Beyond The Telephone, The Television and The PC - II

January 1998

Contents

• Preface

• Introduction

• Background to Convergence

• Convergence

• Policy Objectives

• Factors which may prevent the UK achieving its policy goals

• Conclusion

• Annex 1 – Question 1: What are the technological changes affecting audio-visual communications and broadcasting including methods of reception?

• Annex 2 – Question 2: What will be the impact of the introduction of Digital Television and Radio and the development of linked interactive technologies including the Internet?

Preface

Oftel welcomes the Select Committee’s Inquiry into audio- visual communications and the regulation of broadcasting.

The Inquiry takes place at a significant period in the development of the UK communications market. Not only is the UK is on the verge of the launch of a new system of mass audio visual communication, but digitalisation and other technological developments will also increasingly blur the boundaries between the historically distinct telecommunications, Information Technology (IT) and broadcasting sectors

Given the difficulty of accurately predicting the type and pace of development of new services based on these technological advances the submission urges the Committee to avoid focussing on a particular technology or a core set of ‘services’. Instead it suggests that the Committee should consider the general characteristics of change within and between these previous distinct sectors. It identifies as one of the key issues facing the Committee the impact of this convergence between sectors on current and future policies. The submission argues that these changes require a comprehensive policy response so that the UK can harness the potential these changes make possible. It suggests that the starting point for a review of these changes should be ‘What is the UK trying to achieve?’

In attempting to answer that question the submission suggest that the Committee considers what

are:

• the key economic and policy objectives for the UK communications sector, and

• the competition and related issues standing in the way of the UK achieving those objectives.

Oftel recognises that the Government would wish to pursue a number of economic and policy objectives as the UK enters the Information age .The submission outlines three high level objectives which could be applied to the emerging Communications market:

• Deliver the Best Deal for the Consumer in terms of Quality, Choice and Value for Money. This overarching aim ensures that policy is focussed first and foremost on consumers and citizens. It implies a strategic policy framework designed to enable all consumers to get reasonable access to the services they need, at the quality they expect, and on reasonable and affordable terms.

• Secure Maximum Economic Benefit for the UK. A thriving digital communications sector, in which investment and innovation are encouraged and fostered, will be a key driver for job creation and economic prosperity for the UK in the twenty first century.

• Enhance Social Cohesion and Promote Welfare. In any society an effective communications network is a prerequisite for social cohesion. As information and services are increasingly delivered to work and home by digital networks it will be important to ensure that everyone is able to benefit and participate.

In addition Oftel suggests a number of secondary objectives:

• Predictable and Consistent Regulation - but only where needed. As the development of new services will be market led, a stable, predictable regulatory regime will be needed to foster investor confidence and enable infrastructure and service development to flourish

• The importance of Competition; - Competition is likely to be the best means of stimulating innovation, better quality, more choice and lower prices for consumers.

• Enabling Effective Competition. The networked communications sector has a number of features which, taken together, result in certain players being in a position to exercise bottleneck control of the market. Such control could prevent effective competition without special rules and careful, sector specific, policing of the marketplace.

• Consumer Protection. Even with effective competition, market forces are unlikely to deliver all the services that are wanted and needed to all citizens. People who are expensive to serve, who are on low incomes, or who face other barriers (eg disability) may be denied access unless special measures are taken.

• Fit with European and International Developments. In a world where service provision increasingly crosses national boundaries, it will be essential to ensure that the UK’s regulatory approach fits with that of the European initiatives and the developing international framework

The issues raised are complex and the solutions are important as they will help shape the future pattern of our society. Although regulatory rules and structures are important, some vision of where we are going is a prerequisite for framing regulation. We support the Select Committee’s Inquiry as a means of fostering a better understanding of the new digital communications world, and how to ensure the UK is best placed to take advantage of the new Information Age.

Introduction

1. In 1995 Oftel attempted a technology/services specific review of future developments and markets. It failed. Instead , we had to carry out a different sort of review (Beyond The Telephone , The Television and The PC - August 1995) focussing on

• key economic and policy objectives for the UK communications sector,
• competition and related issues standing in the way of the UK achieving those objectives,
• the extent and nature of the regulatory rules required beyond general competition law.

2. The Government today faces a similar challenge. We suggest that the Committee does too. Our submission attempts to draw out the overarching policy issues the Committee may wish to consider as part of its Inquiry, as well as responding to the first two questions raised by the Committee. Oftel will respond to the question concerning the implications of these changes for regulation and regulatory bodies in a second submission. Oftel does not intend to comment on the final question, the implications for the division of responsibilities within Government.

Background to Convergence

3. One of the key issues facing the Committee is the impact of convergence on current and future policies. Convergence is a term loosely applied to the increasing blurring of boundaries between telecommunications, broadcasting and communication between computers. It also includes convergence between fixed and mobile telephones. However the term convergence can obscure more than it illuminates. Throughout this submission we adopt a definition close to the EU Convergence Green Paper's (Towards an Information Society Approach - December 1997)

• the ability of different network platforms to carry essentially similar kinds of services and the consequent coming together of consumer devices such as the telephone, television and personal computer

4. However convergence is not just about technology. As the EU Green paper makes clear it is about services and about new ways of doing business and interacting with society. The emergence of new services and the development of existing services is likely to grow the overall information market, providing new routes to the consumer. Converging technologies in the delivery of information offer the prospect of a vast array of new services brought directly into the home and the workplace, into schools and colleges, libraries and hospitals. Such services- some already available - range from online business information services to distance learning and remote teaching, from home shopping and home banking to television on demand and interactive games, from remote health care to teleworking.

