased cable operators are coming up against the limits of the existing available capacity. But this position is likely to change as the transition to digital makes large amounts of new capacity available.

48 The three main commercial multiplexes represent the lion's share of capacity available for pay services on DTT. Third-party broadcasters are unlikely to be able to get access to this capacity except as part of the bouquet of services offered by the multiplex operator where they would have no independent access to the customer. Limited pay services could be launched on some or all of the capacity on the 'guaranteed' multiplexes but this capacity has already been pre-assigned to existing broadcasters. New independent entry is thus unlikely.

49 Both cable and DTT may be characterised as, to a large extent, closed systems in that the cable operator or multiplex operator has the ability not to allow broadcasters into the system.

50 Oftel has not historically regarded this as a problem in relation to cable because of a number of factors:

  • the fact that cable operators have not themselves had significant interests in programming and therefore did not have incentives to exclude attractive programming from their systems;
  • the fragmentation of the cable industry so that programme providers were not faced with a single monopsonist purchaser;
  • competition in the retail market from BSkyB DTH.

This situation is dynamic and the position could change such that the cable industry acquires market power in control/transmission systems and/or content. If this happens, Oftel will consider whether regulatory action is needed to avoid adverse effects on competition.

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DTT bids

51 The award of the DTT multiplex licences is an important opportunity to promote choice for viewers which, in Oftel's view, will be best achieved through competition in supply. The initial decision on who is awarded the licence is crucial to the development of competition in pay TV.

BDB bid

52 Competition concerns in relation to the bid by BDB appear to be the following

  • the members of the consortium all have significant interests in content;
  • the lion's share of multiplex capacity available for new pay-TV services on DTT would be controlled by one entity (and as a subsidiary issue it would operate the conditional access system for pay services on all the multiplexes – although this would of course be subject to regulation);
  • BSkyB's major role in BDB strongly suggests that there would be little real competition between BSkyB and its partners for the purchase of premium programming or between BSkyB and BDB in the retail market.

53 This market power can be summarised as follows:

  • BSkyB would be the main supplier and distributor of paid-for content (especially premium content) to DTH, cable and DTT;
  • BSkyB would control a substantial part of transponder capacity for analogue and digital DTH, and BDB would control a substantial part of capacity for DTT;
  • News DataCom (an associated company of BSkyB) is the most likely candidate to supply the conditional access technology for both DTH and DTT.

54 BSkyB, with its interests in both DTH (content and network control) and cable (through supply of programming), will, through BDB, become powerful in another delivery mechanism (content and network control). In this case, abuse of dominance, such as demanding exclusive rights from content producers who otherwise risk exclusion from the DTT network for example, is a real threat to plurality and diversity.

55 The general problem identified here is one of having transmission and control systems owned by those with a direct commercial interest in content. Power in control, transmission and content leads to a very powerful and sustainable market position – the dynamic reinforcement of a powerful position in content by a powerful position in control and transmission. And vice versa.

56 Awarding all three multiplexes to BDB, based on BSkyB's current access to content, will reinforce BSkyB's market power in control and transmission. It will be the only player able in practice to deliver premium content across all delivery mechanisms. Other satellite broadcasters and cable operators will be handicapped in competing for premium rights as they will not be able to gain access to terrestrial viewers. Oftel regards it as unrealistic to suppose that there will be real competition from other DTT consortium members for those rights, whether the formal agreement between the parties covers the issues or not. Competition in the supply of premium content will therefore be minimised, leading in turn to minimisation of choice for viewers.

57 The fact that the BDB consortium includes Carlton and Granada, in addition to BSkyB, does not therefore negate this analysis at all. In fact it points up the conflict of interest inherent in BDB. While BSkyB has interests in satellite, both analogue and digital, it can hardly be expectedto develop services for DTT which will compete with those. And Carlton and Granada will have little interest in seeing the other ITV services develop genuinely competitive offerings on their guaranteed multiplexes.

58 There are no doubt a number of actions which the ITC could take after award of the multiplex licences to guard against distortion of competition in either the content market or in the development of broadband platforms. But this would be a second best outcome. Best would be if there were competition in supply of premium content, leading to a greater choice for viewers.