5. It is difficult to predict what impact the introduction of any technology will have. The ultimate arbiter of success or failure will be the consumer. Nor is it possible to predict, if such technology advances are a success, when that success will fully materialise. However it is already clear that convergence could have potentially negative as well as positive effects, which underlines the need for a comprehensive policy response.

6. Given the difficulty of accurately predicting the exact nature and pace of development of the digital communications sector we would advise the Committee to avoid focussing on technology or a core set of ‘services’. While many of the services identified in the Beyond the Telephone Consultation document are now on the verge of fruition, others have not materialised and new ones have emerged. In the broader policy debate the particular technological developments are not important; the general characteristics of change are. The UK must harness the potential these changes make possible. The starting point for any review should therefore be: “What is the UK trying to achieve?”

7. In order to understand the policy issues that arise from convergence it may be helpful to identify the general characteristics of change by analysing the features of the “old” distinct telecommunication, broadcasting and information technology (IT) sectors and the difference convergence makes to those structures.

Old Broadcasting (TV)

8. The central feature of broadcasting is that it is based on limited spectrum or network capacity which in turn leads to few broadcasters and channels.

9. A limited number of broadcasters could have the ability to act against the consumer interest, but this problem has been identified and dealt with by successful regulation by Government via the ITC and the BBC Board of Governors, in particular through the imposition of positive and negative programming requirements - like the requirements for quality, diversity and impartiality and a series of restrictions on ownership. However, many of these requirements were only acceptable to the companies involved provided they remained one of only a few broadcasters.

10. The absence of significant numbers of competitors also made limited funding mechanisms possible (one broadcaster financed by a compulsory licence fee, the rest primarily or solely by advertising) acceptable to the companies and capable, through regulation, of delivering high quality broadcasting.

11. The concept of a broadcast transmission differed from 'old' telecommunications in that the former involved one signal sent for simultaneous reception by many (termed 'one to many') and the latter (for basic voice telephony) involved two way live speech ('point to point').

Old Telecommunications

12. The distribution infrastructure was seen initially as a natural monopoly, it provided limited bandwidth, and a centralised control of the communication path. This led to a state monopoly network, which was technically unsuitable for broadcast purposes. Early focus was on basic voice telephony services and for two-way live speech.

13. The telecommunications industry has recently undergone significant development, and the successful development of infrastructure competition, for example the roll out of alternate networks by cable companies, means that the network is now no longer considered a natural monopoly. Increasingly the networks are used for image and data services and broadcast-like services, that is, video on demand. To date national telecoms operators are prevented from transmitting 'true' broadcasting, that is, transmitting material for simultaneous domestic reception. Video on demand is permitted because the material transmitted is sent on individual request, and is technically an aggregation of point to point services rather than a true broadcast one to many service. Although technically distinct, the distinction can, in practice, be difficult to draw, particularly where the same material is sent in response to a large number of individual requests. To the consumer the distinction may be undetectable.

Old IT

14. The IT industry has, traditionally, been built around either stand alone single pieces of equipment (or isolated aggregations of different equipment - eg PC, printer, fax), or equipment has been networked on relatively small, locally managed networks. The provision of the equipment and the local networks, have not been considered natural monopolies, and the “private” nature of the networks has meant that issues of the supply by public operators of capacity, bandwidth or control has not been an issue. This has led to a market structure where there have been no restrictions on entry and no sector specific regulation. This has not been problem free. Although there has been choice of systems, there has also been a continued lack of interoperability between technologies and applications such as incompatible word-processing formats. In addition, there is the issue of dominance of certain sectors such as PC operating systems by Microsoft.

Convergence

15. The impact of the technological developments of convergence is to change these characteristics.

New Broadcasting

16. The near future holds out the prospect of 200 or more channels on satellite and cable, and 20 terrestrial channels, reaching significant proportions of homes and most businesses. In addition, the introduction of centralised control systems in broadcasting systems via Conditional Access systems (a form of electronic turnstile by which the controller of the CA system, which is contained in viewers’ set top boxes attached to their televisions can restrict the reception of a particular programme or channel until a condition is fulfilled - usually by the viewers paying a subscription - and the turnstile is unlocked.)

17. The advent of pay TV, where a customer chooses to subscribe individually to specific channels or even specific programmes, has brought broadcasting much closer conceptually to telecommunications in that the role of the viewer is no longer entirely passive. This trend will be further accelerated with the introduction of truly interactive broadcast services which will allow a return communications path to be used in conjunction with conventional "one to many" broadcast services.

18. More channels will require new methods of "navigation" via Electronic Programme Guides known as EPGs. These are in the form of a screen menu which viewers will use to select from the range of available programmes as well as ordering and paying for TV and interactive services.

New Telecoms

19. New compression technology and bandwidth increases mean networks can be used to deliver broadcasting and high speed interactive services without significant capacity constraints. This will lead to an increasing diversity of networks that will be able to supply the services requiring high bandwidth (fixed radio access, mobile/UMTS radio networks, cable, XDSL over copper, etc) (See Table 1 in Annex 1 which details the technologies available for the delivery of broadcast and interactive material).

New IT

20. This features integration into global networks, common standards (e.g. Internet Protocol, Java programming language) and centralised control functions (Internet/intranet connectivity, necessary agreement on addressing systems). In addition, use of navigators for the Internet such as browsers (e.g. Netscape, Microsoft Explorer) and search engines (Yahoo, Lycos etc) will become increasingly significant. PC display devices will increasingly come to resemble television both in appearance and content and television will look more like a PC screen in its own use of navigators - as well as being able to access PC ‘content’ like the Internet.

An Example - The Internet

21. The Internet is a good example of convergence as it illustrates some of the difficulties that convergence presents for current regulation. Software developments now allow telephony and broadcasting (true one to many as well as aggregated point to point services) together with a range of other interactive services to be provided to one or more displays in the home or office. The Internet is therefore a key enabling technology over which converged services are being delivered. It raises a number of questions, for example how, or even whether it is necessary, to licence these services or how to deal with content emanating from overseas. The distributed nature of the control needed to set up communication paths, and the divorcing of the provision of content from the provision of the transmission path itself, makes it difficult to determine who controls content and delivery, or who is liable if things go wrong or rules are breached.

22. Some specific examples of issues the Internet is already raising (not all of which necessarily require “fixing”) provide an insight into the likely complexities of digital markets and possible regulatory implications.

23. Moving pictures can be received simultaneously in more than one household, delivered by way of a Public Telephone Operator’s (PTO) voice telephony network to a users PC. This is a breach of the current ‘broadcast ban’ in telephony operators’ licences. However, the PTO does not know when or where these breaches take place.

24. The above service may also be a service that in theory requires a broadcast licence. However, it is likely that the content originates from, or the transmission has passed through, a foreign country

25. Under existing telecommunications regulation, a licence is required to provide simultaneous live two-way speech services, that is, basic voice telephony. To date, the technology used to provide voice telephony over the Internet has not been deemed robust enough to fall with the definition of ‘simultaneous.’ So a licence has not been required. As technology improves this distinction is becoming increasingly untenable. At a more general level, regulation of services delivered over a telephony network, has traditionally been achieved through the regulation of those who operate the network, or have been given access to scarce spectrum. Those who control services on the Internet do not necessarily (and often do not) fall into either of these two categories. For example voice telephony can be provided over the Internet by the installation of software on the customer’s computer as opposed to a service traditionally provided to the customer by a telecommunications operator. As a result the operators who run the underlying telecommunications network which forms the Internet backbone are increasingly not going to know what services their networks are being used for and increasingly could be, without their knowledge, in breach of their telecommunications licence.

26. The Internet requires interconnection of many different networks in order to function effectively. The emergence of very large suppliers of Internet backbone network has created the possibility that they may try to dominant this market by refusing to interconnect with smaller network suppliers on fair and reasonable terms. The regulatory rules that underpin traditional interconnection are not generally available to deal with this problem should it emerge. (But may not be necessary if competition law is effective.)

27. For the Internet to operate the same addressing system must be used by all network and service providers, and no address can be duplicated. The international treaties that underpin the same issue in the telephone networks are absent from the Internet and although in practice the addressing of the Internet works, there are problems around the edges concerning the nature of “ownership” of addresses and who has rights to distribute new addresses.

28. Convergence is increasingly affecting Oftel’s work. It is clear that telecommunications systems will be a vital component in the distribution of any future digital or broadband services. Under the Telecommunications Act, a 'telecommunication system' is defined in a way that covers virtually any system that conveys messages, including the terrestrial and satellite broadcasters transmission networks ( run by NTL and CTI) and those run by cable PTO's which offer both telecommunications and broadcasting services. Oftel is also responsible for regulating Conditional Access services for digital television. None of these areas is static in terms of either market players or services.

29. From a regulatory point of view converged services like those offered via the Internet and interactive set top boxes (which allow visual images and data to be displayed on the same split screen together with access to interactive services like home banking ) cut across the different markets and existing and regulatory boundaries. Market players like the cable companies, BT and BSkyB are active in both TV and telephony. Increasingly developments in one regulator’s sphere of competence raise issues for others. These regulatory overlaps are set to increase. In order to resolve any difficulties this may cause, the Government will need to decide what policy objectives it wishes to achieve and the way in which regulation can help or hinder the fulfilment of these objectives.

Policy Objectives

30. In answering the question ‘What is the UK trying to achieve?’ Oftel would expect the Government to wish to pursue a number of important policy objectives sector as the UK moves into the Information Age. Oftel would suggest the following three high level goals for the communications sector:-

• Deliver the Best Deal for the Consumer in terms of Quality, Choice and Value for Money

  This overarching aim ensures that policy is focussed first and foremost on consumers and citizens. It implies a strategic policy framework designed to enable all consumers to get reasonable access to the services they need, at the quality they expect, and on reasonable and affordable terms.