DTN bid

59 The DTN bid raises some of the same sorts of issues as the BDB bid, but there are significant differences. The similarities relate to the position that the `winner' would acquire in relation to control of networks and/or control systems. DTN would acquire the commercial multiplexes and would have an existing interest in some of the cable networks in the UK (DTN backer Cabletel currently has some 16 franchises covering 2 million homes in the UK or about 13% of the total licenced and franchised homes). Although both DTT and cable are essentially closed systems the current fragmentation of cable TV networks means that the potential market power of any one company is significantly reduced. In addition, should cable TV consolidate or a cable PTO acquire market power in other ways, an existing condition in its Telecommunications Act licence could be triggered to require it to become an open system. Thus, were DTN to win the bid it would start with significantly less market power in control over delivery than BDB and any subsequent developments would leave it with no greater market power than BDB would have if it were awarded the licences.

60 Much more significant is the different position in relation to content, where DTN has a very different position to the BDB consortium. DTN is not currently a significant player in the content market in respect of the ownership of content or rights. Even if, as a result of winning the DTT bid, DTN chose to become a significant players in the market (and there are other strategies it could adopt) in would do so in a market with an already established player dominant in the wholesale market for pay TV.

61 A reflection of these different starting positions is the apparent existing access to content of the two bidders. If DTN were awarded the multiplexes, it would immediately secure some premium content (the BBC/Flextech channels, some Hollywood studios) and be in a muchstronger position to break BSkyB's dominance of premium sports content when rights become available. Increasing the number of broadcasters in a strong position to bid for content (because they can get fair access to all viewers) will be beneficial to competition by reducing the potential for monopsony power.

62 The DTN bid is thus different significantly from the BDB bid in its effects on competition. It would not give rise to the establishment of dominance over a new network and control system by players with an already strong position in free to air content and a dominant position in wholesale pay TV.

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63 Oftel's arguments in this paper have been based on issues surrounding competition in the provision of services and how such competition can facilitate achievement of ITC's policy objectives. Since the ITC must award the bids on the basis of the criteria in the Broadcasting Acts, Oftel has kept these criteria firmly in mind.

64 Oftel understands that the award of multiplex licences falls within the general duty to ensure fair and effective competition set out in section 2 (2) of the Broadcasting Act 1990, as amended by Schedule 10 to the Broadcasting Act 1996. Sub-sections 2(1) and 2(2) of the Broadcasting Act 1990, as amended, provide that it is the duty of the ITC to discharge their functions under Part 1 of the Broadcasting Act 1996 as respects the licensing of multiplex services, amongst others, in the manner best calculated, inter alia, to ensure fair and effective competition in the provision of such services. It appears to Oftel that the legislation is constructed so as to require the ITC to take into account the general duty referred to above alongside the criteria set out in Section 8 of the Broadcasting Act 1996 in awarding multiplex licences.

65 Oftel's argument is that the maximisation of possible content competition, backed up by regulation where necessary, is the best way to achieve diversity and plurality and deliver choice to viewers. Convergence is allowing competitive supply in the pay TV market and presents UK viewers and content producers with greater opportunities than previously. But as the paper has sought to demonstrate, control of both content and transmission networks could lead to abuse of a dominant position. Awarding the DTT multiplexes to the BDB consortium would, in Oftel's view, reinforce BSkyB's existing dominance in the pay TV market, with the attendant risk of abuse and the certain reduction in plurality and diversity.

66 A more competitive marketplace will help to achieve the specific criteria laid down in the Act. The examples cited earlier from the telecommunications industry argue strongly that coverage and speed of roll out will be improved if there is genuine competition for viewers by alternative delivery mechanisms. Content producers will have a more competitive market for their offerings which will help to ensure greater choice for viewers. And fair and effective competition in dealings with providers of programmes and other services is more likely to be guaranteed by an applicant who does not a have a strong direct interest in content already being supplied on other transmission networks.

67 It is Oftel's view that the success of DTT in the UK will be delivered more effectively by a competitive marketplace than by any other mechanism. For perhaps the first time in broadcasting, a dynamic rather than static situation presents itself, in that DTN would be in a better negotiating position to secure that content, including premium content, after the award of the multiplexes than before. To judge solely on current content offerings would be a failure to recognise the magnitude of this change and could reinforce dominant positions in broadcasting at a time when technological changes could be opening up the market.

68 In summary, therefore, Oftel concludes that if the ITC's general duty to promote competition under section 2 of the 1990 Act (as amended) were considered in isolation from the other criteria to be taken into account in the award of multiplex licences, the DTN bid would be far ahead of the BDB bid. In addition, the same arguments appear very relevant to the Commission's decision as to which bid is best "calculated to promote the development of digital television, otherwise than by satellite", as required under Section 8 (I) of the 1996 Act.

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