• Secure Maximum Economic Benefit for the UK

  A thriving digital communications sector, in which investment and innovation are encouraged and fostered, will be a key driver for job creation and economic prosperity for the UK in the twenty first century. There will be rewards for countries who advance more quickly, in an increasingly global marketplace. Modern communication infrastructure and services will improve industrial efficiency, speed the pace of innovation, and contribute significantly to GDP. Use of high speed interactive networks will enhance education and learning opportunities and help provide the skills needed for tomorrow’s jobs.

• Enhance Social Cohesion and Promote Welfare

  In any society an effective communications network is a prerequisite for social cohesion. As information and services are increasingly delivered to work and home by digital networks it will be important to ensure that everyone is able to benefit and participate. Some electronically delivered information services are likely to be so important that all citizens should be able to get them, regardless of their service provider. Safeguards may be needed to ensure that the values of democratic pluralism are conserved. If universal access is secured, more cost effective digital delivery of many public services will be possible.

31. Beneath these strategic goals Oftel would suggest a number of secondary objectives as follows:

• Predictable and Consistent Regulation - but only where needed

  As the development of new services will be market led, a stable, predictable regulatory regime will be needed to foster investor confidence and enable infrastructure and service development to flourish. Regulation should also be consistent and coherent. Because market development will be financed primarily by the private sector, special rules should only be applied where needed, in order to encourage innovation and growth. The new Competition Act can be expected to provide a supportive general framework.

• The importance of Competition

  Experience has shown that competition in both infrastructure and services has been the most effective way of achieving overall policy objectives in telecommunications. The same competition policy approach and competitive principles could be applied to the emerging communications market. Competition is likely to be the best means of stimulating innovation, better quality, more choice and lower prices for consumers.

• Enabling Effective Competition

  The networked communications sector has a number of features which, taken together, result in certain players being in a position to exercise bottleneck control of the market. Such control could prevent effective competition without special rules and careful, sector specific, policing of the marketplace.

• Consumer Protection

  Even with effective competition, market forces are unlikely to deliver all the services that are wanted and needed to all citizens. People who are expensive to serve, who are on low incomes, or who face other barriers (eg disability) may be denied access unless special measures are taken. Special measures may be needed to protect consumer privacy, prevent customer exploitation by dominant market players, ensure that plurality and diversity of content is maintained, and uphold expected standards of taste and decency.

• Fit with European and International Developments

  In a world where service provision increasingly crosses national boundaries, it will be essential to ensure that the UK’s regulatory approach fits with that of the European initiative and the developing international framework. Opportunities to influence policy development in Brussels and in international fora should be seized.

Factors which may affect the UK in seeking to achieve its policy goals

32. Competition Issues

As well as technological convergence we are increasingly seeing companies adopting converging strategies within as well as across traditionally separate markets. The EU Convergence Green paper identifies an emerging value chain which we adopt for illustrative purposes only:-

• content origination (content supply)

• content &service packaging (tailoring and branding)

• service provision (platform and connectivity)

• infrastructure provision (delivery)

• terminal vending (access control)

• Consumer/viewers

33. It is not clear where the economic benefits are going to lie in the value chain. Whether with rights owners, content packagers or distributors, or a combination. It is probable that an effect of convergence will be firms increasingly seeking to extend or consolidate their position in the value chain either via horizontal mergers between firms operating in the same part of the value chain or through vertical integration involving companies on different parts of the value chain due to the significant costs associated with launching digital services. For example in the run up to the launch of Digital there have been two joint ventures - BDB ( Carlton and Granada) and BIB - Sky , BT, Midland and Matsushista . Mergers and joint ventures do not automatically give rise to competition concerns and may help develop the new communications market to its full potential. However as markets and companies converge the potential for leverage of market power from one market to another and anti-competitive behaviour across existing sectoral and regulatory boundaries increases. Global expansion by companies such as Microsoft, who already dominate the software market and are now investing millions of dollars in digital television set top box technology, could prove to be a considerable challenge in the longer term.

34. Control of gateways

Vertical integration and the technology used in the communications market increase the potential for particular parts of the process to become bottlenecks and therefore ‘gatekeeper companies’ emerge. The appropriate structures need to be in place to tackle potential abuses of market power at all stages in the delivery of services to the consumers. Bottleneck control can arise not just via control of a delivery system or content. Problems can arise from the initial sale of rights to broadcast content, through to issues regarding accessing information about services via electronic programming guides. Of particular concern is likely to be control of access to the consumer. The increase in the capacity of digital broadcasting, particularly via satellite or cable, reduces the barriers to entry for new market entrant. However, as with telecommunications, much of the power in the multi-channel broadcasting age will lie with those who provide the final delivery to the consumer . A controller of 'the final mile' might seek to exploit this control over content creators or service providers, or both, by dictating the conditions under which content is made available, with the implicit threat of refusal to convey such content to users. It will be important to ensure that such power is not abused in order to protect consumer choice, competition and plurality and diversity. Regulation is in place to deal with some, although not all of these issues.

35. Standardisation

Another important factor which affects the take up of new technology which the Committee may wish to consider, is the question of compatibility and interoperability of networks and user equipment. Standardisation can be a helpful facilitator of convergence by enabling a common technology to be applied to a variety of applications. This leads to economies of scale which in turn benefit both industry and consumers. Standards are increasingly becoming global rather than national or regional, partly because technology is producing global availability of some services (for example, satellite broadcasting and telephony), where a regional standard would belie the nature of the technology itself.

36. Networks for fixed telecomms, mobile telecomms and broadcasting have, for historical reasons, evolved in different ways based on the technology available at the time. With these three areas converging, it is essential that all parties are involved in standardisation rather than one party pushing standards implementing only their specific area of interest or proposing a system to which the other parties cannot readily and easily migrate. As such, specific sections of the industry should not be allowed to dominate any standards making process. Convergence should also lead to a common approach to approval and enforcement of standards, with consistent penalties for the use of non-approved equipment which might adversely affect the integrity of networks or service delivery to others.

37. In summary, the objective of standardisation should be to facilitate convergence wherever possible, ensuring compatibility and interoperability between systems but providing flexibility in how those systems are deployed.

38. Spectrum allocation

Convergence, whether between fixed and mobile services or between broadcasting and telecommunications, will fundamentally alter the way in which radio spectrum is used to deliver these services. Traditionally, spectrum has been strictly demarcated internationally between fixed, mobile and broadcasting uses, providing limited flexibility to address changing patterns of market demand. In each service category, the limited availability of spectrum was (and still is) used to justify a limitation on the number of competing operators, particularly in the mobile and broadcasting areas.

39. Instead of assigning a particular band of spectrum exclusively for the provision of mobile communications or broadcasting, the assignee could be allowed to use the spectrum for the services of its choice. New services will increase demand for spectrum. Government will have a key role in making more flexible the current balance between telecommunications, broadcasting and public/commercial usage. Frequency spectrum is a key but finite resource even in the digital age. The cost and amount of spectrum available may have an important impact on the development of existing and new delivery channels where a broadcaster offering multimedia or online services uses spectrum obtained free or at low cost, competes with operators from the telecommunications sector who have paid a price reflecting the commercial value of the resource allocated.

40. Convergence is progressively blurring the distinction between the traditional fixed, mobile and broadcasting sectors. This begs the question should there be such rigid demarcation in terms of spectrum allocated between the services? For example, should a mobile operator, having paid an economic price at auction for radio spectrum, be prevented from using this to provide fixed or even broadcast services if it so chooses? Likewise, should a broadcaster be prevented from providing telecommunication services? Indeed the broadband spectrum mentioned above is likely to be used for interactive multimedia services which will, like the Internet, contain elements of both.

41. There are of course technological considerations - to a large extent the current international demarcation between services reflects the requirement to ensure they co-exist without interference. However this could be dealt with at the standards level by ensuring compatible technologies are deployed, rather than by dictating what services can or can not be delivered.

42. Public Service Broadcasting

Although not the focus on this Inquiry, as part of the wider policy debate the effect of convergence on the way in which public service broadcast policy objectives are delivered will have to be considered. For example the existing Public Service Broadcasters market share may diminish as users face increased choice Escalating prices for scarce premium content bid up by demand from new broadcasters with new channels, could subject them to budgetary pressure that might outstrip the capabilities of existing funding mechanisms

43. Globalization of Communications

This is an important issue when considering how UK policy objectives will be delivered. With the liberalisation of telecommunications system around the world and the growth of 'borderless' technologies like the Internet there will be an increased need to consider issues in the context of international developments as well as purely from a UK perspective.

Conclusion

44. As is illustrated by this submission there is a need to identify what are the challenges of the future and the goals that the UK wishes to achieve from the communications market. Many of the issues are complex. However, once overall policy goals are agreed and understood there is a useful framework against which to test the efficacy of existing policies and regulatory structures in delivering those goals. Only then can consideration be given to the sort of regulatory framework which might be more appropriate.

45. In this section of the submission we have drawn togther a number of the issues prompted by the Committee’s questions, in particular the impact of convergence on present and future policies. We have suggested a framework within which the general impact of convergence can be assessed. In the following annexes we set out what we believe are the more detailed, and in some cases short term, impacts that the introduction of digital TV and radio and the development of interactive technologies are likely to have.

46. In Annex 1 we describe the main technological developments which underpin convergence and explain how these developments will significantly alter the way broadcasting, data and telephony services are delivered. Annex 2 highlights the major changes in the short term arising from the launch of digital television and radio and the increased use of interactive technologies. It discusses the potential affect these changes may have on market structures and some of the consumer and competition issues the Committee will need to consider when assessing the appropriate regulatory structure.

47. Oftel is happy to provide further information on any of the matters raised in this submission if the Committee would find it helpful.

ANNEX 1

Question 1: WHAT ARE THE TECHNOLOGICAL CHANGES AFFECTING AUDIO-VISUAL COMMUNICATIONS AND BROADCASTING INCLUDING METHODS OF RECEPTION?

1. The key technology drivers towards convergence are digitalisation, whereby sound pictures and data are converted into binary digits and advances in compression technology which enable far more digitised information to be conveyed in a finite bandwidth. The immediate effect of these two developments is to produce a significant expansion in network capacity and an equally significant reduction in the costs of delivery.

2. Technology convergence between telecommunications and broadcasting is not new. For example, in the Edwardian era, before public radio transmission began, the Electrophone system broadcast concerts to homes using telephone copper cables. Conversely, not long after radio broadcasting began, similar radio technology was used to convey international telephone messages. Satellites emerged in the 1960s to provide transcontinental telephone circuits more economically than copper submarine cables, but in the 1990s have been largely displaced by fibre optic cables. Instead, satellites have established an essential role in the intermediate and final distribution of broadcast TV. Similarly, coaxial copper cables which were developed in the 1940s for trunk telephony circuits, are today predominantly used for delivery of broadcast TV via cable systems.

3. What is different now is that it is becoming economic to deliver broadband services like television on systems which can equally efficiently deliver narrowband services like telephony. This development has been driven by a number of technology advances:

4. Improved digital coding and compression techniques are allowing much more information to be delivered over copper telephone circuits and other existing media.

5. New technical standards for the conveyance of digital signals, such as SDH and ATM have been designed which, unlike existing analogue and narrow band digital standards, have no pre-conceived assumptions about the bandwidth which services might need to use. They are therefore capable of delivering narrowband and broadband services equally efficiently and will be largely future-proofed against new market requirements or technology developments.

6. The de facto standard underlying the World Wide Web, Internet Protocol (IP), is increasingly being promoted as an alternative general purpose conveyance standard for non-internet applications such as voice, fax and interactive broadcasting services. IP networks make almost no assumptions about user’s needs, and therefore impose no restrictions, which is a major strength, but also maybe a drawback in not being easily able to provide connections with guaranteed performance characteristics, as dedicated telecommunications standards can do. A number of hybrid schemes are now emerging which seek to combine IP and other conveyance standards to provide flexibility without compromising network reliability or integrity.

7. There are now a number of technologies capable of delivering broadband to customers, which in varying degrees are competing and/or complementary, according to needs and economics (Table 1).

8. Emerging international transmission standards will enable both existing and new infrastructures to play a role in carrying new services. The capabilities of existing networks can also be enhanced by digital compression techniques such as MPEG2, allowing networks of limited transmission capacity to carry services previously considered possible only on sophisticated and more costly broadband infrastructures. ATM is of considerable interest as a multimedia transport technology. It is a high-speed cell-relay technology, capable of transporting telecommunications traffic of different characteristics (voice, data, video) over the same network, and has been designated by the ITU as the basis for broadband ISDN, the successor generation of its narrow-band counterpart. Continuing competition between different technologies can change the fortunes of one approach or another, making it difficult to be certain about the exact nature of tomorrow's networks.

9. Digitalisation has already brought benefits to telecommunications users, enabling many new network features such as caller ID (which advises call recipients the telephone number of incoming calls), as well as greatly improved line quality. The recent rapid growth in the mobile telephony market is a direct result of the introduction of digital technology, which both reduced costs and increased the capacity of the available radio spectrum. The benefits are likely to be even greater in the broadcasting sector, not least because the gulf between the current analogue technology and the proposed digital technology is so much greater than it was for telecommunications. For example, the migration from analogue to digital TV broadcasting is expected to free up at least half the current analogue TV spectrum, even allowing for the introduction of new broadcast services. This spectrum could then be used to introduce new innovative services, further stimulating competition and choice in the converging, multimedia world.

10. Advances in technology are also enabling frequencies much higher in the radio spectrum to be utilised economically. This means that substantial tranches of spectrum could soon become available for the development of broadband services to homes and businesses. Radio is in many scenarios the most cost effective medium for delivering such services, so it is important that priority be given to improving availability of radio spectrum if competition in the delivery of broadband services is to flourish.

11. In order to receive digital television a consumer will need a decoder to decode the digital signal for reception on an analogue televison. When digital services are first launched it is likely that most of these decoders will be in the form of set top boxes which are attached to the television. In time integrated televisions which incorporate the decoder will be available. These decoders will generally include software and a modem that will allow broadcasting networks to emulate the switching capabilities normally associated with telecommunications. This software, known as the Application Programming Interface (API), resembles the operating system of a Personal Computer (PC). It is used to manage interactive applications, and to provide a specified interface for the development of applications by third-parties. This will allow broadcasters and advertisers not only to access individual customers (as satellite pay-television operators already do through conditional access systems,) but the consumer can send messages back to the broadcaster or advertiser, usually via a telephone return path. The API will also enable consumers to access to the Internet via their domestic TV receivers and telephone lines.

12. Examples of interactive services which will use the API facility include British Interactive Broadcasting (BIB), featuring broadband delivery from the network via satellite and a return path via the users telephone line, and similar systems using digital terrestrial broadcast signals.

13. The large number of channels available with digital television (200 or more on satellite and cable services) will necessitate the use of a “navigation” tool to locate and select specific programmes. The navigation tool is referred to as an Electronic Programme Guide (EPG) and enables viewers to select channels, programme types or individual programmes using an interactive, menu driven display. The EPG will form an important gateway to accessing broadcast material and it is therefore important to ensure that all broadcasters’ material can be accessed readily in this way. The EPG will also provide access to interactive services including the Internet.

14. The Internet is itself potentially a significant platform for broadcasting services. The advent of new software like Real Video and Real Audio have enhanced the quality of reception of broadcast material via the Internet. The EU Green paper notes that ‘Today, there are 650 “Webcast” radio stations and 270 "Real-Video" enabled sites on the Internet offering video material of current European and US broadcasters’. New Internet techniques, such as multicasting, offer the possibility of delivering audio and visual content to many users at the same time rather than sending individual messages thus bringing it closer to the broadcasting model of point to multipoint rather than the traditional voice telephony model of point to point. Unlike conventional broadcasting services, however, the Internet has effectively unlimited capacity and relatively low entry costs, as no dedicated transmission infrastructure is required. The global nature of the Internet brings with it economies of scale unavailable to traditional national or regional broadcasters and the potential for significant audience share on a global basis.

Table 1. Technologies available for the delivery of broadcast and interactive material.

ANNEX 2

Question 2: WHAT WILL BE THE IMPACT OF THE INTRODUCTION OF DIGITAL TELEVISION AND RADIO AND THE DEVELOPMENT OF LINKED INTERACTIVE TECHNOLOGIES INCLUDING THE INTERNET?

Introduction

1. As is indicated in the overview it is Oftel’s belief that there is only a limited usefulness in attempting to answer very specific questions about the long or medium term impact of particular types of technological change and service innovation. No one can yet be certain of the precise impact of the new digital communications technologies nor the timing and pace of particular market developments. However, the broad characteristics of the new digital world can be identified and these can be used to make some potentially useful short term assessments of the impact of these technologies.

2. The Overview has set out the framework within which we believe the general impact of convergence can be assessed. In this annex we set out some of the more detailed, short term, impacts that we believe the introduction of digital TV and radio and the development of interactive technologies are likely to have.

Short Term Changes

3. Digital terrestrial TV, digital satellite TV and digital cable TV are all due for launch by the end of 1998. All three systems will require (at least in the first instance) the purchase of set top boxes, and these boxes will almost certainly contain conditional access systems. Thus, by the end of 1998 it is likely to be possible to receive in excess of 200 channels (cable and satellite and 20 digital terrestrial) of broadcast television (or its equivalent when used to supply other services) throughout the UK. It will also be possible to control access to these channels, so that it will be possible to directly charge customers for consumption of services delivered to them. The capacity shortage for the delivery of high bandwidth services to customers will have, for all intents, technically disappeared.

4. However, the number of customers connected to these delivery mechanisms is initially likely to be relatively small, as the demand for the services that can fill the available capacity is unknown. In addition, customers will need to purchase relatively expensive equipment in order to gain access to these systems, which will slow take up of these new services.

5. The Internet now provides a worldwide mechanism using standard technical protocols for the delivery of voice, video, audio, text and graphics. Five percent of UK households and 35 percent of UK businesses with PC/modem links already access Internet content and services. Current market developments indicate that over fairly short time horizon mass market consumers will be able to access the Internet via their TV screens. Over the same time frame developments can be expected on the Internet so as to enable higher quality broadcast type services (both audio and video) to be delivered using the Internet and/or existing telecommunications networks of the PTOs. Developments can also be expected to improve the access control on the Internet, so as to enable efficient methods of charging for the consumption of these services (if required).

6. This rapid increase in potential capacity across many telecommunications networks (including broadcasting networks) will start to impact on the position of content suppliers - be they independent programme makers, football clubs, newspapers, software providers, broadcasters or telecomms service providers. They will start to have a significant increase in choice of delivery mechanisms, and more players could be expected to enter the market as the main capacity constraints disappear.

7. If the take up of the means of access to either the Internet and/or the high capacity digital broadcasting mechanisms is sustained then, as the number of potential customers for services provided over these networks increases, we can expect this to have a significant impact on the existing suppliers of these services. There is also likely to be a significant shift in the way in which consumers relate to service providers, including broadcasters. These changes are likely to include:

• As distribution limitations erode, the bottleneck scarcity in the market is likely to shift to premium, high quality, content. The price of premium content - and talent in general - is likely to be subject to three conflicting forces: there are likely to be more market players competing for a scarce resource, thus tending to push the price up; the fragmentation of audiences will tend to reduce the income of those suppliers, and the ability of suppliers to charge customers directly for consumption will tend to increase the revenue per customer they can obtain. Audience/consumer behaviour in the face of additional choice of supply will be key to determining which of these forces dominates.
• Electronic Programme Guides (EPGs) will be critically important tools to help consumers navigate their way around the various opportunities available. The presentation and design of these Guides will have a strong impact on how consumers do or do not exercise the new choices available to them.
• New choices available to growing numbers of consumers, and (the potential) rising costs of content and other key inputs, could have an impact on the ability of public service broadcasters such as the BBC and Channel 4 to continue to fulfil their remits. The existing arrangements whereby broadcasters undertake their public service obligations in return to access to scarce capacity and/or privileged funding arrangements are likely to come under increasing strain.
• New services will also “bridge” the different delivery mechanisms. Already BIB has plans to integrate the satellite broadcasting path and the telephone network to provide high quality interactive services integrated with, and access from, satellite broadcasting services.
• The creation of a critical mass of potential customers connected to these networks can be expected to produce new services, as well as the delivery of old services by new means. Plans exist to enable customers to download popular web material or other material (eg an electronic newspaper) to a customers own memory cache (eg a PC hard disk), using spare broadcast capacity, for subsequent viewing on their TV set. Individually these services are unlikely to drive the take up by consumers of the equipment necessary to access these services, but once a critical mass of customers exist these innovative services are likely to become economically viable.
• Some existing services may find themselves rather quickly facing competition from new service providers using new means of delivery, especially when their target audience is particularly likely to have access to the new means of distribution. For example, Real Audio Software is enabling the ‘broadcast’ of Internet radio, giving content providers global reach - which they could not get using existing broadcasting technologies - with very low overhead costs.
• Interactivity will involve a shift from passive to active mode for consumers. Transactional services are likely to grow rapidly as electronic commerce develops, enabling users to order and pay for goods and services electronically.
• Broadcasting services may themselves become seen as part of a “transaction”. Customers will be able to pay for what they want and, critically, not pay for what they do not want. This is likely to change significantly the relationship between customer/viewer and supplier and to put it on a more “normal” commercial basis. Even if traditional broadcasters do not, or can not, adopt this model other suppliers of equivalent services are likely to take up this approach.

Changes in Market Structure

8. There is likely to be an impact on the market structures as we indicated in the overview. However, it is not yet clear where in this value chain the greatest risks and rewards will lie. What is clear however, is a degree of interdependency across the chain.

9. It is probable that firms will seek to consolidate their position in the value chain through horizontal mergers, or through vertical integration between different parts of the chain. Those market players with investments in the relatively high fixed cost distribution networks may wish to move beyond being mere ‘bit carriers’ towards enhanced service provision. Content providers will tend to seek commercial relationships with those controlling infrastructure in order to guarantee distribution. Software companies will wish to ensure that the protocols and interfaces in consumer equipments does not exclude their products. All will need to work through conditional access providers in order to develop relationships with customers.

10. The significant increase in the capacity of digital broadcasting, particularly via satellite or cable, should potentially reduce the barriers to entry for new market players in the same way that liberalisation of telecomms regulation has allowed many new companies into that market. The improvements in Internet technologies will have a similar effect. However, as with telecomms, much of the power in the digital communications age could be with those who control final delivery to the consumer. As each customer is likely to only have one digital gateway or ‘set top box’, companies who control that gateway potentially have the power to dictate the terms on which others can enter the market. Other control bottlenecks could also emerge, depending on the network architecture.

11. The telecomms, broadcasting and IT sectors have tended to be dominated by a few large companies, with many smaller players. With further consolidation, both horizontally and vertically, the ability of one firm or conglomerate to foreclose competition or behave anti-competitively exercise in one or more market segment is likely to increase. The potential for leverage of market power from one market to another is also likely to grow.

12. Notwithstanding the increases in delivery capacity, both the structure and the networked nature of the digital communications market could therefore inhibit the development of effective competition, with a reduction in the potential benefits to consumers of more innovation and choice, better quality and lower prices, unless there is an appropriate regulatory framework. That framework must not stifle innovation, but it must effectively stop anti-competitive behaviour.

Consumer Issues

13. If competition in the provision of services to customers can be delivered through an appropriate regulatory structure then much of what consumers want will be delivered through that competition. Thus, in the new digital world, the ideal scenario would be for any consumer to have the choice of access to any service or content that they required.

14. However, the delivery of such opportunities is likely to require some intervention in the market to ensure interconnection of different networks, interoperability of different services, universal roll out and availability where appropriate, and reasonable terms for certain services. For example, special measures may be needed to ensure there are no ‘information have nots’, as more and more communications and essential services migrate to digital networks. Some in the community may be technology resistant, may not be able to afford user equipment or services, may not understand how to use them, or may have disabilities that require special provision to be made. In addition, the normal measures to protect consumers from unfair trading, invasions of privacy and misuse of personal data, misleading advertising, and exploitation of market power will need to be adapted so they can be effective in the new digital world.

Conclusion

15. The major changes in the short term is the technical removal of the capacity shortage in the delivery of telecommunication services (including broadcast services) and the simultaneous introduction of conditional access to the provision of services over these high capacity systems. If this capability reaches a “mass market” its impact is likely to be profound. The potential for competitive delivery of services increases, but so does the potential for suppliers of one sort or another to create, and exploit, dominant market positions or positions of bottleneck control. The task facing the UK is to react to these developments by creating a regulatory framework that will protect the customer against the latter, while harnessing the innovation potential of the former.